Foreign direct investment and income inequality: Does institutional quality matter?

Abstract

This research examines the impacts of FDI inflows, institutional quality (IQ) and their interaction on income inequality in 36 Asian countries over the period 2000–2018. Results demonstrate that FDI exacerbates income inequality, and the improvement in IQ from FDI diminishes this detrimental impact until a threshold of IQ, then beyond that FDI reduces income inequality. Meanwhile, institutional quality reduces income inequality, and this beneficial effect is intensified with the rising FDI inflows. Notably, IQ moderates the impact of FDI on income inequality through the internal mechanism of government effectiveness, control of corruption, political stability and absence of violence/terrorism, and rule of law.