More Intra-Region Direct Investment through Economic Integration? Modelling the Experience of the EU’s Single Market

I apply the fixed versus variable cost trade-off associated with a multinational firm’s choice between investing abroad and exporting to a setting where the multinational is located inside an economically integrating region. I find that reducing obstacles to investment unambiguously favours setting up plants. When trade barriers decrease, typically, there will be consolidation of investment or a switch to exports. If, however, distance to destination markets matters for the multinational, export platform investment in one country will be induced. This highlights that export platform investment may be a supply option even inside an integrating region once countries are not assumed to be homogenous. Overall, the predictions of the model are indicative of some of the developments in trade and direct investment among EU countries during the Single Market Programme.