Foreign direct investment and inequality in developing countries: Does sector matter?

Scholars have studied the relationship between inward foreign direct investment (FDI) and within‐country income inequality in cross‐national contexts, but have not empirically investigated how FDI in different sectors might affect inequality in different ways. We use error correction models to analyze sectoral FDI data compiled from UNCTAD investment reports in 60 middle‐income countries from 1989 to 2010, arguing that FDI in services is more likely to be associated with inequality than FDI in other sectors. We argue that skill biases and changes in employment patterns associated with service sector investments can help explain these findings.     

Foreign direct investment,growth and income inequality in less developed countries

How does foreign direct investment (FDI) affect economic growth in less developed countries (LDCs)? What is its association with changes in the income distribution? This paper empirically examines these issues within a cross section of less developed countries between 1970 and 1989. FDI is positively associated with economic growth within this sample of countries. However, there is no strong association between FDI and changes in income inequality within these same countries and over this same time period. Hence, there is no evidence that FDI is increasing income inequality within this group of LDCs.     

Spillover effects of FDI inflows on output growth: An analysis of aggregate and disaggregated FDI inflows of 13 MENA economies

This paper examines the effect of foreign direct investment (FDI) inflows on overall growth, as well as its sector-specific spillovers in the Middle Eastern and North African region during the period from 2000 to 2020. Our major innovation is our ability to disaggregate FDI into primary, secondary and tertiary and examine their individual impact on growth, as well as their sector-specific spillovers by using dynamic panel GMM methodology. We find prima facie evidence that total FDI significantly stimulates growth. However, when we turn to the disaggregated FDI data, primary sector FDI adversely affects the gross domestic product (GDP) growth in the service sector and overall GDP growth. On the other hand, secondary FDI has a ‘double-edged’ effect, benefiting its own sector (the service sector's GDP growth), but not other sectors. In contrast, service sector FDI stimulates GDP growth in mining, manufacturing and service sectors, thereby enhancing overall economic growth. Our findings have important policy implications regarding the incentives provided by governments to encourage FDI, which need to be fine-tuned to attract certain types of FDI (tertiary), with less focus on the primary sector     

Foreign investments in real estate,economic growth and property prices: evidence from OECD countries

The last two decades have witnessed a growth in foreign direct investments (FDI) in the real estate sector in most of the Organization for Economic Co-Operation and Development (OECD) countries. It is argued that FDI in the real estate sector may improve economic growth in recipient economies. On the other hand, property prices have increased considerably in OECD countries in recent years and some argue that FDI in real estate is one of the driving forces of high property prices in these countries. The purpose of this study is to analyze the interrelationship between FDI in the real estate sector, economic growth, and property prices while controlling for interest rate and inflation. We use observations from a set of OECD countries for the period between 1995 and 2008. The dynamic interrelationship is analyzed by applying a panel cointegration technique. Our empirical results show that FDI in real estate do not cause property price appreciations and also do not contribute to economic growth in OECD countries in the short run and the long run.     

Finance and income inequality in Kazakhstan: evidence since transition with policy suggestions

Kazakhstan gained independence in 1990 and has undergone significant changes in economic, social and trade conditions since then. We analyse the effects of financial development on income inequality in Kazakhstan, incorporating economic growth, foreign investment, education and the role of democracy as the drivers. We establish that income inequality in Kazakhstan is impaired by financial development. In summary, we send three messages for policy purposes. First, strengthening financial sector is necessary to close the gap between ‘haves and have-nots’. Second, attracting FDI beyond the hydrocarbon sector is necessary to alleviate inequality. Finally, adaptation of education system to the new social and economic environment would help in improving income distribution.     

Foreign Direct Investment and Regional Inequality in China

Foreign direct investment (FDI) is blamed for being one of the main factors widening regional inequality in Chinese regions since it is highly unevenly distributed spatially. If this logic were true, then controlling the scale of FDI could be a solution to reduce regional inequality. However, it is difficult to reconcile the positive effect of FDI on economic growth with its potential "negative" effect on regional inequality. Using the largest panel dataset covering all the Chinese regions over the entire period 1979–2003 and employing an augmented Cobb–Douglas production function, this paper proves that FDI has been an important factor responsible for regional growth differences in China. However, it suggests that FDI cannot be blamed for rising regional inequality. It is the uneven distribution of FDI instead of FDI itself that has caused regional growth differences. The research results have important policy implications on regional development in China relating to FDI.     

