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FDI and Income Inequality: Evidence from Europe

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  • Dierk Herzer
  • Peter Nunnenkamp

Abstract

This paper examines the effects of inward and outward FDI on income inequality in Europe using panel cointegration techniques and unbalanced panel regressions. Our main result is that both inward FDI and outward FDI have, on average, a negative long-run effect on income inequality. This result is robust to alternative estimation methods, potential outliers, different measures of FDI and inequality, and period and sample selection. Other findings are: (i) While the long-run effect of inward and outward FDI on income inequality is clearly negative, their short-run effect appears to be positive. (ii) Long-run causality runs in both directions, suggesting that an increase in inward and outward FDI reduces income inequality in the long run, and that, in turn, a reduction in inequality leads to an increase in inward and outward FDI. (iii) There are large cross-country differences in the long-run effects of inward and outward FDI on income inequality; for some countries the long-run effects on income inequality are positive

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1675.

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Length: 21 pages
Date of creation: Jan 2011
Date of revision:
Handle: RePEc:kie:kieliw:1675

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Keywords: FDI; income inequality; panel co-integration; Europe;

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  1. Guillaume Daudin & Christine Rifflart & Danielle Schweisguth, 2009. "Who produces for whom in the world economy?," Documents de Travail de l'OFCE, Observatoire Francais des Conjonctures Economiques (OFCE) 2009-18, Observatoire Francais des Conjonctures Economiques (OFCE).
  2. Hans-Werner Sinn, 2006. "The Pathological Export Boom and the Bazaar Effect - How to Solve the German Puzzle," CESifo Working Paper Series 1708, CESifo Group Munich.
  3. Park, Donghyun & Shin, Kwanho, 2010. "Can Trade with the People’s Republic of China Be an Engine of Growth for Developing Asia ," Asian Development Review, Asian Development Bank, Asian Development Bank, vol. 27(1), pages 160-181.
  4. Kim, Soyoung & Lee, Jong-Wha & Park, Cyn-Young, 2010. "The Ties that Bind Asia, Europe, and United States," ADB Economics Working Paper Series 192, Asian Development Bank.
  5. Prema-chandra Athukorala, 2011. "Production Networks and Trade Patterns in East Asia: Regionalization or Globalization?," Asian Economic Papers, MIT Press, MIT Press, vol. 10(1), pages 65-95, January.
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