Al Muizzuddin Fazaalloh,

Faculty of Economics and Business,

Brawijaya University,

Malang, Indonesia

E-mail: almuiz.wang@ub.ac.id

ORCID 0000-0002-0526-9717

Is foreign direct investment helpful to reduce income inequality in Indonesia?

Abstract. It is undeniable that foreign direct investments (FDI) are needed by many countries to push their economic growth. However, a trade-off between economic growth and income inequality, particularly in developing countries, frequently occurs. This paper examines the influence of FDI on income inequality in Indonesia. To estimate the relation of both variables, panel data regression model with panel-corrected standard errors (PCSE) technique was used to analyze provincial level data from 33 provinces over the period of 2012-2016. The study finds that FDI has a direct and insignificant effect on income inequality. Moreover, FDI has indirect and negative effects on income inequality, via economic growth. Interestingly, the indirect effects of FDI on income inequality through education and trade are statistically insignificant. In addition, non-linear relation between FDI and income inequality has not been proved.

Received: January, 2019

1st Revision: March, 2019

Accepted: September, 2019

DOI: 10.14254/2071-789X.2019/12-3/2

JEL Classification: O15, F2, F63

Keywords: foreign direct investment, income inequality, panel data regression, Indonesia