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Host Country-Foreign Investor Bargaining Power and Investment Incentive Provisions in Multilateral Investment Agreements

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  • Richard Mash
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    Abstract

    The paper is concerned with foreign investment in developing countries and the incentives offered to attract that investment in relation to the use of a possible future multilateral investment agreement as a commitment device over incentive levels. The existing literature has identified two sources of benefit from such commitment, firstly to avoid time inconsistency problems whereby incentives are less effective than otherwise because investors fear that they may be reduced once sunk costs have been incurred, and secondly to avoid excessive competition for foreign investment. This paper demonstrates a third benefit from commitment which arises from low host country bargaining power when negotiating incentive levels with foreign investors. If bargaining power is low, incentives agreed under bargaining will be generous to the investor and host country welfare will be lower than otherwise. It is shown that this consequence of low bargaining power may be avoided if host countries can commit themselves in advance to provisions that limit the incentives they may subsequently agree with foreign investors. It is argued that provisions of this kind should be optional from a host country perspective since those with low bargaining power will gain from them but those with high bargaining power would not.

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    File URL: http://www.economics.ox.ac.uk/materials/working_papers/paper047.pdf
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    Bibliographic Info

    Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 47.

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    Date of creation: 01 Dec 2000
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    Handle: RePEc:oxf:wpaper:47

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    Keywords: foreign investment; bargaining; MFN; multilateral investment agreements;

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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.
    2. Bester, Helmut, 1993. "Bargaining versus Price Competition in Markets with Quality Uncertainty," American Economic Review, American Economic Association, vol. 83(1), pages 278-88, March.
    3. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
    4. Arnold, Michael A & Lippman, Steven A, 1998. "Posted Prices versus Bargaining in Markets with Asymmetric Information," Economic Inquiry, Western Economic Association International, vol. 36(3), pages 450-57, July.
    5. Panagariya, Arvind & Rodrik, Dani, 1993. "Political-Economy Arguments for a Uniform Tariff," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(3), pages 685-703, August.
    6. Kozul-Wright, Richard & Rowthorn, Robert, 1998. "Spoilt for Choice? Multinational Corporations and the Geography of International Production," Oxford Review of Economic Policy, Oxford University Press, vol. 14(2), pages 74-92, Summer.
    7. Kennan, J. & Wilson, R., 1991. "Bargaining with Private Information," Working Papers 90-01rev, University of Iowa, Department of Economics.
    8. Veugelers, Reinhilde, 1993. "Reputation as a Mechanism Alleviating Opportunistic Host Government Behavior against MNEs," Journal of Industrial Economics, Wiley Blackwell, vol. 41(1), pages 1-17, March.
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