Location Decisions of Heterogeneous Multinational Firms

In this paper we examine how multinational firms with varied levels of total factor productivity (TFP) self-select into different host countries. Using a dataset that records the subsidiaries of over 1300 French manufacturing multinationals in 65 potential hosts, we find that firm-level TFP plays an important role in explaining the sorting of French firms across host countries. Both the aggregate- and firm-level estimates suggest that more productive French firms are consistently more likely than their less efficient domestic competitors to invest in relatively tough host countries. In particular, countries with a smaller market potential, higher fixed costs of investment or lower import tariffs tend to have higher cutoff productivities and attract a greater proportion of productive multinationals. This self-selection mechanism remains largely robust when we control for unobserved firm and country heterogeneity and address the potential endogeneity of TFP.