Economic Integration,Growth and Income Distribution

This paper constructs a two‐sector growth model with heterogeneous labour, to explore the impact of the economic integration on growth and income distribution. There are two sectors in each country, including the consumption‐good sector and the R&D sector. We suppose that the R&D sector produces new blueprints or ideas for these innovations, and hence provides the engine of growth. Assume that the talent's distribution of workers is the uniform distribution. We show that the economic integration will stimulate the developing countries' economic growth and then decrease its income inequality. In addition, we also demonstrate that if the growth rate of the advanced country rises after the integration, then income inequality of that will increase, and vice versa.     

Trade liberalisation,market competition and wage inequality in China's manufacturing sector

Economic reforms of the late 1980s have contributed to rapid economic growth in China. While the overall standard of living has improved, economic growth has also resulted in an increase in income inequality. Rising income inequality can increase social tensions that can impede further economic growth. By making use of firm level panel data, this paper focuses on the impact of increased market competition and trade liberalisation on skilled–unskilled wage inequality in China's manufacturing sector. A theoretical model is used to argue that trade liberalisation and market competition can affect skilled–unskilled wage inequality. Based on this result, an econometric model is specified. The empirical analysis presented in this paper shows that increased trade liberalisation has contributed to an increase in skilled–unskilled wage inequality in China's manufacturing sector. However, increase in market competition has the opposite effect.     

FINANCIAL DEVELOPMENT AND THE FDI‐INEQUALITY NEXUS

This article empirically investigates whether the link between foreign direct investment (FDI) and income inequality varies with financial development. Using a smooth transition regression model to a panel of developing and advanced countries over the period of 1976–2005, the results indicate that financial development indeed defines the relationship between FDI and inequality. FDI raises income inequality and the effect becomes stronger in magnitude with financial sophistication. The results also indicate a large variation in the FDI effect across countries and over time, contingent on financial development. (JEL C23, F40, O15)     

Green technological progress,agricultural modernization,and wage inequality: Lessons from China

Green technological progress (GTP) is crucial for environmental protection and economic growth in China. Over the past decades, China made huge GTP which exerts a far-reaching consequence on economic and social development. However, a paucity of research investigates the distributional effect of GTP. Meanwhile, we incorporate agricultural producer service sector into a three-sector general equilibrium model to reflect the modernization of small-scale agriculture. The agricultural producer service sector that acts as an intermediate sector can facilitate the utilization of intermediate inputs indirectly. To desalinate this process, a two-layer vertical production structure is established: parts of manufacturing goods are utilized by the service sector, outputs of which are intermediate inputs that could substitute labor in agriculture. Theoretical analysis shows that GTP increases both wage of skilled labor and unskilled labor. Nevertheless, GTP generates a greater impact on the wage of skilled labor than unskilled labor, leading to widening income disparity. Then, we examine the impact of GTP on wage inequality using a balanced panel data covering 30 provincial units in China during 2000–2019. In line with our theoretical conjecture, we find strong supportive evidences that GTP significantly widens the wage inequality.     

Income inequality and FDI: evidence with Turkish data

This article explores how foreign direct investment (FDI) and other determinants impact income inequality in Turkey in the short- and long-run. We apply the nonlinear auto-regressive distributed lag (ARDL) modelling approach, which is suitable for small samples. The data for the study cover the years from 1970 to 2008. The empirical results indicate the existence of a co-integration relationship among the variables with asymmetric adjustment of the income distribution in the short- and long-run. The negative impact of FDI on the Gini coefficient, decreasing income inequality, is statistically significant in the short- and long-run, though with a quantitatively small impact in both cases. In the short run, GDP growth increases inequality initially, an effect that is reversed in the next period, increases in domestic gross capital formation decreases inequality, and increases in the literacy rate have very minor adverse effects on income equality. However, in the long run these variables have no statistically significant effects on the Gini coefficient. A reduction in the population growth rate reduces inequality in the short run but has no effect in the long run, whereas an increase in the rate reduces inequality in the long run but has no effect in the short run.     

FDI, domestic capital and economic growth: Evidence from panel data at China’s provincial level

Based on panel data at the provincial level in China, this paper found that direct effects foreign direct investment (FDI) had on economic growth were of insignificance. However, through improving technical efficiency and “crowding” in domestic investment, FDI produced positive effects on China’s economy. The state sector still played a major part in the total fixed investment, therefore, direct effects on growth were significant. Although private sector was increasingly important for the whole economy, it had no direct influences on economic growth. Meanwhile, neither the state sector nor private sector made contribution to the improvement on technical efficiency. __________ Translated from Shijie Jingji Wenhui 世界经济文汇 (World Economic Papers), 2006, (4): 27–43     

Reexamination of Economic Growth, Tax Policy, and Distributive Politics

The paper examines the relationship between economic growth, tax policy, and distribution of capital and labor ownership in a one‐sector political‐economy model of endogenous growth with productive government spending financed by a proportional tax on capital income. The analysis shows that inequality in wealth and income can be positively or negatively related to the optimal tax rate. In either environment, higher inequality leads to a lower after‐tax return to capital, thereby reducing the economy's growth rate.     

