Foreign Direct Investment, Production Factors Productivity and Income Inequalities in Selected CEE Countries

Abstract

Abstract The issue of global economic inequality has inspired researchers to explore the potential connection between income inequalities and foreign direct investment (FDI), as it is one of the driving forces of globalization. Although there is a large body of theoretical as well as empirical studies linking these variables, the empirical literature on the relationship between FDI, production factors productivity and income inequalities is not conclusive because most scientists treat FDI as uniform. Therefore there is a lack of reliable empirical evidence on the distributional effects of FDI, especially in emerging countries, such as in Central and Eastern Europe (CEE). The research presented in the article fills this gap. The aim of the study is to analyze the impact of the inflow of foreign direct investment on the productivity of production factors (labor, capital and total factor productivity) and income inequality of households in four Central and Eastern European countries (Poland, the Czech Republic, Slovakia and Hungary) in the period 1990–2016. The four countries were selected for analysis as a classic example of European countries transforming their economic structures and similar in terms of the level of economic development. In turn, the choice of the analysis period was related to the availability of necessary statistical data. According to the theory of economics, the inflow of foreign direct investment should have a positive impact on production factors productivity as well as on income inequalities of households in investment receiving countries. In the study, a research method based on the study of economic literature in macroeconomics and international finance and econometric methods (vector autoregression models—VAR) was used. Results of the research suggest a significant and positive impact of greenfield investment inflow on labor productivity and total factor productivity, as well as a positive impact of brownfield investment inflow (mergers and acquisitions) on capital productivity in countries receiving investments. Moreover, the results also revealed the lack of a statistically significant impact of greenfield and brownfield investment on income inequalities in all of the examined countries. The statistical data used in the study came from the statistical databases of the Organization for Economic Cooperation and Development (OECD), the World Bank (World Development Indicators), World Income Inequality Database (United Nations University World Institute for Development Economics Research) and Total Economy Database (The Conference Board of Canada).