Customs Union and International Production

Abstract

Market integration-from-below cannot be fully understood by merely studying trade integration. In a world of multinational enterprises, having a choice of servicing foreign markets through exports or foreign production, direct investments have to be taken into consideration. With the exception of a restrictive analysis of ‘welfare’ effects, traditional trade theory has little to offer in this respect and the empirical tests, inspired by it, have obtained poor results. Moreover, they invariably concentrate on foreign direct investment from outside the union while ignoring intra-union direct investment. Following an industrial economics approach, I shall assess the determinants of direct investments both of American and Community firms, and briefly discuss some of the effects on market integration-from-below.