REDUCING INEQUALITIES BETWEEN AND WITHIN COUNTRIES: THE FDI SPILLOVER EFFECTS

Abstract

Direct investment into productive assets by a foreign business is termed as foreign direct investment (FDI). For many decades, policymakers have considered FDI to be contributing towards economic growth. This chapter contributes to the discussion on FDI’s inequality effects towards achieving United Nations’ Sustainable Development Goal 10 (SDG 10). By utilising existing empirical studies, we discuss the conditions under which horizontal and vertical FDI spillovers affect inequality between and within countries. The chapter begins with reviewing the literature on FDI spillovers, specifically, how FDI transfers technology, knowledge, and management skills to firms in host countries. Research reveals that certain conditions must be met for FDI spillovers to occur. Also, there exist various channels through which FDI can either increase or decrease inequality between and within countries. Though FDI has the potential to increase wages, enhance skills, and improve productivity convergence in developing countries, it can also increase within-country inequality if the benefits accrue primarily to skilled workers or if investments are limited to urban areas. Overall, it is suggested that policies should be designed to increase the likelihood of positive spillovers by implementing strategies having focus on human capital and regional development.