When people think about globalization, they often first think of the increasing volume of trade in goods and services. Trade flows are indeed one of the most visible aspects of globalization. But many analysts argue that international investment is a much more powerful force in propelling the world toward closer economic integration. Investment can alter entire methods of production through transfers of knowledge, technology, and management techniques, and thereby can initiate much more change than the simple trading of goods.

Over the past years, foreign investment has grown at a significantly more rapid pace than either international trade or world economic production generally. In fact, foreign direct investment in the United States in 2012 equaled roughly $174.4 billion (down from its peak $325 billion in 2008) (Organization for International Investment).

The tremendous growth in levels of foreign direct investment is a recent phenomenon and is one of the most powerful effects—and causes—of globalization. In 1982, the global total of Foreign Direct Investment (FDI) flows was $57 billion. According to UNCTAD 2013, by the end of 2012, FDI flows reached an estimated $1.35 trillion, a 14 percent decline since 2011 (OECD). Global international investment has still not yet returned to pre-crisis levels.

But as with many of the other aspects of globalization, foreign investment raises many new questions about economic, cultural, and political relationships around the world. Flows of investment and the rules which govern or fail to govern it can have profound impacts upon such diverse issues as economic development, environmental protection, labor standards, and economic and political stability.

At the same time, focusing entirely inward on domestic production to limit foreign investment and international interaction is largely detrimental to one’s economy. For some nations, this has manifested itself in import substitution industrialization (ISI), which refers to an international economic and trade policy based on the belief that a nation should reduce its dependency on foreign investment and goods by domestic production of industrial goods.

In Latin and South America, one region where ISI became common through the middle of the 20th century, domestic employment grew and global shocks (such as recessions) did not affect the region as harshly. But the negatives far outweigh the positives: The industries created under ISI became futile and inefficient, and did not create the institutions or infrastructure to maintain ISI. Additionally, countries typically participating in ISI lacked rich enough economies to sustain the system. Had foreign investment played a part, many of these industries might have been able to grow and develop (Baer, 1972).

The following Issue in Depth will explain the fundamental concepts of cross-border investment, define key terms, and explore the major controversies related to international investment.

Next: What Are the Different Kinds of Foreign Investment?