Income divergence and global connectivity of U.S. urban regions

Abstract

After a century of inter-regional income convergence, average incomes have been diverging between U.S. cities since the 1980s, calling for new policy agendas. We argue that policy research should move beyond its current focus on the effects of inter-city divergence from technological change, migration, and trade, to include the effect of outward foreign-direct investments (OFDIs). This paper suggests that OFDIs have contributed to income divergence across U.S. cities. We argue that OFDIs can positively contribute to average income levels in investing (home) cities through labor, knowledge, multiplier and trade effects – a relationship that has not been systematically investigated in prior research. It is suggested that regional income levels and OFDIs are subject to a virtuous co-evolutionary process for high-income cities while having weaker effects for lower-income cities. This is tested with a combination of fixed-effects panel regressions and quantile regressions, before and after the 2008/2009 financial crisis. Our key finding is that, while OFDIs have a positive effect on regional income levels in the post-crisis period, their effect is largest for cities with incomes around the 60th to 80th percentiles of the income distribution. This suggests that the benefits of OFDIs primarily accrue to already successful city-regions, allowing them to further their pre-existing lead.