FDI and Income Inequality: Do Digital Service Trade Restrictions Matter?

The rapid digitalization of global economies has transformed trade and investment flows, yet many countries continue to impose restrictive policies on digital service trade, raising important questions about their broader economic consequences. Using the newly developed Digital Trade Restrictiveness Index (DTRI), this study explores how these restrictions moderate the relationship between foreign direct investment (FDI) and income inequality. By using panel regression and predictive margins analyses on a sample of 68 countries, we find that stricter digital trade restrictions significantly diminish the inequality-reducing effects of FDI. Notably, this moderating effect varies across the five dimensions of digital trade restrictions. While stringent regulations on electronic transactions primarily weaken the beneficial impact of FDI on reducing inequality, more severe restrictions on infrastructure and connectivity not only impede but also exacerbate inequality. These findings highlight the critical need for balanced digital trade policies that enable inclusive growth by maximizing the equitable benefits of FDI while addressing legitimate regulatory concerns. [ABSTRACT FROM AUTHOR]