Does foreign direct investment polarize regional earnings? Some evidence from Israel

Michael Beenstock, Daniel Felsenstein*, Ziv Rubin

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

8 Scopus citations

Abstract

This paper investigates the polarizing effect of FDI on regional earnings in host nations. A key hypothesis is that the link between FDI and regional inequality is mediated by regional capital–labor ratios. In the absence of regional FDI data, a method for estimating the effects of FDI on regional inequality is proposed in which national FDI is hypothesized to be a common factor for regional capital investment. Empirical analysis of regional panel data for Israel shows that regional capital stocks vary directly and heterogeneously with the stock of national FDI, and that regional earnings vary directly and homogeneously with regional capital–labor ratios. These two relationships are used to calculate the contribution of FDI to regional earnings inequality over time. We find a substantial polarizing effect. Between 1988 and 2010 the variance of log regional earnings increased from about 0.011 to 0.025. More than half of this increase may be attributed to the polarizing effects of FDI. Policy implications of these findings are discussed.

Original languageAmerican English
Pages (from-to)385-409
Number of pages25
JournalLetters in Spatial and Resource Sciences
Volume10
Issue number3
DOIs
StatePublished - 1 Oct 2017

Bibliographical note

Publisher Copyright:
© 2017, Springer-Verlag GmbH Germany.

Keywords

  • Capital–labor ratio
  • Common correlated effects estimator
  • FDI
  • Regional earnings decomposition
  • Regional inequality

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