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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
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Handle: RePEc:zbw:ifwkpb:76
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  1. Molana, Hassan & Montagna, Catia, 2006. "Aggregate scale economies, market integration, and optimal welfare state policy," Journal of International Economics, Elsevier, vol. 69(2), pages 321-340, July.
  2. Andersen, Torben M., 2002. "International Integration, Risk and the Welfare State," IZA Discussion Papers 456, Institute for the Study of Labor (IZA).
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  5. DEL GATTO, Massimo & MION, Giordano & OTTAVIANO, Gianmarco I.P., 2006. "Trade integration, firm selection and the costs of non-Europe," CORE Discussion Papers 2006061, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  8. Geishecker, Ingo & Görg, Holger & Munch, Jakob Roland, 2010. "Do labour market institutions matter? Micro-level wage effects of international outsourcing in three European countries," Open Access Publications from Kiel Institute for the World Economy 32951, Kiel Institute for the World Economy (IfW).
  9. Perotti, Roberto & Alesina, Alberto, 1997. "The Welfare State and Competitiveness," Scholarly Articles 4553027, Harvard University Department of Economics.
  10. Daniel Kopasker & Holger Görg & Hassan Molana & Catia Montagna, 2013. "Negative Shocks, Job Creation, and Selection," WWWforEurope Working Papers series 11, WWWforEurope.
  11. Casarico Alessandra, 2001. "Pension systems in integrated capital markets," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 1(1), pages 1-19, November.
  12. Pemberton, James, 1999. "Social Security: National Policies with International Implications," Economic Journal, Royal Economic Society, vol. 109(457), pages 492-508, July.
  13. Bruce A. Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," NBER Working Papers 11299, National Bureau of Economic Research, Inc.
  14. Pennings, Enrico & Sleuwaegen, Leo, 2000. "International relocation: firm and industry determinants," Economics Letters, Elsevier, vol. 67(2), pages 179-186, May.
  15. Amable, Bruno, 2003. "The Diversity of Modern Capitalism," OUP Catalogue, Oxford University Press, number 9780199261147, March.
  16. Sinn, Hans-Werner, 1997. "The selection principle and market failure in systems competition," Journal of Public Economics, Elsevier, vol. 66(2), pages 247-274, November.
  17. Alberto Alesina & Roberto Perotti, 1994. "The Welfare State and Competitiveness," NBER Working Papers 4810, National Bureau of Economic Research, Inc.
  18. Torben Andersen & Allan Sørensen, 2011. "Globalisation squeezes the public sector—is it so obvious?," International Tax and Public Finance, Springer, vol. 18(4), pages 369-382, August.
  19. Dani Rodrik, 1997. "Has Globalization Gone Too Far?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 57.
  20. Görg, Holger & Molana, Hassan & Montagna, Catia, 2009. "Foreign direct investment, tax competition and social expenditure," International Review of Economics & Finance, Elsevier, vol. 18(1), pages 31-37, January.
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