Inward and outward FDI and income inequality: evidence from Europe
- 2.2k Downloads
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.
KeywordsFDI Income inequality Europe Panel cointegration
JEL ClassificationF21 D31 C23
The authors are grateful to an anonymous reviewer for constructive criticism and helpful suggestions.
- Aghion, P., & Howitt, P. (1998). Endogenous growth theory. Cambridge, MA: MIT Press.Google Scholar
- Alonso-Borrego, C., & Arellano, M. (1999). Symmetrically normalised instrumental-variable estimation using panel data. Journal of Business and Economic Statistics, 17(1), 36–49.Google Scholar
- Baldwin, R. (2006). Globalisation: The great unbundling(s). Prime Minister’s Office, Economic Council of Finland. Helsinki. Accessed May, 2011 from http://hei.unige.ch/~baldwin/PapersBooks/Unbundling_Baldwin_06-09-20.pdf.
- Deutsche Bundesbank (2004). Kapitalverflechtung mit dem Ausland. Statistische Sonderveröffentlichung 10. Frankfurt.Google Scholar
- Geishecker, I., Görg, H., & Maioli, S. (2008). The labour market impact of international outsourcing. In D. Greenaway (Ed.), Globalization and labour market adjustment (pp. 152–173). Basingstoke: Palgrave Macmillan.Google Scholar
- Guest, R., & Swift, R. (2008). Fertility, income inequality, and labour productivity. Oxford Economic Papers, 60(4), 97–618.Google Scholar
- Herzer, D., & Nunnenkamp, P. (2011). FDI and income inequality: Evidence from Europe. Kiel Institute for the World Economy, Working Paper 1675, Kiel.Google Scholar
- Jones, R.W., & Kierzkowski, H. (2001). A framework for fragmentation. In S.W. Arndt & H. Kierzkowski (Eds.), Fragmentation: New production patterns in the world economy (pp. 17–34). Oxford: Oxford University Press.Google Scholar
- Lindert, P.H., & Williamson, J.G. (2001). Does globalization make the world more unequal? National Bureau of Economic Research, NBER Working Paper 8228. Cambridge, MA.Google Scholar
- Lipsey, R.E. (2002). Home and host country effects of FDI. National Bureau of Economic Research, NBER Working Paper 9293. Cambridge, MA.Google Scholar
- Marin, D. (2004). A nation of poets and thinkers – less so with Eastern enlargement? Austria and Germany. Centre for Economic Policy Research, Discussion Paper 4358. London.Google Scholar
- OECD (2003). International Direct Investment Statistics Yearbook. Paris: OECD.Google Scholar
- Roodman, D. M. (2009b). How to do xtabond2: An introduction to difference and system GMM in Stata. The Stata Journal, 9(1), 86–136.Google Scholar
- Sala-i-Martin, X. (2002). The disturbing ‘rise’ of global income inequality. National Bureau of Economic Research, NBER Working Paper 8904. Cambridge, MA.Google Scholar
- Schröder, C. (2006). Industrielle Arbeitskosten im internationalen Vergleich (An international comparison of industrial labor costs). IW-Trends, 33 (3). Accessed July, 2012 from http://www.iwkoeln.de/en/studien/iw-trends/beitrag/53715.
- UNCTAD (2010). World Investment Report 2010. New York: United Nations.Google Scholar