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Globalization: Foreign Direct Invest and Poverty Traps Aid the Increasing Wealth Gap
Rachael Bennett
Portland State University

Introduction and Thesis
As of recent years there have been several mentioning of potential increases
in income inequality and what it might mean for future generations (Thomas,
2014). With both developed and developing nations affected concern is
beginning to mount on exactly why income inequality is so stratified. Many
attribute the wide spread nature of income equality to Globalization, a
modern phenomenon that entails the spreading of goods and ideas quickly.
Globalization today is synonymous with the fundamentals of business which
are being used in ways that create income inequality One such example is
that of Foreign Direct Investment (FDI) which “Globalization has resulted to
increase in the flow of foreign direct investments between countries and this
flow has brought a fundamental impact in the distributive consequences
among various economies.” (Ekmekçioğlu, n.d.) The use of FDI’s has been
linked with many negative outcomes and can be seen as causing
dependency between countries. Likewise not just incoming cash flow but
exports as well can be held accountable for much of the cyclical poverty
found in developing nations. This paper argues that globalization business
practices are helping to increasing income inequality by way of Foreign
Direct Investments and by products such as poverty traps.
Research Process
Globalization is a broad and often confusing topic that can have
various ideas and aspects associated with it. This can lead to a multitude of

answers as well as ideas being formulated about globalization and the
effects it can have on our world. When speaking in terms of the wealth gap
this could not be more true as there are several factors that can be
attributed to its growth. This being said I chose to focus on modern business
practices and the impact they create. The term modern business practices is
meant to encompass those practices that have become popular and more
available since the wide spread of globalization. Yet this is still a significantly
broad topic of globalization and in order to focus my lens further I decide to
center on Foreign Direct Invest (FDI) and the byproduct they can create
poverty traps. It was by no accident that I selected these topics, as during
the previous term I was enrolled in a Macroeconomic class that described
extensively what they were and how they affect a region. While this
knowledge helped me to select my topics I was no closer to understanding
the role globalization played in them and magnitude to which they effected
and area. Knowing this I was quick to find their correlation to the wealth gap
and many relations to globalization. I achieved this through the use of
several online search engines, hoping to get an in depth look at the topic.
In order to get a better understanding of the topic I had chosen I
decided to not limit my research to only one site or source. The result of this
is that much of my research was through the search engine Google Scholar
as well as various articles found through the Portland State University Library
Database. Of the two sources I found Google scholar to be much easier to
navigate as well as containing more relevant information. The ability to skim

articles or books for relevant information was vastly easier on Google Scholar
than the Library Database. Google Scholar also offered books online to
preview, source from which I obtained most of my information. However the
Library Database was generally more adept to finding not only peer reviewed
articles but several news articles in various languages.
Through these two search engines I was able to collect numerous
amounts of sources however not all of the data would end up to be relevant
to this final paper. These sources mainly consisted of published books but
there were also several articles as well as peer reviewed papers. The
research process was long and tedious as much of the information had to be
sifted through or extracted from extensive books upon the subject. However
this not only lead me to good information on the topic but several case
studies about regions where FDI and poverty traps were having a negative
effect on the population. Though it is hard to understand the full impact of
FDI or poverty traps through only slight research, the case studies provide
ample information to become familiar with the topic. Above all the research
process provided insight into a topic that can help me to better understand
the world I live in.
Discussion and Analysis
As with any topic that has social or economic elements there is going
to be some connection to globalization. This is largely due to the fact that
globalization has my sub genera’s and far reaching aspects that help to

encompass all features of life. Two of these sub genera’s stand out as
elements of globalization that also correlate to the expansion of the wealth
gap; foreign direct investments and poverty traps. Foreign Direct Investment
(FDI) “defined as cross-border expenditures to acquire or expand corporate
control of productive assets” (Froot, 2008) has been steadily on the rise in
the past few decades. This has also lead to the creation and increase of
poverty traps where, “Poor nations are caught in a vicious cycle: they cannot
afford to invest much in public health, their life cycles are brief, and planning
horizons are short, contributing to the scarcity of private investment and to
perpetual poverty.” (Bowles, Durlauf, Loff, 2006) Each in its own right can
remove revenue from a community, stratify a society and have impacts that
are further reaching than a single community. On their own these aspects are
harmful to a community and their surrounding areas, but because the world
is now globalized they have a wider impact. FDI and poverty traps both are
not only aspects of globalization but also factors of the increasing wealth
gap. As of recent years the global community has begun to take note of the
ever increase wealth gap, for “over the last 50 years the poorest 10% of
countries have grown at the same rate that America did in the past 200”
(C.W., 2014) This is cause for alarm as theoretically countries should be
growing faster than ever before in a new globalized economy. However it
seems to be the exact opposite as aspects of globalization such as modern
business practices are only increasing the wealth gap.

A prominent aspect of globalization that exerts force upon the wealth
gap is modern business practices. This aspect of globalization encompasses
everything from exchange rates to real estate. However modern business
practices are a large aspect of globalization that would need to be narrowed.
FDI is an aspect of modern business practices that stood out as having a
strong connection between the wealth gap and aspects of globalization. FDI
inherently contained several pieces that alluded to aiding in increasing the
wealth gap. Through research it was easy to find these correlations and also
discover several other byproducts that FDI was capable of creating such as
poverty traps. Though not initially obvious FDI is an aspect of globalization
that has helped to increase the wealth gap through several means.
There are several aspect the FDI that can impact the region it’s in. Of
these aspects there are some that can hinder a community and those that
can make it flourish (Agence France-Presse, 2015). However, more often than
not, FDI drains a community of capital, labor, and resources simply due to
the way it operates (Lipsey, 2004). This can not only leave a community
dependent but also cause a plethora of other poverty related problems.
Often the impact felt by a community can be shared by an entire region. But
these problems are never caused by a single thing in particular. The many
aspects of FDI are equally important, but in the context of discussing the
wealth gap two stand out from all the rest. The creation of labor and
infrastructure are two inherent aspects of FDI that some might argue are of it
best qualities (Yuan, 2002). However there is an alternative side to these

