Institutional Choice and Cooperation in FDI Competition


Charlton (2003) suggests that policy-makers faced with establishing cross-national or cross-jurisdictional FDI governance measures are confronted with three general choices, depending on their level of ambition and resources: (1) creating transparency enhancing measures; (2) establishing cooperation between jurisdictions; and (3) instituting binding and enforceable multilateral rules.603 The following section reviews these options from a regime-theoretic view.


Foreign Direct Investment Pareto Frontier Political Competition Labor Market Regulation Issue Area 
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  1. 603.
    See CHARLTON (2003), p. 27. Note that Charlton only discusses the first two options.Google Scholar
  2. 604.
    See KOKKO (2002), p. 6.Google Scholar
  3. 605.
    See CHARLTON (2003), p. 28.Google Scholar
  4. 606.
    See OMAN (2000), pp. 122–123.Google Scholar
  5. 607.
    The BIAC survey presented in Chapter 4 suggested that firms welcome a transparent incentive setting as it creates a more level-playing field vis-à-vis competitors as well as improves the firm’s strategic position when bargaining with governments. CHARLTON (2003) suggests that it can also improve the government’s position during the bargaining process. Overall, both governments as well as firms are likely to gain from a more transparent environment, which makes a real assessment and comparison of project-related costs and benefits possible.Google Scholar
  6. 608.
    See CHARLTON (2003), p. 28.Google Scholar
  7. 609.
    In game theory, a Nash equilibrium denotes a strategic game situation, where no player can benefit from unilaterally changing their strategy, while others keep their strategy unchanged (see also NASH, 1951).Google Scholar
  8. 610.
    See KRASNER (1991), p. 338.Google Scholar
  9. 611.
    See KRASNER (1991), p. 338.Google Scholar
  10. 613.
    KRASNER’s (1991) main contention is that there are many points along the Pareto frontier and the question of how and which one will be chosen matters as much as the question of how to get to the Pareto frontier.Google Scholar
  11. 614.
    See KRASNER (1991), p. 340.Google Scholar
  12. 615.
    Wishlade rightly asserts that “the issue of competition for mobile investment has been the driving force behind the Commission policy in controlling general investment aid, and, in particular, regional aid” (RAINES/ BROWN, 1999, p. 94).Google Scholar
  13. 616.
    See RAINES/ BROWN (1999), p. 95.Google Scholar
  14. 617.
    See CALLEO (2001) for an interesting account of the diverging ideas about Europe’s future as well as their intellectual and spiritual progenitors.Google Scholar
  15. 619.
    RAINES/ BROWN (1999), p. 93.Google Scholar
  16. 620.
    According to GRUBB/ WELLS (1993), cited in RAINES/ BROWN (1999), p. 163, in 1993, the UK and Ireland displayed the most flexible overall labor environment, whereas Greece, Portugal and Italy had the least flexible labor market regulation.Google Scholar
  17. 621.
    See RAINES/ BROWN (1999), p. 162.Google Scholar
  18. 622.
    See our earlier discussion of MICHALET’s (1999, 1997) proposition that each country competes for FDI only with other locations at a similar level of development. CEE countries (except Slovenia) would find themselves not in the same league as the EU-15 countries but rather with countries such as Chile, Malaysia, Costa Rica, Brazil, Botswana, South Africa, the Dominican Republic and Peru.Google Scholar
  19. 623.
    See UNCTAD (2003), p. 64.Google Scholar
  20. 625.
    See PUTNAM (1988), p. 434. This constellation of international politics has subsequently been termed a “two-level game” (PUTNAM, 1988, p. 434).Google Scholar
  21. 626.
    See PUTNAM (1988), p. 442.Google Scholar
  22. 627.
    See Clement in RAINES/ BROWN (1999), pp. 147–148.Google Scholar
  23. 628.
    See PUTNAM (1988), p. 439.Google Scholar
  24. 629.
    PUTNAM terms this strategy of “creating a policy option [...] that was previously beyond domestic control” as “synergistic linkage” (PUTNAM, 1988, p. 447).Google Scholar
  25. 630.
    KRASNER (1991), p. 341.Google Scholar
  26. 631.
    KRASNER (1991), p. 343.Google Scholar
  27. 632.
    See KRASNER (1991), p. 342.Google Scholar
