International Portfolio Investment, Institutional Quality, and Income Inequality: Evidence from Global Sample

Abstract

This study examines the effect of total portfolio investment and its sub-categories (debt and equity) on income inequality using a sample of 76 countries. The empirical results show that foreign portfolio flows worsen income inequality in recipient countries, regardless of the inequality indicators used. The study also digs deeper to examine the conditions under which international portfolio investment can have an inequality-reducing effect. The empirical evidence confirms our hunch that FPI, in the presence of good institutions, serves as a catalyst for bridging the gap between the rich and poor. In other words, domestic factors such as the quality of institutions modulate the link between portfolio investment flows and income inequality. The estimated results are reassuringly robust to alternative measures of inequality (Gini-index and Palma ratio), sub-categories of total portfolio investment (debt and equity), and various estimators such as IV-2SLS, Machado and Silva quantile regression, and JKS Granger non-causality results. JEL classification: F3; P0; I30