The Role of Foreign Direct Investment in International Economics FDI & Domestic Income Inequality in 7 largest FDI recipient countries in Asia (China, Singapore, India, Singapore, Malaysia, Indonesia, Philippine) by Sofyan, Lury (4009R046-8) Jan 2010
One aspect of Heckscher-Ohlin analysis - Samuelson Theorem & Factor Price Equalization Theorem - agreed that trade would contribute to the increasing in wage level. This argument is also applied to Foreign Direct Investment (Appleyard & Field, 2001, P.235). Having more significant role of FDI in international economics, this paper tries to elaborate the role of FDI in increasing wage level issue to the impact of income inequality. This paper emphasize on the impact of FDI towards domestic Income Inequality. Focusing on 7 largest FDI recipient countries in Asia (China, Singapore, India, Singapore, Malaysia, Indonesia, Philippine) this paper found that in short run FDI doesn’t have a significant effect towards income inequality. However, in the longer run, it is found that FDI would contribute to wider gap of income inequality. In the final part, this paper depicts this issue by focusing only on Indonesia. The graph shows supportive finding that in the long run, FDI contributes to income inequality.
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The Role of Foreign Direct Investment in
International Economics
FDI & Domestic Income Inequality in 7 largest FDI recipient countries in Asia
(China, Singapore, India, Singapore, Malaysia, Indonesia, Philippine)
by Sofyan, Lury (4009R046-8)
Jan 2010
International Economics – Sofyan, Lury
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FINAL PAPER
FDI & DOMESTIC INCOME INEQU ALITY IN 7 LARGEST FDI RECIPIENT COUNTRIES IN
ASIA
Graduate School of Asia Pacific Studies (GSAPS) – Waseda University
Students’ Perspectives
SOFYAN, LURY
ソフヤン, ルリ
January 2010
Abstract
One aspect of Heckscher-Ohlin analysis - Samuelson Theorem & Factor Price Equalization Theorem - agreed that trade would contribute to the increasing in wage level. This argument is also applied to Foreign Direct Investment (Appleyard & Field, 2001, P.235). Having more significant role of FDI in international economics, this paper tries to elaborate the role of FDI in increasing wage level issue to the impact of income inequality. This paper emphasize on the impact of FDI towards domestic Income Inequality. Focusing on 7 largest FDI recipient countries in Asia (China, Singapore, India, Singapore, Malaysia, Indonesia, Philippine) this paper found that in short run FDI doesn’t have a significant effect towards income inequality. However, in the longer run, it is found that FDI would contribute to wider gap of income inequality. In the final part, this paper depicts this issue by focusing only on Indonesia.
The graph shows supportive finding that in the long run, FDI contributes to income inequality.
Keywords: International Economics, Foreign Direct Investment, Income Inequality
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Table of Contents Table of Contents ...............................................................................................................................3
I. Background.................................................................................................................................4
II. Review Literature ........................................................................................................................5
A. FDI & the Big Push Theory ........................................................................................................5
B. FDI & Factor Price Equalization .................................................................................................6
C. FDI & Stolper – Samuelson Theorem .........................................................................................6
D. More: Pros & Cons of FDI .........................................................................................................7
1. Stimulation of National Economy .............................................................................................7
2. Stability of FDI ........................................................................................................................8
3. Social development.................................................................................................................8
4. Infrastructure development and technology transfer ................................................................9
5. “Crowding in” or “Crowding out”? .........................................................................................10
6. Scale and pace of investment ................................................................................................10
7. Skewed distribution ..............................................................................................................11
D. Question to be addressed: Relationship between FDI & Domestic Income Inequality? ..................12
Note: Subscript i represents a country and subscript t represents year t. GINI represents the Gini coefficient of a country. INTENSITY stands for foreign direct investment (FDI) stock as a percentage of GDP. PGDP, GDP and PGDPR stand for country i’s per capita GDP, GDP and real per capita GDP growth rates respectively. ASIA is a dummy variable set to one for countries in Asia and zero otherwise.1 LAC is a dummy set to one for Latin American and Caribbean countries and zero otherwise. Dummy variable YEARj is one if j=t and zero if j≠t.
This study concluded that the increase in the FDI intensity measured by inward, outward and total FDI
stock as a percentage of GDP proved to increase the income inequality. Especially outward FDI rather
than inward FDI has more detrimental effect on income distribution. Rich countries and fast growing
countries turned out to have a more even income distribution. Bigger countries tend to have a less equal
income distribution. Latin American and Caribbean countries have unequal income distribution.
