This paper investigates the polarizing effect of FDI on regional earnings in host nations. A key hypothesis is that the link between FDI and regional inequality is mediated by regional capital–labor ratios. In the absence of regional FDI data, a method for estimating the effects of FDI on regional inequality is proposed in which national FDI is hypothesized to be a common factor for regional capital investment. Empirical analysis of regional panel data for Israel shows that regional capital stocks vary directly and heterogeneously with the stock of national FDI, and that regional earnings vary directly and homogeneously with regional capital–labor ratios. These two relationships are used to calculate the contribution of FDI to regional earnings inequality over time. We find a substantial polarizing effect. Between 1988 and 2010 the variance of log regional earnings increased from about 0.011 to 0.025. More than half of this increase may be attributed to the polarizing effects of FDI. Policy implications of these findings are discussed.