Foreign direct investment, income inequality and country risk

Given the continuous debate about the foreign direct investment (FDI)-inequality nexus, there is an acknowledged need for reconsidering their relationship from a new perspective. Therefore, applying balanced panel data composed of 60 countries from 1998 to 2014, this research estimates a finite mixture model with country risk as a concomitant variable to explore the interrelationships among FDI, inequality, and country risk so as to offer fresh insight into the FDI-inequality nexus. We present evidence that shows a significant role of compositing country risk on this. Specifically speaking, FDI deteriorates inequality under the condition of high risk, whereas it alleviates inequality in a country with low country risk. Moreover, we can also obtain the similar findings by considering the role of components of country risk (economic risk, financial risk and political risk) as a determinant for the FDI-inequality nexus. FDI deteriorates inequality under the condition of high political, economic and financial risks, whereas it alleviates inequality in a country with low political, economic and financial risks.