FINANCIAL DEVELOPMENT AND THE FDI-INEQUALITY NEXUS

Abstract

This article empirically investigates whether the link between foreign direct investment (FDI) and income inequality varies with financial development. Using a smooth transition regression model to a panel of developing and advanced countries over the period of 1976-2005, the results indicate that financial development indeed defines the relationship between FDI and inequality. FDI raises income inequality and the effect becomes stronger in magnitude with financial sophistication. The results also indicate a large variation in the FDI effect across countries and over time, contingent on financial development. (JEL C23, F40, O15)