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FDI and income inequality: Evidence from Europe

Author

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  • Herzer, Dierk
  • Nunnenkamp, Peter

Abstract

This paper examines the relationship between foreign direct investment (FDI) and income inequality for a sample of ten European countries over the period 1980 to 2000. Using panel co-integration and causality techniques that are robust to omitted variables, slope heterogeneity, and endogenous regressors, we find that: (1) FDI has a positive short-run effect on income inequality in Europe, (2) the long-run effect of FDI on inequality, however, is negative on average, (3) long-run causality runs in both directions, suggesting that an increase in FDI reduces income inequality and, in turn, higher inequality leads to lower FDI inflows, and (4) there are large differences in the long-run effect of FDI on income inequality, with two countries (Ireland and Spain) exhibiting a positive relationship between FDI and income inequality.

Suggested Citation

  • Herzer, Dierk & Nunnenkamp, Peter, 2011. "FDI and income inequality: Evidence from Europe," Kiel Working Papers 1675, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwkwp:1675
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Efobi, Uchenna & Nnadi, Matthias, 2015. "Foreign Aid, IFRS Adoption and Foreign Direct Investment," EconStor Preprints 114568, ZBW - Leibniz Information Centre for Economics.
    2. Samuel Adams & Edem Kwame Mensah Klobodu, 2019. "Urbanization, Economic Structure, Political Regime, and Income Inequality," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 142(3), pages 971-995, April.
    3. Svilena MIHAYLOVA, 2015. "Foreign direct investment and income inequality in Central and Eastern Europe," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(2(603), S), pages 23-42, Summer.
    4. Dierk Herzer & Peter Nunnenkamp, 2013. "Inward and outward FDI and income inequality: evidence from Europe," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 149(2), pages 395-422, June.
    5. Uchenna R. Efobi & Matthias Nnadi, 2015. "How Does Foreign Aid Affect the Relationship between IFRS Adoption and Foreign Direct Investment?," Research Africa Network Working Papers 15/014, Research Africa Network (RAN).
    6. Stefan Jestl & Sandra M. Leitner & Sebastian Leitner, 2022. "The relative impact of different forces of globalization on wage inequality: A fresh look at the EU experience," Review of International Economics, Wiley Blackwell, vol. 30(4), pages 1003-1037, September.
    7. repec:agr:journl:v:2(602):y:2015:i:2(602):p:23-42 is not listed on IDEAS
    8. Kashif MUNIR & Maryam SULTAN, 2017. "Macroeconomic determinants of income inequality in India and Pakistan," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(4(613), W), pages 109-120, Winter.
    9. Adams, Samuel & Klobodu, Edem Kwame Mensah, 2017. "Capital flows and the distribution of income in sub-Saharan Africa," Economic Analysis and Policy, Elsevier, vol. 55(C), pages 169-178.
    10. Omar Osman, 2021. "Income Inequality and Financial Disturbances: Does Income Inequality Engender Financial Crises?," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 157(2), pages 417-442, September.
    11. Runyu Yang & Youngbok Ryu & Mikhail V. Oet, 2024. "Assessing the Foreign Direct Investment Performance of Middle-Income Countries Using Data Envelopment Analysis with Translation Invariance," Economies, MDPI, vol. 12(11), pages 1-27, November.
    12. Xiao Yan & Saidatulakmal Mohd, 2023. "Trends and Causes of Regional Income Inequality in China," Sustainability, MDPI, vol. 15(9), pages 1-18, May.
    13. Iyud` Wahyudin & Nachrowi Djalal Nachrowi, 2018. "How Do Sectoral FDIs Impact Income Disparities? An Analysis in the Emerging Markets," International Journal of Economics and Financial Issues, Econjournals, vol. 8(1), pages 232-241.
    14. Quoc Hoi Le & Quynh Anh Do & Hong Chuong Pham & Thanh Duong Nguyen, 2021. "The Impact of Foreign Direct Investment on Income Inequality in Vietnam," Economies, MDPI, vol. 9(1), pages 1-15, March.
    15. Mirzat Ullah & Hafiz M. Sohail & Hossam Haddad & Nidal Mahmoud Al-Ramahi & Mohammed Arshad Khan, 2022. "Global Structural Shocks and FDI Dynamic Impact on Productive Capacities: An Application of CS-ARDL Estimation," Sustainability, MDPI, vol. 15(1), pages 1-13, December.
    16. Riccardo Leoncini, 2017. "Innovation, inequality and the skill premium," SPRU Working Paper Series 2017-16, SPRU - Science Policy Research Unit, University of Sussex Business School.

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    More about this item

    Keywords

    FDI; income inequality; panel co-integration; Europe;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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