The impact of <scp>FDI</scp> on income inequality: Evidence from the perspective of financial development

Abstract By considering the threshold effects of different financial indicators, the current study investigates the relationship among income inequality, foreign direct investment (FDI), and financial development (FV) for a sample of 37 countries over the period 2001–2015. Using the panel smooth transition regression (PSTR) model, the empirical results indicate that FDI helps to reduce income inequality, but this beneficial effect becomes weak when the country has reached a threshold level of financial development. We also find that the effect of FV on income inequality is significantly positive, but this harmful effect decreases when the development of the financial system increases further. When the cross‐country heterogeneity is considered, the results indicate that it is possible to improve income distribution through a combination of foreign and domestic funds for non‐high income and non‐lending countries. For those of non‐income and counties with low FDI levels, they should focus more on strengthening financial development.

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