features that cause a community to become dependent upon the present
firm and even slide into a poverty trap. (Dang, Low, 2014)
When speaking in terms of the labor aspect of FDI there are several
attribute that aid in the wealth gap. In a paper written by Dr. Ercan
Ekmekçioğlu these aspects are illustrated as “the penetration of FDI in
middle and low income countries hampers economic growth and increases
income inequality by creating dualism and disparities in various economies
and their productive structures” (Ekmekçioğlu) When a region is entered by
FDI (s) often this raises the demand for labor within the region as well as the
use of resources in the area. This demand for labor while not always, often
requires some level of skill and education that many of the people in the area
have not had access to. This can create stratification between high skilled,
higher wage population and low skilled, low wage workers within and around
the community. This can inevitably led to a bleed of important funds and
resources from neighboring regions, as they are unable to access those tools
offered by the FDI.
Along with a social stratification organizations that utilize FDI often
divide communities through the establishment of infrastructure. Multinational
companies that engage in FDI(s) often are required to build infrastructure to
meet their need and operate in a suitable fashion. While it is often thought
that FDI increase income in a region “There are studies, however, suggesting
a negative relationship between infrastructure investment and economic

growth rate. Devarajan et al. (1996) indicated that infrastructure in
developing countries actually had negative impacts on economic growth if
infrastructure is oversupplied relative to the economic scale.” (Dang &
Pheng, 2015) When an FDI is present within a community it not only creates
jobs but also facilities to operate and distribute from. This can mean
anything from building a large factory to paved roads and even installing
telephone wires. Much like the creation of labor within an area these all may
appear to be a good thing but they can quickly have negative impacts upon
a community. For starters much of the infrastructure that is built is done so
to benefit the FDI and its goals, therefore item such as paved roads or
telephone line rarely reach outlying communities. Such as with labor this can
create a draw of resources and funds as many individual are drawn to work
in areas with these amenities. Another more dangerous aspect of FDI is its
lack of permanence. Communities where FDI are present rely on the
infrastructure they build as well as the company in charge to continue
operating in the area so the capital continues to flow. When elements such
as labor laws, wage increases, or a disaster impact an area a company
involved in FDI is quick to find another location. When this is done the
investment in the area is removed and a dependent economy has lost its
source of funding. This can be incredibly devastating for an area and among
the many reasons FDI helps to increase the global income gap.
Another increasingly debated topic that can help to increase the global
income gap is poverty traps. As stated previously a poverty trap is “a

spiraling mechanism which forces people to remain poor. It is so binding in
itself that it doesn't allow the poor people to escape it. Poverty trap generally
happens in developing and under-developing countries, and is caused by a
lack of capital and credit to people” (The Economic Times, n.d.). When put
into the context of globalization and by extension FDI, poverty traps help to
explain why much of the world is still living below the poverty line. In the
terms of FDI, poverty traps can be caused by several factors including the
introduction of infrastructure, lack of revenue, and the removal of FDI(s) from
a region. These aspects help to not only create and sustain poverty traps but
also maintain the wealth gap. As FDI becomes more evident in several
countries across the globe, the number of poverty traps appears to be
increasing. This is well illustrated by an article on The Economist that stated
“the poorest countries had consistently lower per-capita income growth over
a given decade than did rich countries. In the 1970s the spread between
richest and poorest was 24% points. Over all decades the poorest quintile’s
average growth rate was 0.5%” (C.W., 2014). These numbers demonstrate
that the wealth gap is on a steady increase. As globalization becomes
everyday practice and FDI a simple tool it can be assumed that more poverty
traps will emerge in the coming years.
In order to help alleviate this burden that modern business practices
place on the wealth gap through globalization there needs to be intervention.
The wealth gap is not inherent nor is it permanent, through the use of
several different methods and with the aid of time many communities below

the poverty line should be able to flourish (Yuan, 2002). These methods can
include various regulations upon FDI(s), increased funding for infrastructure
in under developed regions, and also job initiatives through the home
country. In total the inherent idea behind closing the wage gap is providing
the capital to the population, but it needs to be derived locally. The innate
issue of FDI is that they artificially stimulate economies and remove capital
from local regions. This is why it is so important to have local initiatives and
funding as to avoid not only dependence but the possibility of poverty traps.
Without these initiatives communities will be left to continue the cycle of
poverty that is slowly leading us to an ever larger wealth gap.
Globalization has lead to a rapid increase of modern business practices
that have begun to increase the wealth gap. Practices such as FDI are being
used in several countries across the world to generate revenue for the
companies at the expense of the community and surrounding areas. This can
lead to dangerous cyclical poverty know as poverty traps, halting an area
from development. Without intervention and regulation this cycle will
inevitably continue, steadily increasing the income gap. Though my research
I have come to understand this topic better and begun to realize that the
best method for intervention is the kind we are not practicing. When faced
with poverty or suffering it is natural to want to help and be a part of the
solution but this may be doing more harm than good. Through the use of

FDI(s) and other foreign sources of capital, the only thing that is being done
is a temporary stimulus to an economy. By allowing local governments to
stimulate the economy themselves and removing the dependency on foreign
capital, revenue is being placed back into the community. There is much
that can be done to close the wealth gap, but until the laws and regulations
are in place it will only continue to increase.

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