Impact of Foreign Direct Investment on Inequality in Emerging Economies: Does the Kuznets Curve Hypothesis Exist?

Abstract

This paper aims to test the Kuznets hypothesis regarding the existence of the inverted U-curve in the relationship between FDI and income inequality with an international sample. Some economists have recently expressed concern that the globalization of the production process can promote inequality and create social problems. Whether foreign resources might be related to unequal income distribution in emerging economies remains an open question. In order to fill the research gap, the paper tries to examine the impact of foreign direct investment on inequality in 33 emerging economies between 1980 and 2019. There are two methods including OLS and 2-SLS estimations are employed to estimate the coefficients of the varia-bles. Where the 2-SLS methodology employs instrumental variables to solve the endogenous phenomenon in the study function. The results indicate that both the FDI-inequality nexus and the income-inequality nexus are non-linear effects that confirm the Kuznets curve hypothesis and that improved infrastructure and trade openness can reduce inequality in this group of economies. Finally, the result also suggests that emerging economies need to persevere to FDI attracting strategy because there is a threshold that FDI will ultimately reduce inequality in these economies.