Foreign direct investment and income inequality revisited

Abstract

This paper discusses the impact of FDI on income inequality.

The theoretical ways in which FDI might influence income inequality between countries as well as within a given country are discussed, with special attention also given to employment generation effects. Revisiting previous research we show that significant effects of FDI are hard to find in more recent work, with older studies showing mixed results. Re-estimating the prominent study of Tsai (1995) with newer data we augment it by allowing for FDI-influences on inequality by region, income level, and export focus. We find no overall impact of FDI on inequality. Also region and income differentiated estimations show no country group-specific impacts of FDI. Only in the export focusdifferentiated estimations we find some evidence of an inequality increasing impact of FDI in countries primarily exporting primary goods (without fuel). FDI thus do not have significant implications for income distribution in general.