Why Does Multilateral Cooperation Vary Across Issue Areas? Trade Versus Foreign Direct Investment

Why does multilateral cooperation sometimes fail to emerge, even in contexts where multilateral cooperation would be more beneficial for all parties than bilateral cooperation? To explore this puzzle, a generalization of the stag-hunt game is developed. The key finding from the analysis of this “stag-elephant” hunt game is that because pursuing multilateral cooperation is a riskier strategy due to the need for a larger number of players to cooperate to achieve it, multilateral cooperation can fail to emerge even when the payoffs from multilateral cooperation substantially exceed those of bilateral cooperation. To instantiate the central argument, I have selected the issue areas of international trade and FDI. The dominant pattern of cooperation in international trade is “multilateralism” while the dominant pattern of cooperation in FDI is “bilateralism”. The dissertation specifically explores how and why different patterns of cooperation emerge in international trade and FDI. The central argument of the research is that cooperation can evolve to a particular pattern of cooperation through a combination of the effects of initial distribution of strategies (initial conditions) and the net payoff ratios. The net payoff ratio measures the relative benefit of multilateralism over bilateralism in an issue area. Multilateralism emerged in international trade due to favorable initial conditions (distribution of strategies) and because multilateralism is much more beneficial than bilateralism. On the other hand, bilateralism emerged in FDI due to favorable initial conditions and because multilateralism is comparatively less beneficial than bilateralism in FDI. The simulation of the stag-elephant hunt game theoretic model using replicator dynamics shows that multilateralism is an Evolutionarily Stable Strategy (ESS) in international trade for a large set of initial distribution of strategies, while bilateralism is an ESS in FDI for large set of initial distribution of strategies. In other words, multilateralism is more likely in international trade while bilateralism is more likely in FDI. I also found strong quantitative support for the three testable implications, which provides strong evidence regarding the usefulness of the model to understand how and why countries decide in a strategic situation whether to cooperate bilaterally or multilaterally.