Foreign Direct Investment and Income Inequality in China

This paper examines the impact of foreign direct investment (FDI) on China's income inequality. Two measures of inequality are used in this study: inequality within the urban community and the urban-rural income gap. Data covering 25 provinces from 1990 to 2006 are analyzed using the following techniques: fixed effects, random effects, and system GMM. This study finds that: (1) FDI significantly increases urban inequality and the distributional effect of FDI on urban inequality is robust in all the techniques and different measures of FDI used. (2) there is no evidence that FDI widens income disparity between urban and rural areas.