The Impact of FDI and Innovation Activities on Income Inequality in Emerging Countries.

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Motivated by ongoing debate among economists and policymakers about potential benefits and drawbacks of FDI, this paper is set out to explore the relationship between FDI, innovations and income inequality in the specific sample of emerging countries. In particular, for estimating the income inequality, this research focuses on wage inequality between high-skilled and low-skilled workers. Based on theoretical foundation of previous academic studies, several hypotheses are developed. Thus, there is expectation that FDI increases wage inequality between high-skilled and low skilled workers in the sample of host emerging countries. In addition, there is a hypothesis that through innovations FDI has indirect effect on wage inequality. Empirically, these two hypotheses are tested using a panel data analysis for a 10-year dateset consisting of 21 emerging countries for the 2006-2016 period. The findings present mixed results. Thus, employing static fixed effect model, findings verify that FDI increases significantly wage inequality. However, using dynamic panel model, there is no evidence that FDI has any effect on wage inequality. Furthermore, there is no evidence found that innovations have mediating impact on the relationship between two main variables, hence the second hypothesis is rejected.
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