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The economics of a multilateral investment agreement

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  • Jiahua CHE
  • Gerald WILLMANN

Abstract

This paper models a multilateral agreement on investment (MAI) as a coordination device. Multinational enterprises can invest in any number of countries. Without a multilateral investment agreement, expropriation triggers an investment stop by the single MNE. Under a multilateral agreement, expropriation leads to a joint reaction by all MNEs. Switching to such a regime increases worldwide FDI and raises the world interest rate. Distinguishing three groups of countries, we show that industrialized countries experience an outflow of capital but benefit overall due to an increase in repatriated profits. Middle income countries are likely to gain from increased inward FDI, whereas least developed countries lose because they receive less FDI. Our results explain the stylized fact that a multilateral investment agreement was opposed by least developed nations and certain groups in rich countries.

Suggested Citation

  • Jiahua CHE & Gerald WILLMANN, 2009. "The economics of a multilateral investment agreement," Working Papers of Department of Economics, Leuven ces09.04, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.
    • Handle: RePEc:ete:ceswps:ces09.04
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    References listed on IDEAS

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    1. Alessandro Turrini & Dieter M. Urban, 2008. "A Theoretical Perspective on Multilateral Agreements on Investment," Review of International Economics, Wiley Blackwell, vol. 16(5), pages 1023-1043, November.
    2. Egger, Peter & Pfaffermayr, Michael, 2004. "The impact of bilateral investment treaties on foreign direct investment," Journal of Comparative Economics, Elsevier, vol. 32(4), pages 788-804, December.
    3. Giovanni Maggi, 1999. "The Role of Multilateral Institutions in International Trade Cooperation," American Economic Review, American Economic Association, vol. 89(1), pages 190-214, March.
    4. Michihiro Kandori, 1992. "Social Norms and Community Enforcement," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(1), pages 63-80.
    5. Bendor, Jonathan & Mookherjee, Dilip, 1990. "Norms, Third-Party Sanctions, and Cooperation," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 6(1), pages 33-63, Spring.
    6. Mary Hallward-Driemeier, 2003. "Do bilateral investment treaties attract foreign direct investment? Only a bit - and they could bite," Policy Research Working Paper Series 3121, The World Bank.
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    Cited by:

    1. Oleksandr Petruk & Habriella Loskorikh & Viktoriia Khvist, 2023. "Capital Investments as a Basic Prerequisite for the Investment Security of the State," Oblik i finansi, Institute of Accounting and Finance, issue 3, pages 70-83, September.
    2. Dieter M. Urban, 2006. "Multilateral Investment Agreement in a Political Equilibrium," CESifo Working Paper Series 1830, CESifo.

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    More about this item

    Keywords

    multilateral investment agreement; FDI; trade policy.;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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