The last fifty years have been characterised by increases in international integration and growing public sectors, with expanding welfare states. According to current conventional wisdom, however, large-scale public provision of social insurance and progressive systems of redistributive taxation are incompatible with economic globalization, hindering country competitiveness, and deterring inward foreign direct investment. Taken together, the analysis in this paper does not support this conventional wisdom. Instead, we find that welfare expenditure is positively associated with country competitiveness if vertical linkages (leading to aggregate scale economies) are high. In such a case, there may be a virtuous cycle of higher social protection, aggregate productivity and welfare.