FDI Inflows, FDI Policy Liberalization, and Income Inequality in East Asia

Over the period 1980 – 2015, foreign direct investment (hereafter FDI) has become more significant in connecting East Asia and the global market. Meanwhile, income inequality has been growing in this region. Although existing literature has achieved noticeable progress in identifying the inequality-inducing effect of FDI inflows both theoretically and empirically, evidence is still inconclusive. This dissertation contributes to the scholarship by providing new time-series evidence from East Asia confirming the inequality-inducing effect of FDI inflows. But this dissertation makes another important contribution by introducing FDI policies to the scholarship. By employing the nested analysis approach, this dissertation sheds light on how FDI policy liberalization conditions the distributional effect of FDI inflows. Time-series cross-section analyses indicate that FDI inflows have deteriorated income inequality in East Asia, and this relationship is conditional on FDI policy liberalization. Liberalized FDI policies intensify the inequality-inducing effect of FDI inflows.Building on case studies on China and Korea, I demonstrate that the conditional effect of liberalized FDI policies can be achieved via two channels: regional distribution and sectoral distribution of FDI inflows. The Chinese case shows that an increasingly equal regional distribution of FDI inflows due to policy liberalization leads to rising income inequality. The Korean case indicates that when liberalized policies open more economic sectors to foreign investors, FDI inflows become more skewed toward service sectors, also resulting in growing income disparities. Thus, the positive relationship between FDI inflows and income inequality is not merely an economic phenomenon, but rather a joint product of political and economic forces.As FDI policy liberalization becomes a dominant policy paradigm, and FDI inflows continue to be a significant way of economic integration between East Asia and the world, income gaps are likely to further deteriorate in this region. How to make FDI inflows more beneficial to society has become a pressing issue for the governments in this region.