Foreign direct investment and welfare

This paper addresses the question of how Foreign Direct Investment (FDI) affects different measures of economic welfare. It fits in an existing stream of research looking at the relationship between FDI and economic growth, but it introduces two variations. First, we explore what the differences are between Fixed Effects (FE) panel data estimations and Generalized Method of Moments (GMM) estimations. Second, we explore different aspects of economic welfare, and thus go beyond the simple measure of GDP growth. The other variables we consider are household consumption, inequality and the Human Development Index (HDI). The conclusions are striking. For GDP and household consumption growth, FDI does not have any significant impact. In all different types of estimations and despite different control variables, FDI continues not to have any impact whatsoever. On inequality, on the other hand, we find that there is a significant positive impact of FDI. This confirms some of the literature that argues that any benefits of FDI are not equally distributed, but rather are obtained by the relatively well-off. On HDI, FDI has a consistent and significant negative effect. While the channel for this is not immediately clear, we theorize that this is potentially the result of policy choices made by governments.