Globalisation and the future of the welfare state

[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.