Haaparanta (1996), Haaland and Wooton (1999), Haufler and Wooton (1999)).
In our model, the focus is on the externalities that are inherent to international
FDI agreements, on problems of implementation, and on welfare.4
To build a model, we need first to isolate the basic ingredients of the proposed
investment agreements, and to identify their economic implications. When en-
tering MAI, countries commit to limit their own freedom of action vis-à-vis
MNEs. As already suggested in Markusen (1998), this commitment translates
into a reduction in countries’ bargaining power that might have real effects. If
investments are specific to the particular firm-country match and investment
cannot be contracted ex-ante, then MNEs are likely to underinvest due to a
hold-up problem. By reducing countries’ freedom of action, MAI has the desir-
able effect of reducing the extent of the hold-up problem and the corresponding
inefficiency. This is the basic rational behind the desirability of MAI imple-
mentation. What is at stake is not only the distribution of FDI rents between
MNEs and host countries. Rather, the economic rational for MAI is that of
fostering investment world-wide through improved transparency and discipline
on governments’ attitude towards MNEs.
Second, we need a model where the distributive implications of MAI are con-
sistent with stylized facts. Here, we note that multilateral investment agreements
cannot really be assimilated to trade agreements. While multilateral liberaliza-
tion is likely to produce gains for all countries - due, primarily, to the exploita-
tion of comparative advantages and scale economies - this is not necessarily the
case for investment agreements. Among the hard-core stylized facts about FDIs,
we know (see, e.g., Markusen (1995)) that foreign direct investments are found
in sectors where firms’ intangible assets are important and that FDIs normally
originate from countries with abundant “knowledge capital”. The economic ac-
tors (managers, workers, scientists,...) that embody the knowledge capital key
to MNEs are unequally distributed across the world, are relatively immobile in-
ternationally, and, in general, cannot be acquired overnight. This explains the
very unequal distribution of FDIs across the world, and its persistency. In this
framework, we expect two possible gainers from MAI: MNEs in general, which
willfind a more favorable environment for their operations, and those host coun-
tries that are able to attract more FDIs, which will benefit from FDI-generated
positive spillovers. Some country, however, may not receive more FDI inflows
after MAI. Equally, some country may not benefit from boosted own MNEs’
profits. We also note that MAI, as compared with trade agreements, is likely
to produce more substantial externalities. When some countries agree on a set
of rules to liberalize and protect investments of foreign origin, they are likely
to divert FDI flows from the countries that remain outside of the agreement.
This, in turn, alters the cost-benefit comparisons concerning MAI on the part
of outsiders.
4The focus of our paper is analogous, for instance, to that of Baldwin (1995). There, the
externalities associated with the formation of common markets are anlysed. The fact that a
group of countries enters this type of agreement may affect the willingness of the others to do
the same, i.e., may produce a “domino effect”.