A Critical Assessment
Chapter 4: The impacts of foreign direct investment on urban–rural income inequality in China
A Critical Assessment
Since the economic reforms implemented in late 1978, China has achieved remarkable results in increasing per capita income and improving the living standards of the Chinese people, which have been attributed to the rapid economic growth. However, with this fast economic growth, income inequality, especially urban–rural income inequality, in China has actually worsened. While FDI has contributed to China’s economic growth, has FDI also contributed to the increase of income inequality in China? Chapter 4 investigates empirically whether FDI has improved or worsened urban–rural income inequality in China. By using a provincial-level panel dataset containing China’s 30 provinces over the period 1987–2014 and employing the fixed-effects and instrumental variable regression techniques, the study finds that the effect of FDI on urban–rural income inequality is non-linear. At first, FDI increases urban–rural income inequality. And after reaching a critical level, FDI starts to reduce urban–rural income inequality through employment creation, knowledge spillovers and contribution to economic growth. Overall FDI will contribute to reducing urban–rural income inequality in China as FDI inflows continue to rise. However, the study also finds that FDI has indirectly contributed to increasing urban–rural income inequality in China through its significant role in international trade. In addition, the study finds that there exists a Kuznets inverted-U curve relationship between urban–rural income inequality and economic development, suggesting that urban–rural income inequality will gradually decline in China as China’s economy continues to grow and per capita income keeps rising.
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