Impact of Trade and FDI on Income Inequality: A Panel Data Analysis

Abstract

This study empirically examines the effects of trade and FDI on intra-national income inequality, particularly with using Gini index and various measures of FDI activity such as inflows, outflows, inward stock, and outward stock. The empirical analysis has estimated a series of augmented panel regressions using a data set in 2000~2015 from 49 to 109 countries. The control variables in the estimation have different effects on income distribution. The effect of educational attainment and tax are found to be statistically significant in alleviating income inequality. Moreover, it is noticeable that the role of higher educational attainment is likely to be most important in income distribution within the country, and openness through either trade or FDI is not found to significantly affect within-country income inequality. However, the subsequent estimations with the consideration of the multicollinearity issue provide additional findings implying a possibility that not only trade openness may improve a country’s inequality, but distributional effects of FDI activity are likely to be significant and varied over types of FDI. The results imply a superior distributional effect of outward FDI over inward FDI. These results can be expected to have valid policy implications for trade openness and FDI liberalization in the countries.