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

by joining MAI a country will benefit compared with a world with no MAI just
because of more abundant FDI inflows. We summarize the results of this section
in the following Proposition.

Proposition 6 i) Except for the case of “ful l MAI”, the size of MAI emerging
at equilibrium is always suboptimal; ii) When MAI is “full”, single countries
can gain from the implementation of MAI only if endowed with MNE shares;
iii) When MAI is “partial”, single countries have to hold MNEs to gain as out-
sider, while they can gain also without MNEs as insiders.

The main message is that MAI rises world welfare without necessarily lead-
ing to a Pareto improvement. The implementation of MAI has three main
effects: an e¢ciency effect, associated with a reduction in the hold-up problem,
a redistributive effect, with a net average gain of MNEs vis-à-vis host countries,
and a FDI-redirection effect, with MAI members receiving more inward invest-
ments. Countries that cannot benefit from repatriated MNE profits or bigger
FDI inflows could end up being net losers after the implementation of MAI. In
general, multilateral investment agreements produce externalities through the
FDI-redirection effect. MAI losers may be willing to join MAI in any case:
opting out will undermine FDI inflows. When a partial MAI is realized, those
countries that opt out suffer from a reduction in FDI inflows; this loss can be
compensated only by sn∏'icieιιl MNEs’ holdings. Conversely, the countries that
participate in a partial MAI can gain from larger FDI inflows even without
MNEs’ holdings.

6 Discussion

We have shown in the previous sections that the implementation of MAI is
subject to coordination failures, and that in spite of the worldwide e∏ciency
gain, Pareto improvements are not guaranteed with MAI. Some country might
gain a lot, some other might lose. Coordination failures arise from the presence
of an externality associated with the FDI-redirection effect of MAI. The fact
that some countries agree to self-restrain from exerting bargaining power vis-
à-vis MNEs tends to divert FDIs from other countries. This affects then the
willingness of each country to enter MAI. The emergence of possible MAI losers
comes from the unequal distribution of knowledge capital, and then MNEs,
across the world. Some countries are the home of many giant multinational
corporations, other countries instead are lacking knowledge capital and MNE
holdings.

We have discussed our results in terms of two key parameters: the degree
of MAI strictness, ° , and the distribution of countries bargaining power, as
expressed by β_l. The implementation of MAI requires a su∏ciently “severe”
agreement: the loss of countries’ bargaining power ° must be high enough.
This is necessary to offset the adverse selection problem that arises with the
implementation of MAI. Those countries that are more likely to trade off their

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