Anti-globalists protesting American commercial investment in developing nations have a notably heavy investment of their own in misinformation.

They would have you believe, for instance, that U.S. foreign direct investment (FDI) in developing countries is harmful to host country workers and the local environment. But a careful look at the record reveals that nothing could be further from the truth.

Higher Wages and Better Conditions

American manufacturers who invest in developing countries typically offer higher wages and better working conditions. This makes jobs at U.S. facilities highly prized, and, over time, leads to improved environmental and worker protection at all levels.

A case in point, is Procter & Gamble, which since 1991, has invested
$85 million in a Czech Republic consumer products company that produces detergent and liquid cleaners. By applying P & G’s worldwide environmental standards, the facility was able to reduce boiler emissions by 99 percent and solid waste by nearly 6,000 metric tons.

In addition to environmental improvements, P & G introduced a competitive compensation program and unique employee benefits, such as loans to renovate apartments and houses, supplementary income payments during illness, maternity leave, and language studies.

P & G also donates $120,000 annually to the development of local education, health care, environmental protection, and social institutions. So impressed with these practices, Czech Republic President Vaclav Havel recently said P& G “could serve as a model for other investors.”

Other American corporations investing in facilities abroad typically promote similar ethical and responsible behaviors.

Nike, the Oregon athletic attire and shoemaker, pays about double the prevailing wage at its contract factories throughout Southeast Asia and scrupulously meets all local environmental and occupational safety and health laws.

To better serve the Chinese market, Eastman Kodak Co. built a state-of-art film and photo paper production plant that exceeds Chinese environmental standards. The U.S. firm pays its Chinese workers more than twice the state-owned company average wage and works with Chinese banks to help make loans available to local entrepreneurs interested in opening their own photo-processing shops.

Agents of Change

Through their operating standards, business practices, values, and principles, U.S. companies serve as agents of change, charting a path for other foreign and domestic companies to follow. And this strategy, which is good for business, results in greater employee loyalty, less absenteeism, higher morale, and increased productivity.

Anti-Globalist Logic Is Flawed

Although exceptions exist, anti-globalists promulgate the notion that, as a whole, U.S. manufacturers investing abroad seek low-cost facilities in order to cut labor and environmental costs. Although anti-globalists’ intentions are good, their logic is flawed.

Their argument is based on the notion that weak environmental and worker standards give producers in poor countries a significant cost advantage. They also theorize that this puts pressure on other countries to lower their standards in order to compete, prompting a “race to the bottom.”

If this were correct, investment would be flowing to underdeveloped countries with the poorest labor and environmental records. In reality, the opposite is true.

The Race to the Top

Developing countries tend to attract only a small portion of America’s foreign direct investment. For example, in 1999, 87 percent of U.S. manufacturing investment abroad was directed in high-wage countries. Political stability, education and productivity levels, communications and transportation infrastructure, the rule of law, proximity to market, and the ability to repatriate profits are the most important determinants of capital flows.

This is why developed countries, which pay the highest wages and have the strongest environmental laws, are the destinations for the vast majority of FDI — promoting a “race to the top.”

Standards Go Up — Not Down

When a major trading partner raises standards, its partners typically follow. For example, when Germany raised its auto emission standards, other European countries did too. Likewise, California’s aggressive environmental regulations have pulled other states up as well.

In reality, little incentive exists to establish facilities in countries with weak standards. Today, complying with environmental regulations typically accounts for less than 1 percent of production costs of industries in Western countries.

Furthermore, research indicates that countries with weak standards do not have a better global export performance than countries with higher standards.

This is not to say that environmental quality in some underdeveloped countries has not deteriorated ... it has. But studies show that after a country’s per capita income reaches about $5,000, environmental degradation ceases, and then improves.

As living standards rise, an increasing percentage of the population becomes better educated and more politically aware. In turn, these people put greater pressure on government to establish and enforce stricter environmental regulations and to allocate more resources to environmental quality.

Educational levels also rise sharply. As incomes rise, families can more easily afford to send their children to school, rather than to work. In fact, research indicates that child labor declines sharply as the level of economic development increases.

Investment Creates Opportunity and Improves Quality of Life

U.S. manufacturing investment in developing countries leads to higher wages, improved labor standards, and provides millions of people with greater opportunities.

But those who do break the rules should beware. In addition to accounting concerns following the Enron scandal, institutional investors are increasingly aware of the importance of sound labor and environmental records of companies to which they provide investment.

This article appeared in Trade Works, November 2002.
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John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the ManzellaReport.com, is a world-recognized speaker, author and an international columnist on global business, trade policy, labor, and economic trends. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.




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