Introduction

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 2008 equaled roughly $325.3 billion.¹ From 1980 to 2000, while the volume of goods traded has increased significantly, foreign investment has grown even faster (See figure below). This investment has been a powerful catalyst for economic growth.

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 FDI flows was $57 billion. By the year 2007, FDI flows reached $1.5 trillion,² breaking the record established in 2000—nearly 30 times the level 25 years earlier. (Due to the recent global financial and economic crisis, however, FDI flows have decreased to an estimated $1.4 trillion in 2008.)³

But as with many of the other aspects of globalization, foreign investment is raising 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.⁴

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