1 Introduction
What is the economic rationale for a Multilateral Agreement on Investment
(MAI)?1 Why do we observe some Least Developed Countries (LDCs) objecting
strongly the prospect of MAI, even though they are not forced to join? What
are the likely consequences of MAI on world welfare? How will the possible gains
be divided? The aim of this paper is that of offering a theoretical framework
for MAI in which the above questions can find an answer.
In the past decades, multilateralism has substantially contributed to main-
tain a free trade climate in a world with wide economic, social, and political
differences. As trade integration deepens the need for a multilateral approach
extends from manufacture trade to new issues such as trade in services, intel-
lectual property rights, or right of establishment. The growing importance of
FDI and FDI-related trade issues has led the OECD to propose in 1995 a draft
for a Multilateral Agreement on Investment, directed to OECD and non-OECD
member countries, with the aim of fostering FDI liberalization and protecting
investment on a multilateral basis, under the working of a dispute settlement
procedure different from that of the WTO. Negotiations on the OECD MAI
draft stopped in 1998. Since then, the desirability and the feasibility of a mul-
tilateral investment agreement is under study by a WTO working group.
The MAI proposal has been strongly debated world-wide, receiving criticism
by several interest and opinion groups within advanced countries (NGOs, en-
vironmentalists, trade unions) and a fierce opposition by some LDCs. This is
somewhat puzzling. In fact, the countries that do not agree with the conditions
of a proposed MAI are perfectly free to opt out. So, why was there such a
strong opposition to the simple eventuality that some nations could join this
agreement? Second, the negative reactions to MAI deeply contrast with the
growing positive attitude towards FDIs that is spreading especially in the de-
veloping world. Almost all LDCs have recently adopted measures that are more
favorable to FDIs, not less.2 Finally, the opposition to MAI clashes with the
proliferation of Bilateral Investment Treaties (BITs) and regional agreements
on foreign direct investments that aim at protecting and liberalizing FDI in
member countries.3
In this paper we present a model to study international investment agree-
ments in which the above puzzle can find an explanation. We develop a frame-
work of analysis in which the desirability of MAI has a sound economic justifi-
cation, but in which it is also possible to provide an explanation of the observed
dfficulties in its implementation.
Our paper is only loosely related with the existing literature on the effects of
FDI policies and on subsidy competition among countries to attract investments
(see, e.g., Bond and Samuelson (1986), Black and Hoyt (1989), Fumagalli (1998),
1 Throughout the paper, the acronym MAI is used generically with reference to any Mul-
tilateral Investment Agreement.
2For example, see UNCTAD (1998) for a review of FDI p olicies across the world.
3 Consider, for instance, the recent initiatives by Asean and Mercosur (UNCTAD (1998)).