Manufacturing FDI and economic growth: evidence from Asian economies

Previous empirical studies on inward foreign direct investment (FDI) and economic growth generate mixed results. This article suggests that the ambiguous results might be caused by the use of total FDI. We study the heterogeneous effects of different sector-level FDI inflows on host country's economic growth. Data from 12 Asian economies over the period of 1987 to 1997 are employed. Strong evidence shows that FDI in manufacturing sector has a significant and positive effect on economic growth in the host economies. FDI inflows in nonmanufacturing sectors do not play a significant role in enhancing economic growth. Furthermore, without the decomposition of total FDI inflows, the effect of manufacturing FDI on host country's economic growth is understated by at least 48%.     

Foreign direct investment and income inequality: Does the relationship vary with absorptive capacity?

There has been little systematic empirical literature on the linkage between income inequality and FDI (Basu and Guariglia, 2007; Tsai, 1995). This paper analyzes the effects of foreign direct investment (FDI) on income inequality and asks whether the relationship depends on absorptive capacity or not, by using a cross-sectional dataset taken from 54 countries over the period 1980–2005. We adopt the endogenous threshold regression model proposed by Hansen (2000) and Caner and Hansen (2004) and find strong evidence of a two-regime split in our sample. That is, FDI is likely to be harmful to the income distribution of those host countries with low levels of absorptive capacity. By contrast, our results support the perspective that FDI has little effect on income inequality in the case of countries with better absorptive capacity. It is also shown that international trade can lead to more equal income distribution.     

Welfare and equity impacts of cross-border factor mobility in Bangladesh: A general equilibrium analysis

We develop a dynamic computable general equilibrium model with cross-border factor mobility to assess the impacts of a foreign wage shock and the effects of counteractive policy measures in Bangladesh. The model features migration of workers and foreign direct investment (FDI) in the ready-made garments (RMG) sector. Our simulation results show that returning migrants induced by a foreign wage fall would reduce household welfare by lowering wages and increasing unemployment, particularly for unskilled workers in the domestic labor market. To counteract this negative shock, FDI promotion in the RMG sector and a human-capital development program are considered. The former policy minimizes the negative impacts of the foreign labor market shock, while a combination of both policies is more equitable.     

Oil booms and inequality in Iran

We study the response of income inequality to positive per capita oil and gas revenue shocks in Iran. Using historical data from 1973 to 2016 and vector autoregression (VAR) as well as vector error correction (VECM) model‐based impulse‐response functions, we find a positive and statistically significant response of income inequality to oil booms. We also explore possible channels through which oil booms may increase inequality, including private sector credit growth, construction investment, international trade (imports) and real economic output. We find that following an oil boom, higher imports, private sector credit growth, and real economic output can explain the increased income gap to a certain degree in Iran's oil‐based economy. Our analysis can help policymakers evaluate and accommodate the possible positive or negative effects of inequality in Iran resulting from the 2016 lifting of the embargo against the country.     

The Effect of Foreign Affiliate Employment on Wages,Employment, and the Wage Share in Austria

This paper estimates the effects of outward Foreign Direct Investment (employment in affiliates abroad) on employment, wages and the wage share in Austria using panel data for the period 1996–2005. There is evidence of significant negative effects of FDI on both employment and wages, and consequently on the wage share. The results are not limited to workers in low-skilled sectors. The negative employment effect is mainly due to the rise in employment in the foreign affiliates in Eastern Europe. The negative wage effects originate from affiliate employment in both Eastern Europe and the developed countries in the industrial sector, but FDI in Eastern Europe has positive wage effects in the services sector due to possible scope effects.     

Greenfield FDI and skill upgrading: A polarized issue

Outbound FDI is often accused of increasing income inequality in developed countries by shifting labour demand from low‐skilled towards high‐skilled workers (wage polarization). In response, we employ data on greenfield FDI that, in contrast to M&As, may be more clearly linked to skill upgrading. Our data also delineate greenfield FDI by sector, function and destination, allowing us to control for different motives and skill intensities for 17 developed countries for 2003–2005. We find that greenfield FDI in support services, e.g., back and front office services, induces polarized skill upgrading, benefitting high‐skilled workers at the expense of medium‐skilled workers, thereby polarizing wages.