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

Jyun Yi Wu, Chih Chiang Hsu

Research output: Contribution to journalArticlepeer-review

47 Scopus citations

Abstract

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.

Original languageEnglish
Pages (from-to)2183-2189
Number of pages7
JournalEconomic Modelling
Volume29
Issue number6
DOIs
StatePublished - Nov 2012

Keywords

  • Absorptive capacity
  • Foreign direct investment
  • Income inequality
  • Threshold regression

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