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Globalisation and the future of the welfare state

  • Chen, Yu-Fu
  • Görg, Holger
  • Görlich, Dennis
  • Molana, Hassan
  • Montagna, Catia
  • Temouri, Yama

[Conclusion] Taken together, the analysis in this paper does not support the conventional wisdom that the welfare state hinders country competitiveness, or that social expenditure (financed through corporate taxation) deters inward foreign direct investment. Instead, we find that welfare expenditure is positively associated with country competetiveness if vertical linkages (leading to aggregate scale economies) are high. In such a case, as argued theoretically by Molana and Montagna (2006), there may be a virtuous cycle of higher social protection, aggregate productivity and welfare. Also, updating and extending Görg, Molana and Montagna (2009) with an analysis using firm level data on the relocation decisions of multinational firms, we find that social expenditure may be attractive to inward FDI and may also act to anchor firms in the home country. Overall, the theoretical and empirical analysis in this paper suggests that the relationship between globalization, international competitiveness and the welfare state is far more complex than what is implied by the conventional wisdom. Further research is warranted to examine exactly the channels through which WS policies affect microeconomic adjustments to globalisation and, through these, countries' competitiveness and aggregate performance.

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Paper provided by Kiel Institute for the World Economy (IfW) in its series Kiel Policy Brief with number 76.

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Date of creation: 2014
Date of revision:
Handle: RePEc:zbw:ifwkpb:76
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  1. Holger Görg & Hassan Molana & Catia Montagna, 2007. "Foreign Direct Investment, Tax Competition and Social Expenditure," Dundee Discussion Papers in Economics 198, Economic Studies, University of Dundee.
  2. Massimo Del Gatto & Giordano Mion & Gianmarco I.P. Ottaviano, 2006. "Trade Integration, Firm Selection and the Costs of Non-Europe," Development Working Papers 218, Centro Studi Luca d\'Agliano, University of Milano.
  3. Dani Rodrik, 1997. "Has Globalization Gone Too Far?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 57.
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  8. Baldwin, Richard & Krugman, Paul, 2000. "Agglomeration, Integration and Tax Harmonization," CEPR Discussion Papers 2630, C.E.P.R. Discussion Papers.
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  10. Hassan Molana & Catia Montagna, 2004. "Aggregate Scale Economies, Market Integration, and Optimal Welfare State Policy," Dundee Discussion Papers in Economics 172, Economic Studies, University of Dundee.
  11. Torben M. Andersen & Allan Sørensen, 2008. "Globalisation squeezes the public sector - is it so obvious?," Economics Working Papers 2008-08, School of Economics and Management, University of Aarhus.
  12. Perotti, Roberto & Alesina, Alberto, 1997. "The Welfare State and Competitiveness," Scholarly Articles 4553027, Harvard University Department of Economics.
  13. Amable, Bruno, 2003. "The Diversity of Modern Capitalism," OUP Catalogue, Oxford University Press, number 9780199261147.
  14. Daniel Kopasker & Holger Görg & Hassan Molana & Catia Montagna, 2013. "Negative Shocks, Job Creation, and Selection," WWWforEurope Working Papers series 11, WWWforEurope.
  15. Bruce A. Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," NBER Working Papers 11299, National Bureau of Economic Research, Inc.
  16. Sinn, Hans-Werner, 1997. "The selection principle and market failure in systems competition," Munich Reprints in Economics 19854, University of Munich, Department of Economics.
  17. Bartelsman, Eric J & Caballero, Ricardo J & Lyons, Richard K, 1994. "Customer- and Supplier-Driven Externalities," American Economic Review, American Economic Association, vol. 84(4), pages 1075-84, September.
  18. Pennings, Enrico & Sleuwaegen, Leo, 2000. "International relocation: firm and industry determinants," Economics Letters, Elsevier, vol. 67(2), pages 179-186, May.
  19. Andersen, Torben M., 2002. "International Integration, Risk and the Welfare State," IZA Discussion Papers 456, Institute for the Study of Labor (IZA).
  20. Pemberton, James, 1999. "Social Security: National Policies with International Implications," Economic Journal, Royal Economic Society, vol. 109(457), pages 492-508, July.
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