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For Whom is MAI? A Theoretical Perspective on Multilateral Agreements on Investment

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  • Turrini, Alessandro Antonio
  • Urban, Dieter M

Abstract

Why do we observe some LDCs objecting to the prospect of a Multilateral Agreement on Investment (MAI), although they have been keen to liberalize investment in preferential agreements in recent years? In this Paper, we analyse the issue of MAI implementation and assess the welfare consequences of such a kind of agreement. In our model, participation in MAI involves a trade-off between less rent extraction from multinational firms (MNEs) and more abundant FDI inflows. At equilibrium, either all countries enter MAI, or all countries stay out, or only some of them enter. Coordination problems may induce multiple equilibria: the three types of equilibria may coexist. So, the implementation of MAI may depend not only on structural factors but also on the general ‘political climate’. When all countries join MAI, world welfare is maximized because this minimizes the hold-up problem faced by MNEs and stimulates investment. However, in an asymmetric world, welfare gains for all countries are not guaranteed.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2774.

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Date of creation: Apr 2001
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Handle: RePEc:cpr:ceprdp:2774

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Keywords: Adverse Selection; Foreign Direct Investment; Incomplete Contracts; International Agreements; Multiple Equilibria;

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  1. Haaparanta, Pertti, 1996. "Competition for foreign direct investments," Journal of Public Economics, Elsevier, vol. 63(1), pages 141-153, December.
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  8. James R. Markusen, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 169-189, Spring.
  9. Hoekman, Bernard & Saggi, Kamal, 1999. "Multilateral disciplines for investment-related policies," Policy Research Working Paper Series 2138, The World Bank.
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Cited by:
  1. Dieter M. Urban, 2006. "Multilateral Investment Agreement in a Political Equilibrium," CESifo Working Paper Series 1830, CESifo Group Munich.

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