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Introduction

Investment is among the most emotional and divisive subjects in the modern debate over trade, globalization, and the world economy. Critics of open market policies routinely assert that foreign direct investment (i.e. money corporations invest in factories and other facilities overseas) serves as a sort of "rabbit" in the "race to the bottom" -- that the lure of weak labor and environmental standards in poor countries is leading American companies inexorably to the poorest nations with the worst-paid workers and the most permissive environmental laws.

These are natural and powerful fears; and they have been at the heart of resistance to open trade policies for a decade. In 1993, Ross Perot's vision of a "giant sucking sound," with American jobs and factories streaming south to Mexico, summed up the case against the North American Free Trade Agreement (NAFTA); similar fears animated demonstrators at the 1999 World Trade Organization (WTO) Ministerial Conference in Seattle and opponents of the trade bills of 2000 on China, Africa, and the Caribbean. As a new administration builds on the record of the 1990s, they will be the most powerful obstacles to creation of a Free Trade Area of the Americas, a more open Asia-Pacific trading environment, a new WTO Round, and the other major initiatives of the new decade.

A look at the record, however, shows a reality strikingly at odds with these fears. Trends in American direct investment, consistent not only in the 1990s but across the five decades in which American administrations have sought trade and investment liberalization, are almost diametrically opposed to prevailing perceptions. In fact, American companies appear to be racing not to the bottom, but to the top. Throughout the postwar era, and in recent years as well:

• The United States has gained a larger share of world direct investment;
• In choosing sites for direct investment, American companies have moved away from the developing world, toward Europe and in particular Great Britain; and
• Even within the developing world, wealthier nations commonly receive more U.S. direct investment than poorer nations.

While the reality of a "race to the top" comes with its own ethical questions and policy challenges, these facts indicate that companies are more likely to be attracted by a wealthy consumer market, a reliable rule of law, and a well-trained workforce than by poverty and lax regulation. The pessimism of the right and the left, and the view that protection of the environment and high labor standards reduce a nation's competitiveness and ability to attract investment, are unfounded; to the contrary, a policy based on open markets is entirely compatible with commitment to social responsibility and protection of the environment.