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Trade openness, foreign investment, and urban-rural income gap

Author

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  • Tang, Bi
  • Liu, Xi
  • Yang, Zhijun

Abstract

Based on panel data of prefecture-level cities from 2008 to 2023, this study systematically explores the impact of trade openness on the urban-rural income gap and its underlying mechanisms using a progressive Difference-in-Differences (DID) model. The findings reveal: First, trade openness significantly widens the urban-rural income gap. Second, Foreign Direct Investment (FDI) plays a partial mediating role between trade openness and the urban-rural income gap. FDI enhances the efficiency of urban enterprises through technology spillover effects, exacerbates the "skill premium" in urban labor markets, and indirectly widens the income gap. Third, policy effects exhibit significant regional heterogeneity: the establishment of Free Trade Zones (FTZs) significantly widens the gap in the Eastern Region due to its superior industrial base and high concentration of foreign investment; conversely, it narrows the gap in the Central Region, benefiting from the "Rise of Central China" strategy and industrial relocation capacity.

Suggested Citation

  • Tang, Bi & Liu, Xi & Yang, Zhijun, 2025. "Trade openness, foreign investment, and urban-rural income gap," Finance Research Letters, Elsevier, vol. 86(PE).
    • Handle: RePEc:eee:finlet:v:86:y:2025:i:pe:s154461232501949x
    DOI: 10.1016/j.frl.2025.108695
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    References listed on IDEAS

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