Parameter Heterogeneity in The Foreign Direct Investment-Income Inequality Relationship: A Semiparametric Regression Analysis

doi:10.1007/s00181-012-0636-7

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Title:	Parameter Heterogeneity in The Foreign Direct Investment-Income Inequality Relationship: A Semiparametric Regression Analysis
Authors:	Deng, Wen-shuenn;Lin, Yi-chen
Contributors:	淡江大學統計學系;淡江大學經濟學系
Keywords:	Foreign direct investment;Income inequality;Semiparametric method;Smooth coefficient partially linear model;Profile likelihood ratio test;Generalized likelihood ratio test
Date:	2013-10
Issue Date:	2012-09-10 13:47:26 (UTC+8)
Publisher:	Heidelberg: Physica-Verlag GmbH und Co.
Abstract:	This article uses the generalized likelihood ratio test to formally test whether the relationship between foreign direct investment (FDI) and income inequality varies with the level of human capital and then uses a flexible semiparametric smooth coefficient partially linear model to provide estimates of the inequality effect of FDI that are specific to the level of human capital in a country. Based on the data of 102 countries over the period 1970–2007, we find the following. First, there exists substantial heterogeneity in the inward FDI-inequality relationship. Inward FDI is inequality-ameliorating in low-income countries where human capital is scarce but is inequality-raising in middle- and high-income countries where human capital is abundant. Second, contrary to the conventional mindset, outward FDI has no significant impact on inequality in low-and high-income countries. Nevertheless, outward FDI is inequality-raising in middle-income countries with low levels of human capital. Our results demonstrate that accounting for parameter heterogeneity is critical to identify the key mechanisms through which FDI affects inequality. Omitting parameter heterogeneity could lead to misspecification and incorrect policy prescriptions.
Relation:	Empircal Economics 45(2),　p.845-872
DOI:	10.1007/s00181-012-0636-7
Appears in Collections:	[Graduate Institute & Department of Economics] Journal Article [Graduate Institute & Department of Statistics] Journal Article

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