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Kiel Institute for World Economics Kiel Working Papers, Kiel Institute for World Economics

No 1675:
FDI and Income Inequality: Evidence from Europe

Dierk Herzer and Peter Nunnenkamp

Abstract: This paper examines the effects of inward and outward FDI on income inequality in Europe using panel cointegration techniques and unbalanced panel regressions. Our main result is that both inward FDI and outward FDI have, on average, a negative long-run effect on income inequality. This result is robust to alternative estimation methods, potential outliers, different measures of FDI and inequality, and period and sample selection. Other findings are: (i) While the long-run effect of inward and outward FDI on income inequality is clearly negative, their short-run effect appears to be positive. (ii) Long-run causality runs in both directions, suggesting that an increase in inward and outward FDI reduces income inequality in the long run, and that, in turn, a reduction in inequality leads to an increase in inward and outward FDI. (iii) There are large cross-country differences in the long-run effects of inward and outward FDI on income inequality; for some countries the long-run effects on income inequality are positive

Keywords: FDI, income inequality, panel co-integration, Europe; (follow links to similar papers)

JEL-Codes: F21,; D31,; C23; (follow links to similar papers)

21 pages, January 2011

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