The International Distribution of FDI Income And Its Impact on Income Inequality

Abstract

Income generated by foreign direct investments (FDI) has grown since the 1990s, and now represents a substantial portion of many countries’ current accounts. Some of these flows are routed through Special Purpose Entities in financial centers that multinational firms use to minimize their tax liabilities. We use IMF and OECD data to ascertain which countries receive FDI-generated income, and find that a few advanced economies are the recipients of the largest shares. We also distinguish between FDI equity income and FDI interest income arising from intra-firm lending. We investigate the impact of these flows on income distribution within the recipient countries. FDI equity income contributes to the income share of the top 1% of households in advanced economies. FDI interest income, on the other hand, has no impact in these economies. FDI equity income also contributes to the income share of the top 1% in financial centers, but interest income is inversely linked to their income share. FDI income, therefore, increases inequality both among and within countries.