  28. 633.
    See YOUNG/ TAVARES (2004), p. 2.Google Scholar
  29. 636.
    For example, international business did not support the ITO Charter as it viewed the provisions for investments as insufficient (see SMYTHE, 1998, p. 89).Google Scholar
  30. 637.
    See SMYTHE (1998), p. 93.Google Scholar
  31. 638.
    SMYTHE (1998), p. 91.Google Scholar
  32. 639.
    See UNCTAD (2003), pp. 208–209.Google Scholar
  33. 640.
    See SMYTHE (1998), p. 94.Google Scholar
  34. 641.
    See SMYTHE (1998), p. 98.Google Scholar
  35. 642.
    The results on TRIMS at the Uruguay Round appear mixed. While TRIMS were identified as a violation of GATT article III (national treatment) and Article VI (quantitative restrictions), and member states were subsequently asked to notify and eliminate non-conforming measures within a certain period, the agreement itself posed few disciplining measures on its member countries and is seen as very limited in scope (see SMYTHE, 1998, p. 99).Google Scholar
  36. 643.
    Much has been written about the failure of the MAI and its subsequent lessons, both favorably and unfavorably to its cause (see for example CANNER, 1998; KOBRIN 1998; SMYTHE 1998; UNCTAD 1999; WALLACE-BRUCE 2001; SEID 2002; COULBY 2003; FERRARINI 2003; NUNNENKAMP 2003). Instead of providing a detailed textual analysis of the case, the focus here is on those converging “forces of a political, policy, social and economic nature” (UNCTAD, 1999, p. 30) that matter most from a regime-theoretic point of view. See also OECD (1995, 1996a, 1996b, 1996c, 1996d, 1997, 1997a) for details on the OECD position.Google Scholar
  37. 644.
    Interviews with MAI negotiators, cited in SMYTHE (1998), p. 100.Google Scholar
  38. 645.
    See CHARLTON (2003), p. 32.Google Scholar
  39. 646.
    See KRASNER (1991), p. 336.Google Scholar
  40. 647.
    See RUGGIERO (1998).Google Scholar
  41. 648.
    SMYTHE (1998), p. 110.Google Scholar
  42. 649.
    SEID (2000) identifies four distinct interest groups in his study: OECD countries, developing countries, public interest groups (business, environment, labor, consumer advocates) and intergovernmental organizations. The latter category as a distinct interest group for MAI purposes is questionable, not at least because the author also excludes this group from the above interest matrix (Table 16).Google Scholar
  43. 650.
    See SEID (2002), p. 199. According to the author, there was general agreement that free currency transfer should be permitted except in cases of balance-of-payment constraints. Similarly, there seems to be general consensus on the issue of expropriation, though different opinions exist on the exact definition of expropriation provisions.Google Scholar
  44. 651.
    See WOHLGEMUTH/ ADAMOVICH (1999), p. 3.Google Scholar
  45. 652.
    KASPER/ STREIT (1999), p. 402.Google Scholar
  46. 653.
    See WOHLGEMUTH (1995), p. 9.Google Scholar
  47. 654.
    WOHLGEMUTH (1995), p. 9.Google Scholar
  48. 655.
    The global business community was thought to be one of the most faithful supporters of the MAI proposal. However, in the end they appeared to have lost interest in the agreement which did not address the issue of taxation provisions, and seemed to provide only limited liberalization measures, while adding new environmental and labor regulations (see UNCTAD, 1999, p. 24).Google Scholar
  49. 656.
    The struggle over the venue of MAI negotiations itself presents an interesting case study on national interests as well as power capabilities of participating states involved in regime formation (see SMYTHE, 1998, for a detailed account).Google Scholar
  50. 657.
    See UNCTAD, 1999, pp. 24–25.Google Scholar
  51. 658.
    YOUNG/ TAVARES (2004), p. 2.Google Scholar
  52. 659.
    CHARLTON (2003), p. 29 cites the example of an agreement between the U.S. states of New York, New Jersey and Connecticut which aimed to put an end to incentive packages for companies to relocate to another state. The entire agreement lasted just four days when New Jersey broke it off by offering US$50 million to First Chicago Corporation, and New York had to counter their offer.Google Scholar
  53. 660.
    YOUNG (1989), p. 368.Google Scholar

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