Foreign Direct Investment and Income Inequality in Mexico, 1990–2000

Abstract

In this article we explore the relationship between the investments of multinational corporations (foreign direct investment) and income inequality in Mexico. We argue that Mexico's liberalization of foreign direct investment (FDI) inflows in the 1990s provides a natural experiment to test how FDI affects income inequality in a middle-income country. We use an instrumental variables approach as our identification strategy to mitigate problems of endogeneity and omitted variable bias. In an empirical test of the determinants of changes in income inequality from 1990 to 2000, we find that increased FDI inflows are associated with a decrease in income inequality within Mexico's thirty-two states.The authors would like to thank Lawrence Broz, John Freeman, Matt Gabel, Geoff Garrett, Quan Li, Eddy Malesky, Layna Mosley, Katie Ridgeway, Pablo Pinto, John Stringer, and Andy Sobel for comments and suggestions. Jacob Gerber and Mariana Medina provided excellent research assistance. Thanks also to Patricio Aroca Gonzalez for generously providing us with his data. We acknowledge the financial support of the Weidenbaum Center on the Economy, Government, and Public Policy. Nate Jensen's contribution to this article was written as a Global Fellow at UCLA's International Institute.