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FDI Lifts Thousands of People in Ethiopia, Vietnam and Turkey Out of Poverty

Diep Nguyen
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Workers in sectors and regions with higher foreign-firm presence are generally more likely to be formally employed and receive higher wages.

FDI Lifts Thousands of People in Ethiopia, Vietnam and Turkey Out of Poverty
Photo Credit: GettyImages
Many countries aim to attract foreign investment to help create jobs and reduce poverty. Yet empirical evidence on the direct poverty-reducing effects of FDI is surprisingly scarce, especially in developing countries. Little is also known about the aggregate effects of FDI on income distributions.
Analysis of unique firm-level and household data from Ethiopia, Vietnam, and Turkey shows that FDI firms create new jobs and pay higher wages than domestic firms. Workers in sectors and regions with higher foreign-firm presence are generally more likely to be formally employed and receive higher wages. 
FDI allowed more than 350,000 individuals to enter formal manufacturing employment in Vietnam between 2007 and 2016, and at least 40,000 in Turkey between 2009 and 2016. FDI also raised average manufacturing wages by 32 percent in Ethiopia, 12 percent in Vietnam, and 8 percent in Turkey.
Consequently, FDI-induced wage increases helped reduce poverty in all three countries. Conservative estimates suggest that FDI contributed to lifting at least 35,000 individuals out of poverty in Ethiopia during 2009–14; 24,000 in Vietnam (2007–16); and 15,000 in Turkey (2009–16). 
Although the FDI-induced wage increases helped improve the incomes of the bottom 40 percent of the population in all three countries, the effects across the entire income distribution differed significantly across countries. In Ethiopia, the benefits of FDI were more concentrated in the bottom 40 percent, while in Vietnam, the welfare gains were evenly distributed across the income distribution. 
Turkey had the greatest average wage benefits from FDI but also experienced increases in wage inequality.
However, FDI can also contribute to inequality by disproportionately benefiting bettereducated and higher-skilled workers. When comparing regions and sectors with higher FDI activity with those with no FDI, higher-skilled workers experience large benefits, while low-skilled workers may see no changes or even experience relative short-term declines in formal employment and wages.
The possible adverse effects of FDI on income inequality and on lower-skilled workers emphasize the importance of a country’s labor market and education policies. Key policies include strengthening the absorptive capacity of domestic firms and workers (for example, through programs that foster FDI-supplier linkages and employment training); supporting vulnerable communities (such as lower-skilled workers, youths, and women) with active jobs information, provision, and skills certification; and establishing programs to stimulate labor mobility within countries.
Many countries around the world aim to attract foreign investment to help create jobs and reduce poverty. Yet direct empirical evidence on the direct poverty-reducing effects of foreign direct investment (FDI) is surprisingly scarce. Most of the earlier literature focused on the ability of FDI to raise economic growth, which in turn is associated with reductions in poverty (Chen and Ravallion 2007). However, it is notably difficult to estimate the growth effects of FDI precisely (Lipsey 2003). 
FDI’s poverty alleviating effects may also be greater or less than average because of its direct influence on a country’s aggregate employment numbers and average wages (Nunnenkamp, Schweickert, and Wiebelt 2007).
A second generation of literature then argued that FDI helps raise household income because formal firms pay premium wages. While important, this literature focuses on firm-level effects. This can present a biased picture because foreign-owned firms may be “cherry-picking” the most productive workers, possibly leading to labor shifts among firms with no real change in overall employment or household income. 
Using firm-level data also means that the aggregate effects on labor markets that most policy makers care about (such as creation of formal jobs and growth in average wages) cannot be observed. To better establish the relationship between FDI and development, it is therefore important to consider FDI’s effect at the household level.
So far, robust economic analysis doing so has been limited.
Little is also known about the aggregate effect of FDI on income distributions. This relationship has become particularly important in recent years, as backlashes against globalization have been attributed to growing concerns around the effects of trade and investment on rising levels of income inequality. 
This may have played a role in reducing investor confidence and FDI flows in recent years. Recent findings about trade liberalization indeed confirm that some evidence backs such popular sentiments. For higher-income countries, import liberalization may have increased competition in less-skilled, labor-intensive industries while favoring demand for skilled workers (Acemoglu and Autor 2011; Acemoglu and Restrepo 2017; Goldberg and Pavcnik 2007; Maloney and Molina 2016; Michaels, Natraj, and Van Reenen 2014; Pavcnik 2017). 

DIEP NGUYEN

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