Asymmetric effects of foreign capital on income inequality: The case of the Post-China 16 countries

Abstract

This study empirically tests for the heterogeneous effects of foreign capital inflow on income distribution, measured by the Gini index, in the Post-China 16 (PC16) countries between 1995 and 2017. In the benchmark model, we apply fixed- and random-effects models. As an alternative model, we use a dynamic panel model based on the Arellano–Bond estimator and autoregressive distributed lag model. We investigate the effects of total foreign capital inflow and individual types of foreign capital (foreign direct investment (FDI), portfolio investment, and other investments), including their equity and debt subcategories. Our results show that the foreign capital inflow to the PC16 countries offers economic benefits only to specific income groups. FDI does not have statistically significant effects on income inequality, but portfolio investment makes income distribution more heterogeneous, and other investments reduce income differences. In addition, we find that income differences are increased by debt-type FDI and portfolio debt investment. In the short run, the effects of debt-type FDI, portfolio debt investment, and other investment inflows are significantly reduced. Finally, debt-type FDI increases income inequality more in countries with higher gross domestic product and human development index values, whereas the poorest and least developed countries use the debt portfolio capital such that it increases income inequality.