For Whom is Mai? A Theoretical Perspective on Multilateral Agreements on Investments
Development Studies Working Paper No. 151
28 Pages Posted: 4 Nov 2001
Date Written: May 2001
Why do we observe some LDCs objecting the prospect of a Multilateral Agreement on Investment (MAI), although they have been keen to liberalize investment in preferential agreements in recent years? In this paper, we analyse the issue of MAI implementation and assess the welfare consequences of such kind of agreements. In our model, participation to MAI involves a trade-off between less rent extraction from multinational firms (MNEs) and more abundant FDI inflows. At equilibrium, either all countries enter MAI, or all countries stay out, or only some of them enter. Coordination problems may induce multiple equilibria: the three typesof equilibria may coexist. So, the implementation of MAI may depend not only on structural factors but also on the general "political climate". When all countries join MAI, world welfare is maximized because this minimizes the hold-up problem faced by MNEs and stimulates investment.However, in an asymmetric world, welfare gains are not guaranteed for all countries.
Keywords: Foreign direct investment, International agreements, Incomplete contracts, Adverse selection, Multiple equilibria
JEL Classification: F13, F23, O19
Suggested Citation: Suggested Citation