For Whom is MAI? A theoretical Perspective on Multilateral Agreements on Investments

countries. However, they are not able to associate country h with a value
of β_h. Hence, firms can only form expectations on the profits that can be
realized in countries belonging to MAI and in those that are outside of MAI. In
the following, we denote, respectively, by Z and —Z the set of MAI and non-
MAI countries. The location decision of each MNE is therefore based on the
comparison between EZ¼ ´ E [¼_hjh 2 Z] and E-Z¼ ´ E [¼_hjh 2 —Z], where
E [:j:] denotes the conditional expectations operator. One observes from (3)
and (4) that locating in non-MAI countries could be preferable for firms only
if the countries that belong to MAI have, on average, higher bargaining power.
Only in this case we can have MNEs choosing p = 0. In case of indifference,
EZ¼ = E-Z ¼, p may have any value between 0 and 1.

As for countries, they choose to participate in MAI only if this leads to
higher expected income.²¹ The choice of entering MAI matters for countries’
expected income because this directly affects countries bargaining power, their
ability to extract FDIs’ rents, and the amount of investment undertaken by
multinationals. Participation in MAI affects also countries’ expected income
indirectly, by shaping the expected FDI inflows. This occurs for two reasons.
First, because MNEs attach different probabilities to the alternative of invest-
ing in MAI or in non-MAI countries. Second, because the mass of countries
belonging to MAI may differ from that remaining outside of MAI. Denoting by
z, z 2 [0; 1] ; the fraction of countries joining MAI, the expected FDI inflows
of an arbitrary country h if, respectively, participating and not participating in
MAI are given by p=z and (1 — p) = (1 — z). Expected income of country h in
the two alternatives are easily obtained:

L ⁺ (Z´ ^(Ph ^— °) (^{1 —} ^h ⁺ °) ^{+ p}h∏(p; ^z) ;

L ⁺ ɑ _— Z) Ph (1^— Ph)⁺ Mh∏(^p;^z);

where ∏(z) are the expected profits of a representative MNE, which in turn
depend upon the values of p and z. The first term in (5) and (6) is labor
income, the second term is the expected rent-extraction from MNEs locating
in country h, and the last term are the aggregate expected profits repatriated
from MNEs to country h. Note that since each country is atomistic, its decision
about whether to enter MAI or not does not alter the last term in the sum
of (5) and (6), i.e., expected repatriated profits are not affected. Note also
that countries have no incentive to exert a bargaining power larger than a half.
Above a half the loss of income from reduced investments weighs out the gains
from an increased share of profits. Consistently, since countries are not obliged
to exercise their bargaining power when this is unprofitable to them, we can

²¹Note that, given symmetric preferences and pricing, countries’ income is also a utilitarian
measure of countries’ welfare.

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