FDI And Household Income Inequality

Since the Chinese Economic Reform, our country has set up many policies to attract foreign capital. The inward foreign capital promotes economic development and technical progress and improve social welfare in our country. However, during the same time, the reformation on income distribution system has widen the income inequality in our society. The inward foreign capital provided pretty well examples for the economic transition in our country:by introducing the market mechanism and under the environment of competition, the productivity in our society has been dramatically improved and a lot of outdated enterprises are closed down. The improvement of productivity increases per-capita income, but the problem of unemployment, such as "laid off" in 1990s, is also occurred alone with the closing down of outdated enterprises, therefore the income inequality keeps widening.Income distribution has attracted a large number of researchers working on it, from measurement of income inequality in early stages, to the relation between economic development and income inequality, and then to the top income related issues and the impact of economic liberalization on income inequality. Currently, divergence still exists on how FDI affect income inequality, and the reason of this divergence is the insufficiency of theoretical explanations but diversity of statistic approaches on different kind of data.In fact, FDI does not directly affect income distribution, but the indirect channel between FDI and income inequality can be divided into two stages. First, inward FDI could spill it advanced technology over in different ways. The FDI spillovers could reduce the cost of innovation in host economies, and in Schumpeterian Economy, technical progress promotes economic growth while producing creative destruction. Then, economic growth could increase the income of representative individual, but creative destruction would also imply that the risk of replacement exists in the income of representative individual, and this risk makes those high-income individuals hardly maintain their high income. On one hand, economic growth could widen income inequality, and on the other hand, creative destruction would narrow income inequality. Therefore, the direction of indirect impact of FDI on income inequality is depend on the balance of the effect of FDI in economic growth channel and the effect of FDI in creative destruction channel. However, the assumption of FDI could promote economic growth and lead creative destruction is FDI would spill its advanced technologies over to domestic industries, and the FDI inflows in advanced countries and in emerging market countries have different significance in FDI spillovers, so the inequality effect of FDI in advanced countries and in emerging market countries are quite different.The unbalanced panel data of 26 counties from 1973 to 2014 demonstrate that the economic growth effect and creative destruction effect of FDI are different in advanced countries and in emerging market countries. These two effects are insignificant in advanced countries, but are both significantly positive in emerging market countries. Utilizing dynamic panel data model, it is also found that in emerging market countries, FDI would widen income inequality, but this widening effect is also insignificant in advanced countries. The empirical analysis based on real data verifies the channel between FDI and income inequality is FDI spillovers, and also it implies that in those counties whose inward FDI spillover is significant, FDI would widen income inequality.The mechanism of FDI spillover affecting income distribution could explain the income inequality issue in our country in post-reform period. And also, it could provide theoretical basis for policy targets and policy combinations.