The Impact of Foreign Direct Investment on Income Inequality in Vietnam

Abstract

Foreign direct investments (FDI) is an important determinant of economic growth. FDI does not only contribute to the growth and economic development but also affects income through contributing to economic development and the impact on employment and salary structure of developing countries. The aim of this paper is to analyze the impact of FDI on income inequality in Vietnam. This study is the first attempt to examine the impact of FDI on income inequality under the constraints of the institution and education levels. To address the potential endogeneity problem, this study adopts Genernalized Method of Moment (GMM) model to conduct the estimation. A two-step GMM model with robust standard errors is used in the study. Empirical results show that FDI tends to increase income inequality in Vietnam and the existence of a non-linearity relationship between FDI and income inequality is also validated. Moreover, the study finds that the effects of FDI on income inequality are different depending on the level of education and institutions of the host provinces in Vietnam. The results of this study imply that, in order to ensure sustainable development, Vietnam’s policies should focus on improving the quality of economic governance and the administrative reform efforts of the government of the provinces and cities. Besides, policies should focus on increasing investment in public education and improving human capital, which not only can reduce income inequality but also can attract more FDI inflows.

Effects of Foreign Direct Investment on Wage Inequality in Developing Countries: Do recipient sectors matter?

“…Each theory used one or more of the channels of transforming the effect. This can explain partially the ambiguity of the distributional effect of inward FDI theoretically (Couto, 2018;Le et al, 2021). In general, most of theories focused attention to the changing pattern of relative demand for unskilled to skilled labor resulted from attracting inward FDI to the host country.…”

“…Through a review of literature, six theoretical basics have linked inward FDI to the effect on income distribution. These theories are the traditional trade theory, the Modernization theory, the North-South model, the dependency theory, the heterogeneous firms model and the endogenous-growth model (Couto, 2018;Huang et al, 2020;Le et al, 2021;Mihaylova, 2015).…”

“…The reason is that despite these processes of production are low-skilled labor intensive from the perspective of MNCs, it is still high-skilled labor intensive from the perspective of developing host countries (Gossel, 2022;Huang et al, 2020). Hence, relying on attracting inward vertical FDI in developing countries will raise wage inequality (Couto, 2018;Le et al, 2021;Li and Su, 2021).…”

“…Despite reducing income inequality is not being a new issue; it has gained additional importance, with increased focus on sustainable development. Although many studies dealt with the impact of inward FDI as one of the dimensions of globalization on socio-economic variables, the impact on income inequality was relatively received less attention, particularly in developing countries (Couto, 2018;Le et al, 2021). Suanes (2016) justified this relative scarcity of attention to the lack of data or the lack of clarity of the theoretical relationship.…”

“…The lack of clarity of the theoretical basis of the distributional effect of inward FDI was reflected on the empirical relationship between them, particularly in developing countries (Le et al, 2021). Some studies failed to find the relationship between the two variables.…”