A Theoretical Perspective on Multilateral Agreements on Investment

Alessandro Turrini () and Dieter M. Urban ()

Review of International Economics, 2008, vol. 16, issue 5, pages 1023-1043

Abstract: Why do we observe some developing countries objecting to the prospect of a Multilateral Agreement on Investment (MAI), even though they have been keen to liberalize investment in preferential agreements in recent years? In this paper, we analyze the issue of MAI implementation and assess the welfare consequences of such kind of agreements. In our model, participation to MAI involves a tradeoff 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 are not guaranteed for all countries. Copyright © 2008 The Authors. Journal compilation © 2008 Blackwell Publishing Ltd.

Date: 2008

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