The Relationship Between FDI and Income Inequality: Does Governance Environment Matter?

Van Bon Nguyen ()
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Van Bon Nguyen: University of Finance Marketing(UFM), Ho Chi Minh City, Vietnam

Asian Journal of Applied Economics/ Applied Economics Journal, 2021, vol. 28, issue 1, 63-77

Abstract: Reducing poverty and income inequality in society is considered one of the millennium goals in developing countries. Attracting more foreign direct investment (FDI) inflows to boost economic growth and development is a good solution to achieve this goal. Thispaper empirically assesses the role of the governance environment in the FDI–income inequality relationship for balanced panel data of 37 developing countries from 2002 to 2018 using the two-step generalized method of moments Arellano-Bond estimator. The estimated results indicate that FDI and governance reduce income inequalitywhiletheir interaction enhances it. Furthermore, economic growth, trade openness, unemployment, education, and infrastructure are significant determinants of income inequality in the developing countriesstudied. In particular, the Pooled Mean Groupestimator is employed to guarantee the robustness of estimates. The findings suggest some policy implications for governments of developing countries in terms of reforming the governance environment to attract more FDI inflows and decrease income inequality.

Keywords: FDI; income inequality; governance; developing countries; system GMM estimator; PMG estimator (search for similar items in EconPapers)
JEL-codes: C33 O10 O53 (search for similar items in EconPapers)
Date: 2021
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