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Do Country Income-Level Variations Impact Foreign Direct Investments? Open Access

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This research studies the impact that the variations in income within a country have on foreign direct investment (FDI) behavior. The literature has not considered the influence that variations in income within a country may have on FDI flows, even as it finds evidence that variations in income across countries influence FDI flows. Likewise, while the literature finds some evidence that FDI impacts the inequality in a country's distribution of income, the literature does not explore the relationship between FDI and a country's distribution of income. Unlike the literature, this research notes key problems in using country level aggregate measures of income and the inequality in their distribution when addressing these gaps in the literature. Instead, this research proposes using the income-deciles that constitute the Lorenz curve to capture the variations in income within a country as it addresses these literature gaps. In doing so, this research formulates new testable hypotheses regarding the scale and income elasticity of investments of FDI in high-income countries. Moreover, it also explores how similar, or different, the FDI responses are in high and middle-income countries when considering statistically indistinguishable measures of income across such countries. The results indicate that income-level variations impact FDI. The implications of that finding for future research and policy analysis are also discussed.

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