III. Empirical Study
Based on previous study above, this paper tries to give an empirical work contends the relationship
between FDI & income inequality. This paper examines 7 Asian countries which are Indonesia, Malaysia,
Singapore, Philippine, Thailand, China and India. The recent of choosing those countries is those
countries are mainly countries that attract most world FDI in Asia (FDI recipients).
Methodology
This paper uses multi regression analysis from panel data across from 1965 to 2007. The data is
obtained from various sources, mainly from World Development Index – World Bank. Since it is difficult
to obtain Gini Coefficient data annually for all those countries, the average five years data is calculated
so that the regression analysis can be run and tested statistically. Furthermore, putting some additional
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important variables, this paper uses the model from Chankyu Choi (2006) and basically redesign the
model becomes:
Giniit = β0 + β1 FDIi t + β2 FDIi t-5 + β3 GDPGROWTHi t + β4 GDPGROWTHi t-5 + β5 GDPPERCAPi t + β6
GDPPERCAPi t-5 + β7 EDUCEXPENDi t + β8 EDUCEXPENDi t-5 + β9 UNEMPLOYi t + β10 WORKERREM&COMi t + β11 WORLDCRISIS + β11 ASIANCRISIS + Uij
Variable Name Important Notice
FDIi t Foreign direct investment, net inflows (% of GDP)
FDIi t-5 Foreign direct investment, net inflows (% of GDP) lag 5 years *) GDPGROWTHi t GDP growth (annual %)
GDPGROWTHi t-5 GDP growth (annual %) Lag 5 Years *) GDPPERCAPi t GDP per capita, PPP (constant 2005 international $)
GDPPERCAPi t-5 GDP per capita, PPP (constant 2005 international $) lag 5 years *) EDUCEXPENDi t Adjusted savings: education expenditure (% of GNI)
EDUCEXPENDi t-5 Adjusted savings: education expenditure (% of GNI) lag 5 years *)
UNEMPLOYi t Unemployment, total (% of total labor force) WORKERREM&COMi t Workers' remittances and compensation of employees, paid (current US$)
WORLDCRISIS Dummy Variable (1 refer to world economic crisis, 0 otherwise) **) ASIANCRISIS Dummy Variable (1 refer to Asian economic Crisis, 0 otherwise) **)
Note:
*) The usage of 5 years lag is to make a consistent average data with the Gini Coefficient Data that
already explained above
**) The criteria of crisis whether it refers to a world economic crisis or regional economic crisis are
based on World Economic Outlook April 2009 – IMF.
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Result & Findings
General
After applying the proposed model above, the outcome mostly statistically insignificant in 5% level (see
appendix 2 for overall result). To give alternative models, this paper simulates 6 scenarios of model and
the Model 6 is chosen as the final model since all the independent variables are statistically significant.
Variable EducExpend (Adjusted savings: education expenditure (% of GNI)) and variable
UNEMPLOYi t (Unemployment, total (% of total labor force) are excluded since the data is quite small and
it decreased the total number of observation. Both dummy variables which are WORLDCRISIS & ASIAN
CRISIS are also excluded from the model since those variables are statistically insignificant for all the
and stimulating up/down stream domestic economy. However, FDI also contribute negative effects
such as: increasing income inequality, environmental damages, stimulating “Crowding out” and stifling
local competition and entrepreneurship, encouraging a culture of consumerism. Among Those pros and
cons, this paper found and interesting result toward FDI & Income Inequality.
Focusing on 7 ASIA FDI recipient countries (Indonesia, Malaysia, Singapore, Philippine, Thailand,
India & China), this paper found that FDI has a negative insignificant impact towards income inequality
in short term. But again, this relation is statistically insignificant. In longer term, it is found that FDI has
a positive significant impact towards income inequality. This is means that having more FDI inflow, it
could lead to more income inequality. This paper found that in 5 years time would be an av erage time
for FDI inflow to increase income inequality.
In addition, emphasizing in Indonesia case, this paper tries to have another perspective towards
the FDI role by depicting the relationship between FDI & income inequality (Gini Coefficient). From the
chart, it is clearly noticed that the increasing of FDI is always followed by the increasing of Gini
Coefficient. Therefore, it can be concluded that FDI has a positive impact toward Gini Coefficient. This
second finding has support the first finding.
One important reason to justify this empirical finding is that FDI can promote raising wage that
consequently establishing gap wages. Another important thing is the present of FDI only in a certain
area; therefore, the positive effect of FDI could not be gained by other areas. This will bring the
different speed of development which, accordingly, promotes more income inequality.
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