The Impact of Foreign Direct Investment on Inequality

Income inequality has always been a problem, especially in Southeast Asia. It is vulnerable to create a disparity and unjust feeling among the society which could potentially raise a social and political conflict within a country. On the other hand, nowadays FDI has been sought by countries in this globalization era in order to sought economic development, income growth and employment absorption. Southeast Asia has been known for its developing attraction for hosting foreign investment. The region has always taken part in attracting attention, particularly in the theme of potential market, resources and investment environment. However, there are still only several studies that explain the relationship of FDI as the economic integration instrument towards income inequality. These studies also present contradicting results in explaining the FDI-income inequality nexus. Therefore, this research aims to to compare and explain the impact of sectoral foreign direct investment towards income inequality in the region of Southeast Asia. It also aims to provide results with the presence of country’s capability in explaining the relationship between FDI per sectors and income inequality, which derived from the capability approach. Lastly, it also aims to provide evidence and suggestion on factors from county’s set of capabilities that significantly affecting FDI and income inequality relationship. On that regards, this research confirms the non-linear relationship between the three major FDI sectors towards gini index of income inequality. Furthermore, results also confirm the significance of capability approach concept in determining the relationship of FDI and income inequality. The presence of three country’s capabilities, namely, human, infrastructure, and government capability are significant in providing instantaneous effect towards FDI in effecting income inequality. However, the significant level only appears in service and manufacturing sectors. Agriculture sector, on the other hand, does not appear to be significant, even in the presence of capability approach. From this result, human capability is arguably the most important capability in determining the impact of FDI towards income inequality as in often appear to be a significant mediating variable. Their indicators of Gross National Income (GNI) and tertiary enrollment rates are mostly significant in all final regression models in each FDI sectors. Some indicators from infrastructure and government capability are also appear to be significant at times with mobile subscriptions and corruption index as the most often indicators to have significance level.