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FDI inflows and income inequality: A Schumpeterian economic growth

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  • Wang, Wenhao
  • Xu, Tao
  • Liu, Xiaoyi
  • Sun, Yongkun

Abstract

It is well documented that inward FDI promotes economic growth and technological progress which are demonstrated to affect income inequality. This paper investigates the distributional effect of FDI inflows. We propose a Schumpeterian economic growth model adopted with the Pareto income distribution. The theoretical model implies that FDI inflows would increase income inequality by promoting economic growth but reduce it by causing creative destruction. The overall distributional effect of FDI inflows is hard to be predetermined. We employ the GLS approach to conduct the empirical test, relying on the dataset taken from 126 countries. The Pareto index constructed based on top income shares indicates that FDI inflows reduce income inequality in emerging market countries but increase income inequality in developed countries. This finding is further confirmed by directly regressing top income shares on FDI inflows. Empirical evidence supports the channels suggested by the theoretical model. The results are found consistent on employing alternative top income shares, proxies of FDI inflows, model specification and estimation approaches.

Suggested Citation

  • Wang, Wenhao & Xu, Tao & Liu, Xiaoyi & Sun, Yongkun, 2023. "FDI inflows and income inequality: A Schumpeterian economic growth," International Review of Economics & Finance, Elsevier, vol. 83(C), pages 805-820.
    • Handle: RePEc:eee:reveco:v:83:y:2023:i:c:p:805-820
    DOI: 10.1016/j.iref.2022.10.023
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    More about this item

    Keywords

    FDI inflows; Income inequality; Technology diffusion; Economic growth; Pareto distribution;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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