THE IMPACT OF FOREIGN DIRECT INVESTMENT ON INCOME INEQUALITY: A COMPARATIVE STUDY OF SAARC AND ASEAN COUNTRIES

Abstract

Income inequality is a significant development issue in developing and emerging economies and it has created a question mark in regard to whether Foreign direct investment (FDI) induced growth is inclusive. Foreign Direct Investment (FDI) can be broadly marketed as an economic development catalyst, yet the effect that it has on income distribution is ambiguous in theory and debatable in practice. This study analyses the impact of foreign direct investment on income inequality by making a comparative study between South Asian Association of Regional Cooperation (SAARC) countries and Association of Southeast Asian Nations (ASEAN) countries. The rationale is to determine the different effects of FDI on income inequality in these two regional blocs that have different economic structures and institutional frameworks. The study utilizes annual panel data from 1981 to 2024 of selected SAARC and ASEAN countries. The Gini index is used to measure income inequality and FDI inflows are considered as the explanatory variable. Control variables are Gross Fixed Capital Formation, trade openness, inflation and unemployment. To have a strong estimation, panel econometric methods are used, such as cross-sectional dependence tests, panel unit root tests, panel cointegration analysis, and the panel Autoregressive Distributed Lag (ARDL) model to allow robust estimation of both the short and the long-run variables. The empirical results affirm that there exists a long-run cointegrating relationship among the variables. The results create the conclusion that FDI lowers income inequality in the prolonged period, and a greater and steadier influence exists in ASEAN nations in contrast to SAARC nations. This difference reflects variations in the structure of industry, labor market absorption and state institution quality. It finds that FDI is capable of achieving the purpose of enhancing equitable income distribution in the country in the presence of complementary domestic policies, including human capital development, labor market reforms, and macroeconomic stability. These results have great policy implications towards inclusive growth and the Sustainable Development Goal 10.