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The Economics of a Multilateral Investment Agreement

Jiahua Che () and Gerald Willmann ()

No 2562, CESifo Working Paper Series from CESifo Group Munich

Abstract: This paper models a multilateral agreement on investment (MAI) as a coordination device. Multinational enterprises can invest in any number of countries. Without a multilateral investment agreement, expropriation triggers an investment stop by the single MNE. Under a multilateral agreement, expropriation leads to a joint reaction by all MNEs. Switching to such a regime increases worldwide FDI and raises the world interest rate. Distinguishing three groups of countries, we show that industrialized countries experience an outflow of capital but benefit overall due to an increase in repatriated profits. Middle income countries are likely to gain from increased inward FDI, whereas least developed countries lose because they receive less FDI. Our results explain the stylized fact that a multilateral investment agreement was opposed by least developed nations and certain groups in rich countries.

Keywords: multilateral investment agreement; FDI; trade policy (search for similar items in EconPapers)
JEL-codes: F13 F21 F23 (search for similar items in EconPapers)
Date: 2009
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