Does foreign direct investment affect domestic income inequality?

Abstract

Using pooled Gini coefficient 1993 to 2002 data for 119 countries from World Development Indicators 2004, World Bank, we find that income inequality, defined as the Gini coefficient, increases as FDI stocks as a percentage of GDP increase. Increases in per capita GDP and real per capita GDP growth rate reduce income inequality in a country, whereas an increase in GDP deteriorates income distribution. Furthermore, Latin American and Caribbean countries proved to have a less equal income distribution.

Notes

¹ ASIA includes China, Hong Kong, Indonesia, Japan, Korea, Malaysia, the Philippines, Singapore and Thailand.

² Per capita GDP squared is added to the independent variables, but Kuznets’ ‘inverted-U curve’ hypothesis, that inequality has an inverted-U curve relationship with development (Kuznets, 1955; Tsai, 1995; Thornton, 2001), does not hold from our analysis.

³ I also added the product of rich country dummy (per capita GDP > 20 000 dollars) with each type of INTENSITY variable, the literacy rate, trade openness and general government final consumption expenditures as a percentage of GDP from WDI as independent variables. I could not find any significant results in relation to the Gini coefficient when these variables were added and thus those estimation results are not reported in Table 2.

⁴ This result is contradictory to Tsai (1995), where the effect of FDI on income inequality becomes invalid when Asia and Latin America dummies are included.