The Economics of a Multilateral Investment Agreement

This paper models a multilateral agreement on investment (MAI) as a coordination device. Multina- tional 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, expropri- ation leads to a joint reaction by all MNEs. Switching to such a regime increases worldwide FDI and raises the world interest rate. Distinguishing three group s of countries, we show that industrialized coun- tries 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 styli zed fact that a multilateral investment agree- ment was opposed by least developed nations and certain groups in rich countries.