Foreign direct investment, growth and income inequality in less developed countries

Abstract

How does foreign direct investment (FDI) affect economic growth in less developed countries (LDCs)? What is its association with changes in the income distribution? This paper empirically examines these issues within a cross section of less developed countries between 1970 and 1989. FDI is positively associated with economic growth within this sample of countries. However, there is no strong association between FDI and changes in income inequality within these same countries and over this same time period. Hence, there is no evidence that FDI is increasing income inequality within this group of LDCs.Economic growth, income inequality, foreign direct investment, JEL Classification: O15, F21, F43,

Does Foreign Direct Investment Successfully Lead to Sustainable Development in Singapore?

“…Other studies, such as by Sylwester (2005) and Adams (2009) found that FDI variables were not statistically significant in explaining income inequalities. In country-specific studies by Zhang and Zhang (2003), it was revealed that increasing FDI inflows contributed to greater income inequality in China.…”

Foreign direct investment and income inequality in Latin America: A sectoral analysis

“…Many studies estimating the relationship between fdi and income inequality have found it to be positive (Tsai, 1995;Velde, 2003;Choi, 2006;Basu and Guariglia, 2007;Herzer, Hühne and Nunnenkamp, 2012), while others have found it to be negative, or have been unable to find any relationship (Milanovic, 2003;Sylwester, 2005). At the microeconomic level, however, a large branch of the literature has found that when fdi is present, the wage gap between skilled and unskilled workers increases, as therefore does income inequality (Lipsey and Sjöholm, 2004;Mah, 2002;Velde, 2003;Aitken, Harrison and Lipsey, 1996;Feenstra and Hanson, 1997).…”

“…By contrast, Milanovic (2003), employing household survey data for 129 countries from 1988, 1993 and 1998, finds fdi to have no effect on income distribution. Lastly, Sylwester (2005), using a panel of 29 developing economies for the 1970-1990 period, finds no evidence of a positive relationship between these variables. In summary, while the empirical evidence for the relationship between fdi and inequality in developing economies is not conclusive, in no case does it indicate that such investment has the effect of reducing inequality, but rather the opposite.…”

Economic Growth, Regional Savings and FDI in Sub-Saharan Africa: Trivariate Causality and Error Correction Modeling Approach

“…Additionally, studies such as Akinlo (2004) and Aynwale (2007) have found FDI to have insignificant effect on economic growth all things being equal. Hermes and Lensink (2003) and Sylwester (2005) even suggest that FDI tend to have negative effects on host economies under certain conditions.…”