Impact of FDI on income inequality in Africa

FDI is considered as a channel of growth and economic development for the country therefore, many developing countries have gone through economic reforms adopting liberalisation policies towards FDI for achieving higher economic development. There have been contradicting views about the impact of FDI on the economies of recipient countries. Also, there are contradictory evidences in the literature explaining the relationship between FDI and income inequality therefore, present research aims to explain the relationship between FDI and income inequality using dependency theory. It also attempts to identify the factors which determine this relationship in African countries. The study confirms the argument of dependency theory that the relationship between FDI and income inequality is not direct rather it is determined by local factors such as absorptive capacity, human capital, technology and innovation and institutional environment. It is found that all these factors influence the impact of total and sectoral FDI on income inequality(Li and Liu 2005) but absorptive capacity is the most important factor that positively determine the relationship between FDI and income inequality(Wu and Hsu 2012). In general, a higher absorptive capacity in the country is associated with lower income inequality that is countries with higher absorptive capacity have lower income inequality. Further the present study found that role of FDI is also sector specific where FDI in hi-tech and manufacturing sector reduces income inequality in African countries while inward FDI in other sectors does not make a significant impact in the host countries. At regional level, there is no significant relationship between FDI and income inequality because of lack of heterogeneity in the sample of countries.