The Impact of foreign direct investment inflows on income inequality (Case of Indoensia)

ANANDITA, Dina, Prof. Yongjin Park

2010 | Tesis | S2 Ilmu ekonomi

There have been a lot of studies on the effects of Foreign Direct Investment (FDI) on economic growth. We believe that FDI has a lot of benefits and it proved that FDI leads to an increase in economic growth in Indonesia. In this paper we explore the relationship between Foreign Direct Investment (FDI) inflows and income inequality within provinces in Indonesia. The econometric approach of this study uses the Ordinary Least Squares (OLS) method and a panel data of 28 provinces from 2002 to 2006. After analyzing well established determinants of income inequality (such as population, gross domestic product at region level, unemployment, manufacture, infrastructure and education), we find that within 17 provinces, FDI inflows on income inequality are significant and negative. Although the magnitude of FDI is very small, FDI is one of the macroeconomic factors contributing to narrow income gaps in each province. This result for Indonesia within 17 provinces implies that FDI gives impact on income inequality and tends to reduce it. However, within 28 provinces, FDI proved to be insignificant or weakly significant with the negative sign, thus we could not find out any clear impact of FDI on income inequality with the data used. Based on these arguments and the experiences of Indonesia, we abstract relevant policy implications for the efficiency and positive impacts of FDI in reducing income inequality.

Kata Kunci : Foreign direct investment,Income inequality