Multinational Enterprises and the Welfare State

This paper presents an empirical analysis on the extent to which a country’s welfare spending influences foreign direct investment (FDI) decisions, with a core focus on relocation. We argue, and subsequently test empirically, that higher welfare spending by governments attracts foreign investment. Moreover, MNEs located in high welfare spending countries, have a lower likelihood of relocating to foreign markets compared with MNEs in countries with lower welfare spending.

Using data for multinational enterprises (MNEs) in 27 OECD countries, our results show that MNE performance is positively related to welfare spending. These findings appear more pronounced for MNEs that operate in high- compared to low-technology manufacturing industries. Our results suggest that, in the case of host developing economies that high welfare spending does deter FDI, but that these effects are small. We suggest that this is a result of firms being more hesitant to invest in developing countries where they will be expected to contribute to welfare, than in developed countries.

This suggests that a degree of trust between firms and host country governments is required concerning institution building and delivery of welfare. Our results suggest that the conventional wisdom of firms avoiding or relocating away from locations with high welfare spending, due to the associated additional costs, is questionable, but that firms need to be confident on the efficacy of this spend.