The Relationship Between FDI and Income Inequality: Does Governance Environment Matter?

Reducing poverty and income inequality in society is considered one of the millennium goals in developing countries. Attracting more foreign direct investment (FDI) inflows to boost economic growth and development is a good solution to achieve this goal. This paper empirically assesses the role of the governance environment in the FDI–income inequality relationship for balanced panel data of 37 developing countries from 2002 to 2018 using the two-step generalized method of moments Arellano-Bond estimator. The estimated results indicate that FDI and governance reduce income inequality while their interaction enhances it. Furthermore, economic growth, trade openness, unemployment, education, and infrastructure are significant determinants of income inequality in the developing countries studied. In particular, the Pooled Mean Group estimator is employed to guarantee the robustness of estimates. The findings suggest some policy implications for governments of developing countries in terms of reforming the governance environment to attract more FDI inflows and decrease income inequality.