A surge in activity by multinationals in the developing world has opened a new chapter in globalization. What was once a marginal activity in emerging markets has now become essential to the competitiveness and growth of many foreign companies. In 2002 they invested $162 billion in the developing world, up from just $15 billion in 1985. Today their investments are worth more than $2 trillion and growing.

Governments in emerging markets are understandably eager to have their share of this foreign capital, along with the technology and management skills that accompany it. Foreign companies get a smorgasbord of tax holidays, import duty exemptions, subsidized land and power, and other enticements, all offered by developing countries in the belief that this is the way to attract multinationals. For every job created, the incentives may add up to tens of thousands of dollars annually—in some cases, more than $200,000 in net present value.

Yet even as developing nations dole out lucrative incentives to attract foreign investment, they are often wary of multinational companies. Attempting to protect domestic industry and to ensure that foreign investment benefits the local economy, many of these nations restrict the way foreign companies can operate.

But new research...