Foreign Direct Investment and Income Inequality in Mexico, 1990-2000

In this paper we explore the relationship between the investments of multinational corporations (foreign direct investment) and income inequality in Mexico. We argue that Mexico's liberalization of foreign direct investment (FDI) inflows in the 1990s provides a natural experiment to test how FDI affects income inequality in a middle-income country. We use an instrumental variables approach as our identification strategy to mitigate problems of endogeneity and omitted variable bias. In an empirical test of the determinants of changes in income inequality from 1990 to 2000, we find that increased FDI inflows are associated with a decrease in income inequality within Mexico's 32 states