Sovereignty,Bargaining, and the International Regulation of Foreign Direct Investment

While developing countries have undergone a remarkable transformation in their attitudes toward foreign direct investment (FDI) during the past decade, they still resist the establishment of a multilateral regime governing FDI. This is puzzling, first, because these states are liberalising their policies anyway, and second, because a multilateral regime offers several advantages over the patchwork of unilateral and bilateral arrangements that currently exist (for instance, by contributing to increasing FDI flows). What explains this paradoxical attitude? This paper critically examines a number of potential explanations. Concerns about losing sovereignty, lack of knowledge about the costs of FDI restrictions, or lingering suspicions of multinational corporations may play some role, but cannot account for unilateral and bilateral liberalisation. Another approach highlights the role of domestic groups in supporting or opposing a multilateral agreement. Yet the pattern of variation among the attitudes of developing countries casts doubt on this explanation as well. Finally, the paper puts forth an argument that focuses on how bargaining power affects the trade-off between economic gains and the loss of sovereignty. The host state's perceived attractiveness to multinational investors conditions whether or not the government resolves this trade-off in favour of supporting a multilateral regime.