Bangladesh Bank Training Academy Journal

Abstract

This paper analyzes the effect of Foreign Direct Investment (FDI) on income inequality from two perspectives- the sectoral composition of FDI and the mode of entry of FDI. From the first perspective, FDI inflow is divided into three major sectors of economic activity namely primary, manufacturing and service sector. From the second perspective, FDI is divided into greenfield FDI and cross border mergers & acquisitions (M&A) FDI. Two different models have been used to estimate the results. The first model is controlled for Kuznets Hypothesis and the second model is controlled for technology, globalization and other relevant macroeconomic variables. Both the models have been estimated using OLS & Fixed Effect estimation method. The results show that total and service sector FDI increase income inequality in both short and long run whereas manufacturing and primary sector FDI has no statistically significant effect on income inequality. On the other hand, both greenfield FDI and M&A FDI increase income inequality in the long run. Moreover, human capital has a strong conditional effect on primary, manufacturing and service sector FDI in reducing income inequality.