FDI and income inequality in Africa

Abstract

This paper tests the impact of foreign direct investment (FDI) on income inequality in a panel of 16 African countries from 1980 to 2013. We controlled for both non-linear effects and heterogeneity by using a Pooled Mean Group estimator. There is robust evidence that the relationship is non-linear and we document a U-shaped effect of FDI on inequality. The results reveal that FDI increases equality of distribution of income in the countries examined. However, this effect diminishes with further increases in FDI. Policy implications emanating from this study suggest that although FDI may be growth enhancing, FDI-induced growth may not necessarily translate into a reduction in inequality. FDI has to be structured in such way that the resulting skill-biased employed is mitigated. To address inequality, policy implications from this study imply that FDI has to target both ends of the labour market.