The Impact of Trade and FDI on Income Inequality

Economic globalization, which includes free trade and the number of international capital transactions, has increased in the 20th century. These two factors play an important role in improving a nation’s GDP and economic development. The advantage of economic globalization is that a country can achieve much more efficiency and competitiveness through the allocation of resources. However, income inequality, namely how to reallocate the benefits of economic globalization, in the county can be a critical issue for the economic growth. In this study, we analyze the impact of free trade and foreign direct investment (FDI) on a nation’s income inequality. The study focuses on two groups- advanced and developing countries during specific periods, including the booming period of the 1990s, by panal regression analysis. In the case of advanced countries, free trade and FDI make income inequality worse, while in developing countries free trade and FDI do not effect the income inequality statistically or those also have a negative impact on income inequality, as found in analysis using the Gini coefficient. In the research, results can be subtly different according to the different income inequality index and data collection, especially for the developing countries.