Effect of Foreign Direct Investment on Income Inequality in Sub Saharan Africa
Year: 2025
Type: article
Abstract: This study investigates the effect of Foreign Direct Investment (FDI) on income inequality in Sub-Saharan African countries using panel data from 2015 to 2021. Employing the Two-step system Generalized Method of Moments (GMM) estimator to address potential endogeneity and dynamic panel bias, the model controls for institutional quality, exchange rates, GDP growth, and lagged income inequality (Gini Index). Diagnostic tests, including AR(1), AR(2), Hansen, and Sargan, validate the model and instrument selection. Results indicate a highly persistent income inequality process, with the lagged Gini Index coefficient close to unity and statistically significant (p < 0.001). FDI exhibits a positive and marginally significant effect on income inequality (coefficient = 8.37, p = 0.05), implying that increased FDI inflows are associated with rising income inequalities in the region. Institutional quality, exchange rate, and GDP growth variables show no statistically significant effects. These findings highlight the heterogeneous and context-dependent nature of FDI’s distributional effects, suggesting that in Sub-Saharan Africa, FDI may exacerbate inequality under prevailing institutional and economic conditions. Policy recommendations include promoting inclusive FDI projects, enhancing education and skills development, and implementing progressive redistribution mechanisms to mitigate rising inequality.
Language: English
Subfield: Sociology and Political Science
Field: Social Sciences
Domain: Social Sciences
Open Access status: diamond
OpenAlex ID: W7219976750