568 International Organization ease.On the other hand,the income stream accruing to a branch plant of a manufacturing multinational corporation typically is specific to its participation in a global enterprise-it relies on managerial,marketing,or technological inputs available only within the firm.While the host government can seize the factory,it cannot appropriate the rents. By the same token,site-specific assets can be protected by force on the part of investors or their home countries.A mine or plantation can be retaken from a host government by force,and it can continue to earn income once retaken, especially if it is producing for export.While a branch factory can be retaken by force,inasmuch as it is integrated into the local economy-perhaps with networks of suppliers and customers-it would be unlikely to continue to earn income in such circumstances. This leads me to expect that investing country governments will tend to use or threaten force more the easier it is for the income accruing to the asset in question to be physically seized or protected.The more the rents earned by an asset are site-specific,the more the use of force will serve to protect them,and hence the more likely it is to be used. Net expected benefits of investor cooperation Leaving aside whether or not investors and their home countries use force, we want to understand the circumstances under which investors cooperate with one another instead of pursuing unilateral solutions (including colonialism).I assume the goal of cooperation would be to monitor and enforce the host country's compliance with explicit or implicit contractual commitments.18 I expect cooperation among investors to be more common when the net expected benefits of collaborative action compare favorably with those of private enforcement by a single investor. As discussed above,one important determinant of the benefits of collective action is the degree to which monitoring and enforcement become easier for each investor as more investors participate.At one extreme,the cost of monitoring an agreement can be the same for each investor no matter how many there are.This might be the case when each firm must observe aspects of the contract specific to itself;no matter how many firms are in similar situations,no one firm's efforts affect those of any other firm.At the other extreme,there may be significant economies of scale in monitoring and enforcing an agreement,such that the cost per firm declines steeply with the number of investors. 18.Contractual monitoring and enforcement costs are essentially the same as transactions costs. For a survey of transaction costs,see Oliver Williamson,"Transaction Cost Economics,"in R. Schmalensee and R.D.Willig,eds.,Handbook of Industrial Organization,vol.I (Amsterdam: Elsevier,1989).I use the longer term because it is more specific as to the costs involved and can more readily be broken down into component parts for the purposes of more detailed discussion
Colonialism 569 This continuum applies to monitoring and enforcement costs.If a debtor threatens default on foreign loans,information about the government's solvency,macroeconomic conditions,and other contingencies may be valuable to all creditors.This information is essentially the same for all creditors,and if they each contribute a small amount toward a common effort to obtain the information,they will be better off than if each goes about trying to gather the data on its own.By the same token,in some instances each investor has effective ways of punishing a host government that violates a contract.The owner of a mine that is nationalized might withhold technological information without which the mine cannot run and which is not available elsewhere.In other instances,however,cooperation among investors may be necessary to ensure effective enforcement.Perhaps the technology in question is available to a dozen foreign mining firms;all would need to participate in withholding this technology for the sanctions to bind. Monitoring and enforcement both may be characterized by diminishing costs (increasing returns)for many reasons.19 For my purposes,it is enough to observe that the incentives for investors to cooperate in monitoring and enforcing contractual compliance by host governments increase the more such efforts are characterized by diminishing costs (increasing returns);the specifics of each case can be examined separately. Nevertheless,it is also necessary to look at the costs of organizing such beneficial cooperation.As the number of investors rises,if the increased benefits of monitoring are outweighed by the increased costs of holding an ever more fractious group of investors together,then cooperation will not be stable. The costs of obtaining and sustaining cooperation are a function of well-known collective action considerations.As mentioned above,the coopera- tive monitoring and enforcement of cross-border contractual commitments by a host country can have characteristics of a public(or at least a club)good. Using the earlier example of creditors who agree to cooperate to monitor a troubled debtor,if all the creditors expect the information to be gathered by others and shared with them,no single creditor has an incentive to contribute toward its gathering.Similarly,creditors who agree to impose sanctions on a recalcitrant debtor face the problem that while all benefit from successful sanctions,no one creditor alone has an incentive to impose the sanction. Many circumstances conduce toward reducing free riding.These include relatively small numbers,so that all members of the group can observe which members are not contributing and try to design effective sanctions;selective incentives,by which those who contribute can be rewarded;and long time horizons,which increase incentives to cooperate by increasing the expected benefits of cooperation.All of these conditions vary from international 19.Diminishing costs of (increasing returns from)monitoring are a common feature of much of modern industrial organization.They are,for example,central to many interpretations of the role of financial intermediaries.See Douglas Diamond,"Financial Intermediation and Delegated Monitoring,"Review of Economic Studies 51 (July 1984),pp.393-414