Location Decisions of Heterogeneous Multinational Firms

We examine how multinational Örms with heterogeneous total factor productivity (TFP) self-select into different host countries. Both aggregate- and Örm-level estimates suggest that more productive French Örms are more likely than their less efficient competitors to invest in relatively tough host countries. Countries with a smaller market potential, higher Öxed 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 Örm and country heterogeneity and address the potential TFP endogeneity.