Regionalism, international trade, and multinational firm location

This paper explores how the emergence of the "new regionalism" and a surge in direct investment relate to each other and to the theory of international trade. Reform in the East and South-the most significant economic event of our era-plays a central role. Countries anxious to implement economic reform establish preferential trading arrangements with industrial countries intended to induce direct investments by firms supplying products to their partners. This does not imply that direct investment will consist mainly of flows between geographic neighbors. Multilateral liberalization is crucial, and this implies globalization: firms will be competing with each other on a worldwide basis. The paper's combination of theories results in predictions very much different from the traditional view of direct investment motivated by a desire to circumvent trade barriers.