Economic Analysis of the Influence of International Investment Agreements on the Actions of Multinational Enterprises and the Social Welfare of Host Countries

This paper investigates the influence of international investment agreements (IIAs) on the actions of multinational enterprises (MNEs) and the social welfare of host countries according to the market structure in the host country. In cases where MNEs are monopolies and duopolies, IIAs promote foreign direct investment (FDI) and improve the social welfare of the host country. When MNEs are in competition, the social welfare of the host country increases more significantly, but the optimal level of commitment to IIAs for the host country will be higher as the range in which MNEs have incentives in choosing FDI will be narrower. When MNEs compete with import-competing firms in the host country, the range of FDI incentives of the former will widen if the discount rate is below a certain threshold, but this worsens the social welfare of the host country. However, if import-competing firms exist in the host country, with the spillover effects of FDI, IIAs will encourage MNEs to engage in FDI and increase the social welfare of the host country. In such case, the optimal level of commitment to IIAs for the host country must be higher compared to the case in which there is competition between MNEs. It is important to negotiate IIAs based on the analysis of the market structure in the home country, because the influence of IIAs on the social welfare of the host country and the optimal level of commitment to IIAs for the home country change according to the market structure in the home country.