FDI and Income Inequality: Evidence from a Panel of US States

This study employs state-level panel data to explore the relationship between inward foreign direct investment (FDI) and income inequality in the United States. Using panel cointegration techniques that allow for cross-sectional heterogeneity and cross-sectional dependence, we find that, in the long run, FDI exerts a significant and robust negative effect on income inequality in the United States. This result for the United States as a whole does not imply that FDI narrows income gaps in each individual state. There is considerable heterogeneity in the long-run effects of FDI on income inequality across states, with some states (21 out of 48 cases) exhibiting a positive relationship between FDI in income inequality.