The Enabling Role of Financial Development in the FDI and Income Inequality Relationship in Emerging Markets
Keywords:
Emerging Markets, FDI Inflows, Financial development, Income Inequality, Thresholds.Abstract
Purpose – This study investigates the complementary effect of Foreign Direct Investment (FDI) and Financial Development (FD) on income inequality in emerging markets from 2010 to 2023. Design/Methodology/Approach – The study used the Fixed Effects Generalised Least Squares (FE–GLS) and the Fixed Effect Threshold with Lag proposed by Wang (2015) on 15 emerging markets. Findings – The study revealed that FDI on its own increases inequality, whereas FD directly reduces it, and their interaction significantly reverses FDI’s effect on inequality. The threshold results show a reducing effect when FD exceeds a threshold of 0.62. Research Implications – The study recommends that strengthening financial development beyond a critical threshold is essential for transforming FDI from an inequality-widening force into a driver of equitable growth in emerging markets. In addition, the study applied a more inclusive income disparity indicator from UNDP-HDI index. Originality / Value – The paper is the first to introduce financial development into the FDI- FD-inequality relationship on emerging markets, considering the FD role as a moderator and threshold variable.
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