Academic journal article Atlantic Economic Journal

Foreign Direct Investment and the Distribution of Income

Academic journal article Atlantic Economic Journal

Foreign Direct Investment and the Distribution of Income

Article excerpt

An issue in the development literature centers on the impact of foreign direct investment (FDI) on the distribution of income in the Third World. It is argued that the degree of monopolization by multinationals increases the return to capital. Some also found that MNCs use more capital-intensive technologies or produce mostly in the more capital-intensive sectors. Therefore, it is likely that a larger presence of FDI causes a higher share of income to accrue to the wealthier households.

This note presents empirical evidence that FDI has skewed the distribution of income in the Third World. The hypothesis tested is that the share of income earned by the poorest quintile of households (LOW) diminishes and the share of income earned by the richest quintile (HIGH) increases the higher the presence of FDI.

The presence of FDI (FDIPOP) is measured here by the stock of FDI per capita [OECD, Development Cooperation]. For any given year, there is only a small set of countries for which the distribution of income is reported. However, the distribution of income is fairly stable over short periods of time. Therefore, a reasonable sample size is obtained without creating bias by using data for the distribution of income collected within five years of some base year, 1975 in this case. LOW and HIGH are reported by the World Bank in various World Development Reports. …

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