Does Foreign Direct Investment Improve Income Inequality? A Quantile Panel Data Approach

This paper examines the relationship between foreign direct investment (FDI) and income inequality in a panel of 63 developing countries over the period 1990–2019. Using an unconditional quantile regression framework for panel data, the analysis allows the association between FDI and inequality to vary across different points of the inequality distribution, rather than focusing solely on average effects. The results indicate that the relationship between FDI and income inequality is heterogeneous across the distribution. In particular, higher levels of net and inward FDI are associated with lower income inequality among countries in the upper quantiles of the inequality distribution. In contrast, no statistically significant association is found among countries in the lower and middle quantiles. These findings are robust to alternative specifications, additional control variables and different treatments of FDI timing. The results suggest that the distributional implications of foreign investment differ across countries and that the potential inequality-reducing association of FDI is more likely to materialize in contexts with relatively high inequality.