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Why the case for a multilateral agreement on investment is weak

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  • Nunnenkamp, Peter
  • Pant, Manoj

Abstract

The demand of industrialized countries for a multilateral agreement on investment to be negotiated under the roof of the WTO is meeting with considerable resistance on the part of developing countries. The proponents of such a multilateral agreement argue that binding disciplines of capital-importing countries would help reduce uncertainty and, hence, result in more foreign direct investment (FDI) in developing countries. By contrast, the opponents consider such an agreement to be biased in favor of business interests and against the development objectives of Third World economies. It is for various reasons that the case for a multilateral agreement on investment is not compelling: Investment regulations have been liberalized progressively by unilateral measures without multilateral obligations to do so. Moreover, the protection of foreign investors against political risk is fairly advanced given the large number of bilateral and plurilateral investment treaties. A multilateral agreement could reduce FDI-related transaction costs significantly only in the unlikely event that the complex net of existing arrangements would be replaced. A “WTO plus”-type framework appears to be the more realistic outcome of negotiations, with a multilateral agreement defining the smallest common denominator of WTO members and more substantive agreements with limited membership remaining in place. Empirical evidence suggests that WTO negotiations on investment are neither sufficient nor necessary to induce higher FDI flows to developing countries. Transaction-cost-related impediments to FDI have played a minor role in driving FDI, and the absence of a multilateral agreement has not prevented the recent boom of FDI in developing countries. Wishful thinking prevails on the part of developing countries, which insist on preferential treatment with regard to their own obligations as host countries and on binding obligations for foreign investors and their home countries. It is highly questionable whether developing countries could derive more benefits from FDI if a multilateral agreement were to include “development clauses” allowing for flexible and selective approval procedures and performance requirements such as local-content rules. The call for binding rules on the behavior of foreign investors may discourage multinational enterprises from investing in developing countries altogether, instead of fostering transfers of technology and improving the quality of FDI. By insisting on preferential treatment with regard to FDI incentives, developing countries tend to ignore that incentives- based competition for FDI is mainly between themselves. Unless developing countries are prepared to tie their own hands, they cannot reasonably expect significant concessions from industrialized countries. Developing countries will become relevant negotiation partners in the WTO only by offering something on their own. Rather than engaging in a futile attempt to block multilateral negotiations on investment altogether, developing countries should commit themselves to rulebased FDI policies as a negotiating chip. The pressure on industrialized countries to engage in negotiations on labor mobility would mount if developing countries refrained from performance requirements and granted national treatment to foreign investors. --

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy (IfW) in its series Kiel Discussion Papers with number 400.

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Date of creation: 2003
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Handle: RePEc:zbw:ifwkdp:400

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  1. Manuel Agosin & Roberto Machado, 2005. "Foreign Investment in Developing Countries: Does it Crowd in Domestic Investment?," Oxford Development Studies, Taylor & Francis Journals, vol. 33(2), pages 149-162.
  2. Magnus Blomstrom & Robert E. Lipsey & Mario Zejan, 1992. "What Explains Developing Country Growth?," NBER Working Papers 4132, National Bureau of Economic Research, Inc.
  3. Marcelo Soto, 2000. "Capital Flows and Growth in Developing Countries: Recent Empirical Evidence," OECD Development Centre Working Papers 160, OECD Publishing.
  4. Haaland, Jan I. & Wooton, Ian, 1998. "International Competition for Multinational Investment," CEPR Discussion Papers 1937, C.E.P.R. Discussion Papers.
  5. Theodore H. Moran, 1998. "Foreign Direct Investment and Development: The New Policy Agenda for Developing Countries and Economies in Transition," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 53.
  6. Alan M. Rugman & Andrew D.M. Anderson, 1997. "NAFTA and the Dispute Settlement Mechanisms: A Transaction Costs Approach," The World Economy, Wiley Blackwell, vol. 20(7), pages 935-950, November.
  7. Hoekman, Bernard & Saggi, Kamal, 2000. "Assessing the Case for Extending WTO Disciplines on Investment-Related Policies," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 15, pages 629-653.
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Cited by:
  1. Nunnenkamp, Peter, 2004. "Corporate social responsibility and socially responsible investment : new paradigm, latest fad, or ingenious plot?," Open Access Publications from Kiel Institute for the World Economy 4322, Kiel Institute for the World Economy (IfW).
  2. Lücke, Matthias & Spinanger, Dean, 2004. "Liberalizing international trade in services: Challenges and opportunities for developing countries," Kiel Discussion Papers 412, Kiel Institute for the World Economy (IfW).
  3. Nunnenkamp, Peter, 2003. "FDI for development? : Assessing the case for a multilateral investment agreement from the perspective of developing countries," Open Access Publications from Kiel Institute for the World Economy 3117, Kiel Institute for the World Economy (IfW).
  4. Kjetil Bjorvatn & Carsten Eckel, 2003. "Winners and losers from an international investment agreement," CMI Working Papers WP 2003:11, CMI (Chr. Michelsen Institute), Bergen, Norway.
  5. Bjorvatn, Kjetil & Eckel, Carsten, 2006. "Policy competition for foreign direct investment between asymmetric countries," European Economic Review, Elsevier, vol. 50(7), pages 1891-1907, October.
  6. Gern, Klaus-Jürgen & Meier, Carsten-Patrick & Scheide, Joachim, 2003. "Evidence of the new economy at the macroeconomic level and implications for monetary policy," Kiel Discussion Papers 401, Kiel Institute for the World Economy (IfW).
  7. Peter Nunnenkamp & Julius Spatz, 2003. "Intellectual Property Rights and Foreign Direct Investment: The Role of Industry and Host-Country Characteristics," Kiel Working Papers 1167, Kiel Institute for the World Economy.
  8. Nunnenkamp, Peter, 2003. "Systemic factors and economic development in Islamic countries," Open Access Publications from Kiel Institute for the World Economy 4319, Kiel Institute for the World Economy (IfW).

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