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Review of World Economics

, Volume 149, Issue 2, pp 395–422 | Cite as

Inward and outward FDI and income inequality: evidence from Europe

  • Dierk Herzer
  • Peter NunnenkampEmail author
Original Paper

Abstract

This paper examines the effects of inward and outward FDI on income inequality in Europe using panel cointegration techniques and unbalanced panel regressions. Our main result is that both inward FDI and outward FDI have, on average, a negative long-run effect on income inequality. This result is robust to employing alternative estimation methods, controlling for potential outliers, using different measures of FDI and inequality, and changing the period and sample selection. Other findings are: (i) while the long-run effect of inward and outward FDI on income inequality is clearly negative, their short-run effect appears to be positive. (ii) Long-run causality runs in both directions, suggesting that an increase in inward and outward FDI reduces income inequality in the long run, and that, in turn, a reduction in inequality leads to an increase in inward and outward FDI. (iii) There are large cross-country differences in the long-run effects of inward and outward FDI on income inequality; for some countries the long-run effects on income inequality are positive.

Keywords

FDI Income inequality Europe Panel cointegration 

JEL Classification

F21 D31 C23 

Notes

Acknowledgments

The authors are grateful to an anonymous reviewer for constructive criticism and helpful suggestions.

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Copyright information

© Kiel Institute 2013

Authors and Affiliations

  1. 1.Department of EconomicsHelmut-Schmidt-UniversityHamburgGermany
  2. 2.Kiel Institute for the World EconomyKielGermany

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