Multinational enterprises and the welfare state

24 Pages Posted: 30 Aug 2022

See all articles by Nigel Driffield

Nigel Driffield

University of Warwick - Warwick Business School

Holger Görg

University of Kiel; Kiel Institute for the World Economy

Yama Temouri

Khalifa University

Xiaocan Yuan

University of Warwick, Warwick Business School

Date Written: August 29, 2022

Abstract

This paper presents an empirical analysis on the extent to which a country’s welfare spending influences foreign direct investment (FDI) decisions, particularly as they relate to relocations. We argue, and subsequently empirically test, that higher welfare spending by governments attracts foreign investment. Moreover, multinational enterprises (MNEs) located in high welfare spending countries have a lower likelihood of relocating to foreign markets compared with MNEs in countries with lower levels of welfare spending. Using data for MNEs in 27 OECD countries, our results show that MNE location decisions are positively related to welfare spending. These findings appear to be more pronounced for MNEs operating in high-tech rather than in low-tech manufacturing industries. Our results suggest that high welfare spending does deter FDI in the case of host developing economies, 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. This suggests that a degree of trust between firms and host country governments is required on institution building and the delivery of welfare. Our results suggest that the conventional wisdom of firms avoiding or relocating away from locations due to the associated additional costs of high welfare spending is questionable, but that firms need to be confident on the efficacy of this welfare expenditure.

Keywords: globalization, institutions, multinational enterprises, relocation, welfare state

JEL Classification: F23, F68, H53, L23, P16

Suggested Citation

Driffield, Nigel and Gorg, Holger and Temouri, Yama and Yuan, Xiaocan, Multinational enterprises and the welfare state (August 29, 2022). Transnational Corporations Journal, Vol. 29, No. 2, 2022, Available at SSRN: https://ssrn.com/abstract=4203485

Nigel Driffield (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Holger Gorg

University of Kiel ( email )

Olshausenstr. 40
D-24118 Kiel, Schleswig-Holstein 24118
Germany

Kiel Institute for the World Economy ( email )

P.O. Box 4309
Kiel, Schleswig-Hosltein D-24100
Germany

Yama Temouri

Khalifa University ( email )

Abu Dhabi
United Arab Emirates

Xiaocan Yuan

University of Warwick, Warwick Business School ( email )

West Midlands, CV4 7AL
United Kingdom

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