DP2774 For Whom is MAI? A Theoretical Perspective on Multilateral Agreements on Investment

Author(s): Alessandro Antonio Turrini, Dieter M Urban
Publication Date: April 2001
Keyword(s): Adverse Selection, Foreign Direct Investment, Incomplete Contracts, International Agreements, Multiple Equilibria
JEL(s): F13, F23, O19
Programme Areas: International Trade and Regional Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=2774

Why do we observe some LDCs objecting to 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 a kind of agreement. In our model, participation in 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 types of 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 for all countries are not guaranteed.