FDI and Income Inequality: How MNEs Can Have Negative Impacts on Developing Countries

Foreign direct investment (FDI) has the potential to drive economic growth in developing countries by facilitating the transfer of capital, technology, and managerial expertise from developed nations. However, FDI can also have adverse effects, often resulting in the exploitation and depletion of vital resources. Through the lens of dependency theory, this dynamic underscores how the dominance of one country over another is frequently mirrored in their FDI relationships. Thus, we question whether FDI is leading to socio-economic disparities and, as a result, income inequality within developing countries. Specifically, we study how natural resources seeking FDI (NR-FDI) impacts income inequality in developing countries and what role rural communities and entrepreneurial opportunities play in coping with this inequality. Drawing on dependency theory and empirically studying NR-FDI, we find that the investments increase inequality in developing countries. However, strong local communities and high levels of entrepreneurial opportunity mitigate these negative effects. Our findings contribute to a better understanding of the impact of FDI on developing countries and how dependency theory can be applied to make sense of MNE activities.