The welfare state and the political economy of globalisation : the case of foreign direct investment and policy convergence

In the age of globalisation, it has been widely claimed in scholarly as well as public debate that the welfare state will retreat due to a convergence pressure by global economic forces. This thesis examines a convergence hypothesis in the area of foreign direct investment (FDI), predicting a tax policy convergence due to mobility of FDI. The hypothesis claims that mobility of attractive economic resources confers structural power upon transnational corporations (TNC). This power is assumed to be due to the ability of TNCs to make discriminatory location choices causing allocation of FDI, avoiding relatively high taxation regimes. According to the convergence hypothesis, tax policies will converge on TNC preferences (assumed by the convergence hypothesis to be low taxation and thus threatening the fundamentals for diversified welfare ambitions) since inward foreign direct investment is by states highly attracted economic activity. The competition situation among states for FDI will result in lower taxation and hence a restraint on states' ability to pursue ambitious welfare policies. This thesis tests the issue of whether investment choices by TNCs are discriminatory in correspondence to the convergence hypothesis, i.e. that there is a reluctance to invest in jurisdictions with relatively high taxation. The study leaves out the question of actual preferences of transnational corporations, and focuses only on the actions of TNCs through allocation of foreign direct investment. The states of the European Union prior to the accession of ten new member states in 2004 has been chosen for a quantitative study analysing correlation between level of taxation and success in attracting foreign direct investment. This study observes no correlation between high levels of taxation and low success in attracting FDI. Instead, the only connection seems to be between high levels of taxation and high success in attracting FDI. While more studies are necessary to conduct in the area, this thesis constitutes a logical questioning of the convergence hypothesis tested, and stresses the need for further research on the survival of the welfare state in the age of globalisation.Validerat; 20101217 (root