Foreign direct investment : assessing the need for a multilateral agreement

Abstract

Do we need a multilateral agreement for policies towards international investments similar to the trade agreements that exist? Foreign direct investments (FDI) play an important role in the international economy, and in many cases FDI are at least as important as trade for international transactions between countries. FDI may have significant effects for the overall welfare of a country as well as for the income distribution within the country; hence, countries typically have incentives to use active policies towards FDI, similar to the incentives for trade policies. Nevertheless, when it comes to international policy regulation and coordination, trade and FDI are treated in a very asymmetric way, with extensive multilateral agreements for trade policies, but nothing similar for FDI. This report focuses on policies towards FDI and discusses the need for a multilateral agreement to regulate the use of such policies. There are good reasons to call for international coordination of FDI policies; the question is, however, whether a new multilateral investment agreement is the best solution, or if the need for international coordination could be better taken care of within existing agreements. After a brief review of the effects of FDI for host and home countries, and the incentives to use active policies towards such investments, the report discusses the pros and cons of a new multilateral investment agreement. In the final section of the report, the status for such an agreement after the Ministerial Declaration from Doha is sketched.