The final ingredient of our model is a mechanism through which countries
self-select between MAI members and MAI outsiders. The gain from MAI mem-
bership is associated with larger FDI inflows. This could be offset, however, by
the loss of freedom and the bargaining power that the countries undergo when
joining MAI. When countries are heterogenous in their institutions, laws, or
habits, wefind that the countries that are more keen to join MAI are those with
higher bargaining power: for them, the loss of freedom due to MAI membership
has a relatively low weight.
In order to capture relevant effects, we must develop a model where countries
are many, where firms make profits, and where MNEs and countries (govern-
ments) interact in a rather complex way. The level of investment undertaken by
MNEs in the different countries, the partition of countries in MAI-members and
outsiders, and the direction of FDI flows must all be determined endogenously
in equilibrium. As will be clear, we have to economize on the analysis by making
quite radical simplifications, basically a highly symmetric world without differ-
ences in factor endowments across countries and equal production techniques.
The model set-up borrows from Murphy, Shleifer and Vishny (1989) the use of a
dual-technology production representation. As Grossman and Helpman (1999),
we also resort to a world with incomplete contracting.
We analyze how the size of MAI depends on the strictness of its rules, e.g., on
the loss of discretion (bargaining power) that countries have to accept by joining
MAI. Wefind that, depending on the degree of severity of the discipline imposed
by MAI, equilibrium may either exhibit no MAI participants, or all countries
entering MAI, or only some countries as members. Roughly, we observe the
equilibrium size of MAI rising, and then falling as MAI becomes stricter. It is
to note, however, that coordination problems might be particularly strong. In
some cases, the three types of equilibria may coexist. So, the implementation
of MAI may depend in some circumstances not only on structural factors, but
also on expectations and the general “political climate”. Finally, we find that,
in spite of the desirability of MAI from a world viewpoint, the countries that
are not endowed with sufficient MNEs’ holdings may end up losing from MAI.
A country owning no MNEs can hope to gain from the implementation of MAI
only when MAI does not reach full participation, thanks to larger FDI inflows.
The remainder of the paper is structured as follows. In the next section we
summarize stylized facts of international investment agreements and outline the
main features of the economics of MAI. In section 3, we develope the set-up
of our model. Section 4 is devoted to the equilibrium analysis, while section 5
focuses on the welfare properties of MAI. In section 6, we discuss our results.
Concluding comments are found in section 7.