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By using a simple North-South trade model with vertically related markets, this article draws our attention to previously unidentified effects of foreign direct investment (FDI), namely that a North downstream firm affects the pricing behavior of an input supplier through technology spillovers and market integration led by FDI. Whether or not the North firm strategically undertakes FDI in the presence of technology spillovers depends on the South firm's capacity to absorb North's technology. When the capacity is not very high, the North firm could actually gain from technology spillovers to the South firm. FDI may benefit all producers and consumers.
