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Foreign direct investment and income inequality: Does the relationship vary with absorptive capacity?


  • Wu, Jyun-Yi
  • Hsu, Chih-Chiang


There has been little systematic empirical literature on the linkage between income inequality and FDI (Basu and Guariglia, 2007; Tsai, 1995). This paper analyzes the effects of foreign direct investment (FDI) on income inequality and asks whether the relationship depends on absorptive capacity or not, by using a cross-sectional dataset taken from 54 countries over the period 1980–2005. We adopt the endogenous threshold regression model proposed by Hansen (2000) and Caner and Hansen (2004) and find strong evidence of a two-regime split in our sample. That is, FDI is likely to be harmful to the income distribution of those host countries with low levels of absorptive capacity. By contrast, our results support the perspective that FDI has little effect on income inequality in the case of countries with better absorptive capacity. It is also shown that international trade can lead to more equal income distribution.

Suggested Citation

  • Wu, Jyun-Yi & Hsu, Chih-Chiang, 2012. "Foreign direct investment and income inequality: Does the relationship vary with absorptive capacity?," Economic Modelling, Elsevier, vol. 29(6), pages 2183-2189.
  • Handle: RePEc:eee:ecmode:v:29:y:2012:i:6:p:2183-2189 DOI: 10.1016/j.econmod.2012.06.013

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    References listed on IDEAS

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    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Ines TROJETTE, 2016. "The Effect Of Foreign Direct Investment On Economic Growth: The Institutional Threshold," Region et Developpement, Region et Developpement, LEAD, Universite du Sud - Toulon Var, vol. 43, pages 111-138.
    2. Kaisa Alavuotunki & Mika Haapanen & Jukka Pirttilä, 2017. "The Consequences of the Value-Added Tax on Inequality," CESifo Working Paper Series 6318, CESifo Group Munich.
    3. Ahmad, Mahyudin, 2016. "Middle income trap and income inequality: Empirical evidence on the distributional effect of economic liberalization and political regime," MPRA Paper 76437, University Library of Munich, Germany.
    4. Law, Siong Hook & Azman-Saini, W.N.W. & Ibrahim, Mansor H., 2013. "Institutional quality thresholds and the finance – Growth nexus," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5373-5381.
    5. repec:lde:journl:y:2017:i:87:p:9-33 is not listed on IDEAS
    6. Asteriou, Dimitrios & Dimelis, Sophia & Moudatsou, Argiro, 2014. "Globalization and income inequality: A panel data econometric approach for the EU27 countries," Economic Modelling, Elsevier, vol. 36(C), pages 592-599.
    7. Usman Qamar Sheikh & Muhammad Zafar Iqbal & Hafiz Khalil Ahmad, 2016. "The Impact of Foreign Aid, Energy Production and Human Capital on Income Inequality: A Case Study of Pakistan," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 5(1), pages 1-9, March.
    8. Kaisa Alavuotunki, & Jukka Pirttilä2, 2015. "The consequences of the value-added tax on inequality," WIDER Working Paper Series 111, World Institute for Development Economic Research (UNU-WIDER).
    9. repec:col:000174:015706 is not listed on IDEAS
    10. Hale, Galina & Xu, Mingzhi, 2016. "FDI effects on the labor market of host countries," Working Paper Series 2016-25, Federal Reserve Bank of San Francisco.

    More about this item


    Income inequality; Foreign direct investment; Absorptive capacity; Threshold regression;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development


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