Assessing the effects of FDI and trade openness on income inequality in developed countries (OECD): Panel data analysis
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Date
2024-08
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University of New Brunswick
Abstract
The purpose of this study is to examine the relationship between trade, foreign direct investment net inflows (NFDI), and income inequality for developed OECD countries, using annual data from 2004 to 2021. The study attempts to answer a critical question: does openness affect income distribution? In order to answer this question we have employed the classic FE/RE model however, the analysis of the model involves the examination of likely nonlinear effects of both trade and FDI on income distribution. Therefore, a Difference Generalized Method of Moments (Diff-GMM) estimator was also applied to mitigate the problem of non-linearity and possible endogeneity and compare the results. The results for both models indicate that Trade has significant effects on income inequality while FDI does not have a significant effect when interacting with the Gini index; in the case of GDP, an inverted U-shaped curve holds as proposed by the Kuznet Theory.