Foreign direct investment, sectoral distribution and income inequality in developed and developing economies

Abstract

Despite some progress in reducing income inequality between countries over the last two decades, there is evidence that income inequality is on the rise within nations. This article uses panel data compiled from multiple sources and a growth curve modeling approach to examine the relationship between foreign direct investment (FDI) and within-nation income inequality across two samples: one comprising 2,095 country-year observations nested in 141 countries from 1991 to 2018 to explore the broader FDI-income inequality relationship, and a second, more focused sample of 405 country-year observations nested in 61 countries from 2000 to 2018, designed to analyze effects of the sectoral distribution of FDI. The analyses find that the relationship between FDI and income inequality is positive and linear for non-OECD economies but follows an inverted U-shaped path for developed countries. Moreover, in this article, I have developed and introduced two new indices, the FDI Pluralism Index and FDI Sectoral Gini Coefficient, to measure the distribution of FDI among the sectors of the host economy. Results show that a concentration of FDI in one sector aggravates income inequality since foreign capital tends to flow into the most profitable industries, creating uneven growth between sectors and increasing between-sector income inequality.