Foreign Direct Investment and Income Inequality in Latin America

Abstract

There is a heated debate on the effects of Foreign Direct Investment on development. Proponents argue that FDI is good for development, and hence the rapid expansion of FDI in Latin America in the past decade and a half is manna from heaven. In some cases, it is indeed difficult to imagine whether the same development level could have been achieved without FDI. Critics, however, contend that FDI leads to more poverty, isolation and a neglect of local capabilities. Recent difficulties with privatisation in Latin America, which involved FDI, appear to tell us that not all share in the benefits. The paper positions Foreign Direct Investment (FDI) in the debate on income inequality in Latin America. The main conclusion of the paper is that while FDI may have been good for development, more can be done to improve its impact on income distribution and the poor in Latin America, either through appropriate government policies in the area of education, training and infrastructure (i.e. a general development policy), or through working directly with TNCs through incentives or partnerships. Determining which policies are most appropriate and relevant will depend on country characteristics as well as FDI characteristics, and hence will require further discussion and in-depth studies.

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