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Location Decisions of Heterogeneous Multinational Firms

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  • Maggie Xiaoyang Chen
  • Michael Owen Moore

    (Department of Economics/Institute for International Economic Policy, George Washington University)

Abstract

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.

Suggested Citation

  • Maggie Xiaoyang Chen & Michael Owen Moore, 2008. "Location Decisions of Heterogeneous Multinational Firms," Working Papers 2008-02, The George Washington University, Institute for International Economic Policy.
  • Handle: RePEc:gwi:wpaper:2008-02
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    More about this item

    Keywords

    Foreign direct investment; multinational firms; location decisions; firm heterogeneity; total factor productivity;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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