DOES ECONOMIC-INTEGRATION CAUSE FOREIGN DIRECT-INVESTMENT

We analyze the effect of economic integration on oligopolists' interna tional trade and foreign direct investment (fdi) activities, using a t hree-country, three-firm model. Increased country size leads to disper sed fdi, while improved market accessibility leads to export-platform fdi. Increased intra-regional market accessibility prompts outside fir ms to invest in the regional bloc, reducing product prices, profits of intra-bloc firms, and increasing total surplus. Integrating economies are more likely to gain from improving intra-regional market accessib ility than from tougher external trade policy, and may wish to offer i nvestment incentives to encourage fdi by outside firms.