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The southward enlargement of the European Community with the full accession of Spain and Portugal in 1986 and the creation of the Single Market in 1993 have opened up new opportunities for exports to the EU and have intensified competition with Spanish-made products in the rest of the EU. This paper hypothesises that local adjustment to European integration is conditioned by the comparative local advantages (or disadvantages) in human resources, nodality and external economies which can shape local capacity for the achievement of economies of scale in production, technological modernisation, the development of small and medium enterprises (SMEs) and business services. The capacities for these four dynamic processes are articulated through the interaction between the investment decisions of Spanish and foreign-owned firms and the local comparative advantages, and hence influence the capacity of localities to respond to European integration through trade creation and trade diversion. [ABSTRACT FROM AUTHOR]