Income Inequality: Does FDI Matter?

This paper combines two strains of literature - the literature on foreign direct investment (FDI) spillover effects and the income inequality literature - to find out if FDI inflows are among the determinants of income inequality. It explains the different FDI spillover effects, the general causes of changes in income inequality and elaborates upon two hypotheses in which these strains of literature are integrated. Using OLS regressions, this study confirms that FDI spillover effects have a positive influence on income inequality. No changes to this conclusion are found, when only developing countries are tested. This makes it possible, to add this study to a great number of papers that call for more FDI inflows into poor countries in the fight against poverty. Testing whether the positive influence of FDI inflows on income inequality changes if countries are open to trade, leads to the conclusion that the positive effect in this case almost doubles. This study, therefore, advises that governments do not only try to attract more FDI inflows but at the same time should introduce policies to stimulate trade in general.