Foreign direct investment, sectoral distribution and income inequality in developed and developing economies

Abstract

Despite some progress in reducing income inequality between countries over the last two decades, there is evidence that income inequality is on the rise within nations. This article uses panel data compiled from multiple sources and a growth curve modeling approach to examine the relationship between foreign direct investment (FDI) and within-nation income inequality across two samples: one comprising 2,095 country-year observations nested in 141 countries from 1991 to 2018 to explore the broader FDI-income inequality relationship, and a second, more focused sample of 405 country-year observations nested in 61 countries from 2000 to 2018, designed to analyze effects of the sectoral distribution of FDI. The analyses find that the relationship between FDI and income inequality is positive and linear for non-OECD economies but follows an inverted U-shaped path for developed countries. Moreover, in this article, I have developed and introduced two new indices, the FDI Pluralism Index and FDI Sectoral Gini Coefficient, to measure the distribution of FDI among the sectors of the host economy. Results show that a concentration of FDI in one sector aggravates income inequality since foreign capital tends to flow into the most profitable industries, creating uneven growth between sectors and increasing between-sector income inequality.

Keywords:

• FDI
• income inequality
• growth curves
• sectoral distribution
• absorptive capacity
• global and transnational sociology

Acknowledgement

The author would like to thank Drs. Thomas J. Burns, Cyrus Schleifer, Rob Clark, and Allen Hertzke for their insightful comments and thoughts on the earlier drafts of this article.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 A list of all countries represented in both samples is available in the online appendix Table A-5.

2 www.investmentmap.org.

3 For a detailed discussion of the methodology used by the ITC Investment Map refer to: .www.investmentmap.org/methodology-fdi-data

4 World Bank data on this measure reports every five years. Thus, following Clark (2020), I replaced missing values by using linear interpolation.

5 I have reverse coded the original information in a way that higher values show greater intervention.

6 I have reverse coded this index.

7 See Model 1 in online appendix Table A-1.

8 See Model 2 in online appendix Table A-1.

9 See Model 3 in online appendix Table A-1.

10 For full models, see online appendix Table A-2.

11 These results are produced by four different GCMs presented in online appendix Table A-3.