The difference in the FDI inflows – Income inequality relationship between developed and developing countries

Abstract

Foreign direct investment (FDI) plays a crucial role in the fight against poverty and income inequality in countries worldwide. How does the governance environment decisively contribute to the difference in the FDI – income inequality relationship between developed and developing countries? To answer this question, the study empirically assesses the effect of FDI on income inequality for a group of 24 developed countries with the good governance environment and a group of 37 developing countries with the poor one from 2005 to 2018 using the two-step system GMM Arellano-Bond estimator. The estimated results indicate some interesting findings. First, FDI increases income inequality in developed countries but reduces it in developing countries. Second, in both groups of countries governance and education narrow income inequality while economic growth widens it. In particular, the robustness of estimates is checked by the PMG estimator. These findings suggest some policy implications for central governments about policies and regulations relating to the fight against income inequality.