This work empirically examines South African data covering the years 1956-2011 to look into the relationship between FDI and inequality. By investigating how FDI is linked to inequality, policy makers would be better poised to develop policies that optimise on the benefits of FDI without the dampening effect of inequality. The benefits of FDI, particularly to the South African economy, are that it provides capital to finance investment by bridging the savings gap in the country. In addition to that, FDI facilitates transfer of technology and managerial skills from the source country. Moreover, FDI has a positive impact on balance of payment not only because of the impact capital inflow has on balance of payment, but because FDI also promotes exports of the country to world markets. Empirical evidence presented in literature suggests that the FDI-inequality relationship is complex. In some locations, for example in the US, Latin America and in some developing countries, FDI tends to raise income inequality. In other locations evidence is inconclusive.
The results of this study showed that there is a negative relationship between inequality and foreign direct investment for the period examined in the study. This finding is not consistent with the a priori expectation that foreign direct investment increases inequality. Contrary to what has been predicted, the findings show that foreign direct investment is likely to reduce inequality. The findings also show that there is a statistically significant and positive relationship between GDP and inequality.