RIEB Discussion Paper Series No.2025-18

Title

The Impact of Foreign Direct Investment on Income Inequality: Evidence from New Instruments

Abstract

The impact of foreign direct investment (FDI) on income inequality is still under debate and requires further research. Employing unique instrumental variables based on linguistic and geographic distances, this study empirically analyzes the impact of FDI on income inequality in developing countries, revealing heterogeneous impacts across different regions. This study constructs a unique unbalanced panel dataset comprising 103 developing countries divided into four regional subsamples from 1991 to 2021. Using these full sample and subsamples, this study evaluates the aggregate impact of FDI on income inequality in developing countries and its region-specific effects. The results indicate that FDI has no significant impact on income inequality in the full sample. However, in the regional subsamples, FDI demonstrates significant positive effects on income inequality only in Latin America and the Caribbean region, whereas no statistically significant effects are observed in other regions. Moreover, the study demonstrates that the main findings are robust to the use of five-year average data, sub-periods of analysis, and alternative instrumental variables based on different definitions of linguistic distance.

Keywords

Foreign direct investment; Gini coefficient; Developing countries; Instrumental variables; Linguistic distance

JEL Classification

F21, F62, O15, O57

Inquiries

Junsong SHI
Graduate School of Economics, Kobe University

Yoshimichi MURAKAMI
Research Institute for Economics and Business Administration
Kobe University
Rokkodai-cho, Nada-ku, Kobe
657-8501 Japan
Phone: +81-78-803-7036
FAX: +81-78-803-7059