Does economic integration cause foreign direct investment?

We analyze the effect of economic integration on oligopolists' international trade and foreign direct investment (fdi) activities, using a three-country, three-firm model. Increased country size leads to dispersed fdi, while improved market accessibility leads to export-platform fdi. Increased intra-regional market accessibility prompts outside firms 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 accessibility than from tougher external trade policy, and may wish to offer investment incentives to encourage fdi by outside firms.