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Foreign Direct Investment and Regional Inequality: A Panel Data Analysis

  • Christian Lessmann

Foreign direct investments (FDI) are an important determinant of economic growth. Coun-tries try to attract mobile capital in order to foster economic development, albeit FDI might increase regional inequality since the many different regions of a country usually do not receive FDI in equal measure. A conflict emerges between efficiency and redistribution. The aim of this paper is to investigate the impact of foreign direct investment on regional inequalities. First, the Chinese case is analyzed as an introductory example. FDI has increased regional inequalities in China after the economic reforms in the 1980s, but the effect has vanished - if not reversed - since the end of the 1990s. Second, the major contribution of the paper is to analyze cross-country time-series data on FDI and regional inequalities. Based on a unique panel data set of regional inequalities covering 55 countries at different stages of development, I find net FDI inflows to increase regional inequality in low and middle income countries, while there are no negative redistributional consequences in high income economies. The analysis also shows that the observable higher mobility of individuals in high developed countries as well as government policies are likely to mitigate the negative redistributional impact of FDI on regional inequality. Insofar, the cross-country data supports the lessons from the Chinese case with respect to the reducing effect development has on the negative impact from FDI on regional inequality.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4037.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_4037
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  1. Chen, Jian & Fleisher, Belton M., 1996. "Regional Income Inequality and Economic Growth in China," Journal of Comparative Economics, Elsevier, vol. 22(2), pages 141-164, April.
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  14. Bell, Martin & Muhidin, Salut, 2009. "Cross-National Comparison of Internal Migration," MPRA Paper 19213, University Library of Munich, Germany.
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  19. Anderson, T.W., 2005. "Origins of the limited information maximum likelihood and two-stage least squares estimators," Journal of Econometrics, Elsevier, vol. 127(1), pages 1-16, July.
  20. Christian Lessmann, 2009. "Fiscal decentralization and regional disparity: evidence from cross-section and panel data," Environment and Planning A, Pion Ltd, London, vol. 41(10), pages 2455-2473, October.
  21. Alfaro, Laura & Chanda, Areendam & Kalemli-Ozcan, Sebnem & Sayek, Selin, 2004. "FDI and economic growth: the role of local financial markets," Journal of International Economics, Elsevier, vol. 64(1), pages 89-112, October.
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  23. Lessmann, Christian, 2014. "Spatial inequality and development — Is there an inverted-U relationship?," Journal of Development Economics, Elsevier, vol. 106(C), pages 35-51.
  24. repec:oup:restud:v:78:y::i:4:p:1345-1378 is not listed on IDEAS
  25. Fu, Xiaolan, 2004. "Limited linkages from growth engines and regional disparities in China," Journal of Comparative Economics, Elsevier, vol. 32(1), pages 148-164, March.
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  27. Alfaro, Laura & Chanda, Areendam & Kalemli-Ozcan, Sebnem & Sayek, Selin, 2010. "Does foreign direct investment promote growth? Exploring the role of financial markets on linkages," Journal of Development Economics, Elsevier, vol. 91(2), pages 242-256, March.
  28. Ravi Kanbur & Tony Venables, 2005. "Introduction: Spatial inequality and development," Journal of Economic Geography, Oxford University Press, vol. 5(1), pages 1-2, January.
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