The basic theory of customs union, first presented and explained by Viner in 1950 and later extended and modified by Meade in 1956, Lipsey in 1957and 1960, Gehrels in 1956-1957, and others, provides the theoretical foundation on which the theory of integration rests. Viner’s (1950) analysis was modified and added to by relaxing some of the more limiting assumptions on which it rested; thus, preparing the way for a deeper understanding of the economic integration process. The theory of economic integration was strengthened by the incorporation of economies of scale and terms of trade effects. Furthermore, the emergence of the new trade theories led to additional significant contributions to advance the theory by extending the analysis to incorporate the effects of increasing returns and imperfect competition. As economic integration arrangements are formed and mature, both static and dynamic effects of economic integration will arise; and with increased factor mobility between member states, different locational factors would come into play in deciding where investment is going to be located. Therefore, economic integration theory has become increasingly concerned about the location effects of economic integration arrangements, thus giving rise to or reflecting the growing interest of trade theorists in the importance of geography. New models of trade, incorporating the effects of factor mobility, external economies of scale and product competition, have established the importance of location in the analysis of the effects of economic integration arrangements.
Given the growing interest and concern of location effects of integration, it becomes important to consider the implications of economic integration for industry location given the various theoretical debates with regard to locational choices of industries. There is no shortage of theories that try to explain the location of industries in general and agglomeration of industries in particular. For each theoretical framework, even if all the conditions are met and industrial location and even agglomeration takes place; it does not mean that all the conditions have been met for that industrial location and agglomeration to continue or remain in a locality and remain competitive. Therefore, each theory alone cannot answer the question of industrial location and even agglomeration, despite highlighting and clarifying relevant factors. Thus, the various theories must be integrated, as it may be difficult to understand the dynamics with which economic integration has implications for foreign direct investment flows by viewing the theories of industrial location theories separately.
Both the static and dynamic effect of economic integration have implication for foreign direct investment flows into a regional group, as well as the relocation of investment by firms already domiciled in the regional group. Agglomeration economies and easier access to the economic diversity of the regional group are important driving factors for industrial location by foreign investors or industrial relocation by firms already in the regional group. The theoretical arguments based on the Traditional theory of industrial location, the Marshallian theory, the theory of New economic geography, Weber’s theory and Dunning’s ownership, location and internalisation (OLI) theory can be used to illustrate the implications of the static and dynamic effect of economic integration on investment inflows.