Foreign Direct Investment, Income Inequality and Poverty in Portugal, 1973-2014: What does cointegration analysis tell us?

The empirical evidence on how inflows of foreign direct investment impact on income inequality and poverty of a country is scarce and produces divergent results. Moreover, most existing studies look into underdeveloped or developing countries. The aim of this study is to contribute to the empirical literature on the relationship between foreign direct investment (FDI), poverty and income inequality, focusing on a little explored context, a developed country, Portugal, characterized by having relatively high levels of inequality and poverty. Using time series estimates (cointegration), in particular, the Johansen test and Granger causality, for the period between 1973 and 2014, the results show that there is a longstanding relationship between inflows of foreign investment and the indicators of inequality and poverty. In particular, evidence points to the fact that FDI inflows are associated to lower levels of inequality and poverty. Nevertheless, Granger causality maintains that, in Portugal, between 1974 and 2014, it was this lower level of inequality and poverty that fostered greater inflows of FDI, and not the opposite. Thus, if the objective is to increase competitiveness by attracting FDI, it is crucial to promote integrated social and economic policies (education, labor market, taxation) that will help mitigate inequality levels and poverty rates.