Few subjects polarize public opinion as much as the role of globalization in developing countries. Foreign direct investment, its advocates note, boosts their economic performance by endowing them with new skills, new technologies, and new jobs—all of which increase their standard of living. Detractors contend that corporations too often demand special treatment for their export businesses, push back on environmental regulations, seek to avoid taxes, and resist more costly labor market rules in the countries where they invest.

Certainly, not every corporation makes its foreign direct investment contingent on tax breaks, incentives, and regulatory exemptions. But those that negotiate hard with the governments of developing countries may want to rethink that approach. Instead of seeking concessions, these companies would be better off encouraging rational tax systems, equitable social policies, sustainable environmental regulations, balanced controls on short-term capital movements, and transparent rules. There are three good reasons to do so.

First, though many of the tax breaks, incentives, and regulatory exemptions global corporations negotiate may provide a one-off boost to performance, they actually lower the long-term productivity of investments. Corporate taxes are much easier to collect than the personal income tax, so they are often critical to the public revenues of developing countries. Too many tax breaks to corporations can leave governments more strapped for cash than ever. The result may be underinvestment in infrastructure and education—both vital to long-term corporate productivity—and in basic social services. This kind of underinvestment can exacerbate social tensions and erode political stability.

Second, the "race-to-the-bottom" model of foreign direct investment—in which global companies pursue the lowest possible wages as they move from country to country—has done huge damage to their good name in their home markets. Just think, for example, about the branding problems of companies in the "sweatshop" apparel and footwear industries and about the vociferous attacks on the reputation of the big oil and chemical companies as a result of lax environmental standards in low-income countries. Remember too that the Internet has made the world a village for media-savvy nongovernmental organizations with an antiglobalization agenda.

Third, poor policy making in developing countries—even when the objective is to attract foreign investment—doesn’t create a basis for sustainable growth. The big opportunity for many foreign companies isn’t the short-term profits they can generate from a distorted policy environment; it is participating in developing economies whose growth rates, over the next 25 years, could be much higher than those of more mature countries.

In reality, global corporations and the developing countries where they invest have symbiotic objectives. Globalization brings broadly positive economic benefits to developing economies, which in turn represent the best hope for the future of global companies. Both sides should recalibrate their approach. As "The truth about foreign direct investment in emerging markets"—our cover story—makes clear, developing economies must deconstruct the barriers and restrictions that hinder foreign direct investment if they are to enjoy all of its benefits. Global corporations must understand that it is in their own best interest to promote policies that strengthen the stability of the host countries. By becoming the allies of social progress, such corporations will not only accelerate the sustainable growth of these countries but also create an enduring competitive advantage by winning the battle for trust and legitimacy.