Effect of Inward Foreign Direct Investment on Income Inequality in Transition Countries

Abstract

This paper empirically tests the link between FDI and income inequality for transitional countries in Eastern Europe and Central Asia for the period of 1990 to 2002. The theoretical motivation comes from a model developed in a previous paper, which predicts that inward FDI reduces income inequality for an economy where wage earners outnumber capital owners. Using fixed effects, there is no evidence that FDI inward stocks affect overall income inequality. However, breaking the effect into its components, the statistical evidence suggests that FDI inward stocks exacerbated wage income inequality, while reducing capital income inequality. • JEL classification: F21, D31, O15 •