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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)

The aim of the thesis is to investigate the interdependency relation between transnational corporations and states, as actors in the international political arena. The thesis extracts a theory of asymmetric interdependence, which to some extent explains the nature of this relation. Transnational corporations now play a central role in creating values in the states in which they perform FDI projects. In many respects, this can be said to be a result of the globalisation of the world economy, and most distinctly from the globalisation of markets, making possible for these large transnational corporations to with ease shift production between increasingly similar national markets. This development has also given the transnational corporation the advantage of being able to, in line with the overall strategy of the firm, shift the activities in response to changing factor endowments or government policy and exploit differences between countries on a global scale. These firms’ decisions to invest or not invest in particular geographical locations and the resulting flows of capital, materials, components and finished products, as well as of technological and organisational expertise are clearly essential to economic development and welfare in areas in which these corporations operate. The world’s largest transnational corporations account for approximately four-fifths of world industrial output, and the 500 largest TNCs account for 90 percent of all the worlds’ foreign direct investment. About one third of world trade today consists of intrafirm trade within TNCs, and another third consists of TNC exports to nonaffiliates. In industries dominating worldwide foreign direct investment flows, the considerably increased mobility of the investments has eroded the ability of states to influence the activity of affiliates in line with state preferences. The power relation deriving from asymmetric interdependence is a function of scarcity, since the power of each actor is determined by the scarcity of the possessions sought by the other actor. Transnational corporations have a structural advantage: they control resources generating economic strength, can easily shift these resources between different locations, states are depending on these resources for reaching their objectives and there is a scarcity of these resources and of the actors controlling them. Since there is a scarcity of the value generating, mobile investments controlled by transnational corporations, and since economic growth is a superior political objective for states, which additionally compete for these investments, the states are not able to in a sovereign fashion pursue policies that affect their inflow of foreign direct investment. The ways states may decrease the asymmetry in the interdependence, and thus gain a better outcome in separate bargains and increase the long-term ability to pursue more sovereign policies in matters determining location of activities of transnational corporations, are to either, to some extent, substitute the economic benefits of transnational corporations with other value generating mechanisms, such as domestic firms, or in some way alter the relative scarcity of the firms through creating a real equilibrium between the two scarcities (the scarcity of TNC investments and the scarcity of state controlled markets sought by transnational corporations), i.e. wholly or partly remove the destructive competition between states for foreign direct investment and coordinate policies on such issues that may be used in a competitive way for attracting TNC activity. However, the thesis concludes that it is highly unlikely that governments would attempt to pursue policies aiming to restrict the activities of transnational corporations. A coordination of policies, constituting a form of international regulation of national policies on foreign direct investment, would be highly desirable for states as a group for neutralising the asymmetry of the interdependence, but is also very problematic to realise. Validerat; 20101217 (root)