Foreign Direct Investment Openness and Income Classes in Europe Around the Great Recession

Abstract

Distributional implications of capital account regulation is eminently context-specific. This paper examines the distributional effects of the openness of foreign direct investment (FDI) flows across 27 European countries over different economic environments around the Great Recession, covering the period 2007-2013. Our multi-level approach allows us to combine country-level variables and sociodemographic characteristics of individuals. Results highlight that the openness of FDI flows heterogeneously affects the income share of individual groups, especially favouring the highest income classes. This finding seems to be driven by the educational level. We argue that, despite highly educated individuals are present along the entire distribution, the openness of FDI flows favour especially the highest income classes. This biased distributional effect of the openness of FDI flows persists over the examined years regardless of the economic environment; this is so, in part, because the distribution of highly educated people is not sensitive to the business cycle.

Keywords: Foreign Direct Investment, income distribution, income classes, multilevel analysis