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Does Economic Integration Cause Foreign Direct Investment?

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  • Motta, Massimo
  • Norman, George

Abstract

The authors analyze the effect of economic integration on oligopolists' international trade and foreign direct investment activities, using a three-country, three-firm model. Increased country size leads to dispersed foreign direct investment, while improved market accessibility leads to export-platform foreign direct investment. Increased intraregional market accessibility prompts outside firms to invest in the regional bloc, reducing product prices, profits of intrabloc firms, and increasing total surplus. Integrating economies are more likely to gain from improving intraregional market accessibility than from tougher external trade policy, and may wish to offer investment incentives to encourage foreign direct investment by outside firms. Copyright 1996 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Motta, Massimo & Norman, George, 1996. "Does Economic Integration Cause Foreign Direct Investment?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(4), pages 757-783, November.
  • Handle: RePEc:ier:iecrev:v:37:y:1996:i:4:p:757-83
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    References listed on IDEAS

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    1. Horstmann, Ignatius J & Markusen, James R, 1987. "Strategic Investments and the Development of Multinationals," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(1), pages 109-121, February.
    2. Motta, Massimo, 1992. "Multinational firms and the tariff-jumping argument : A game theoretic analysis with some unconventional conclusions," European Economic Review, Elsevier, vol. 36(8), pages 1557-1571, December.
    3. Smith, Alasdair, 1987. "Strategic investment, multinational corporations and trade policy," European Economic Review, Elsevier, vol. 31(1-2), pages 89-96.
    4. V.N. Balasubramanyam & David Greenaway, 1992. "Economic Integration and Foreign Direct Investment: Japanese Investment in the EC," Journal of Common Market Studies, Wiley Blackwell, vol. 30(2), pages 175-194, June.
    5. Rowthorn, R E, 1992. "Intra-industry Trade and Investment under Oligopoly: The Role of Market Size," Economic Journal, Royal Economic Society, vol. 102(411), pages 402-414, March.
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