Income Inequality and FDI in Turkey: FM-OLS (Phillips-Hansen) Estimation and ARDL Approach to Cointegration

This paper examines the long-run impact of foreign direct investment (FDI) on and the other determinants of income inequality in Turkey. Using a linear income inequality model, we apply the (ARDL) approach to cointegration which is more appropriate for estimation in small sample studies. The long-run results are also estimated by using the fully modified ordinary least squares (FMOLS) method. These methodologies, while proven to produce reliable estimates in small sample sizes, provide a check for the robustness of results. The data span for the study is from 1990 to 2006. The empirical results indicate the existence of a cointegration relationship among the variables. The results also point to a positive impact of FDI on income inequality which is consistent with other past studies. The positive impact of FDI growth rate on income inequality is shown to be significant in the short-run but not in the long-run.