My dissertation examines the question of how foreign direct investment (FDI) affects social welfare spending across countries. To date, there have been three important challenges to studies of the globalization-welfare state nexus. First, most scholars understand market internationalization in terms of the trade of goods and services while minimizing how other aspects of globalization fit into this discussion. Second, scholarly attention to economic globalization has been mistaken when understanding the relationship between demand- and supply-side mechanisms for social welfare provision. Thus, the argument that trade stimulates demand for social welfare has been incorrectly used to oppose the argument that capital mobility significantly undercuts a government's capability to fund welfare states. Lastly, existing studies on this topic mostly center around affluent democracies; various theories of welfare states require further elaborations to increase their external validity.
My dissertation aims to overcome these challenges. For this purpose, I focus on one of the most important aspects of globalization, FDI, which bears meaningful implications for both demand- and supply-side functions of social welfare provisions when explaining variations of social welfare spending across countries. I argue that since the late twentieth century, FDI has been a major cause of the "globalization dilemma,'' proposed by (Rodrik1997), who argues that in an age of globalization governments face increased demand for social welfare and decreased capabilities to supply it. In other words, FDI has conflicting influences on welfare states. On the one hand, FDI works for welfare states as the ensuing economic insecurity increases demand for social welfare. At the same time, however, FDI works against welfare states because governments will experience reductions in capital taxation due to competition among themselves to attract and retain production capitals. I further argue that there is an interesting consequence of this dilemma. Due to the conflicting influences of FDI on welfare states, the expansion of social welfare provisions requires governments to secure additional revenues. Governments will address this concern through a strategy that is both effective and politically less expensive: an increased reliance on indirect taxation. As indirect taxes are mostly born out of labor and thus notoriously regressive, the very effort to supply social welfare provisions goes against the fundamental principle of welfare states: the redistribution of income from the rich to the poor.