Location decision of heterogeneous multinational firms

In this paper we examine how multinational …rms with varied levels of total factor productivity (TFP) self-select into di¤erent host countries. Using a dataset that records the subsidiaries of French manufacturing multinationals, we …nd that …rm-level TFP plays an important role in explaining the sorting of French …rms across host countries. Both the aggregateand …rm-level estimates suggest that more productive French …rms are consistently more likely than their less e¢ cient domestic competitors to invest in relatively tough host countries. In particular, countries with a smaller market potential, higher …xed costs of investment or lower import tari¤s tend to have higher cuto¤productivities and attract a greater proportion of productive multinationals. This self-selection mechanism remains largely robust when we control for unobserved …rm and country heterogeneity and address the potential endogeneity of TFP. Key words: foreign direct investment, multinational …rms, location decision, …rm heterogeneity, total factor productivity JEL codes: F23, D24 We are deeply grateful to Bruce Blonigen and two anonymous referees for many valuable comments and suggestions. We would also like to thank Ana Fernades, Keith Head, Jim Markusen, Keith Maskus, Stephen Yeaple and seminar and conference participants at the World Bank, Hong Kong University, Laurier Conference on Empirical International Trade, Econometric Society summer meeting, GW Research Symposium on Firm Heterogeneity, International Trade and FDI, and George Washington University for very helpful discussions and suggestions. yCorresponding Author: Department of Economics/Elliott School, Institute for International Economic Policy, George Washington University, Washington, DC. Email: [email protected]. zDepartment of Economics/Elliott School, Institute for International Economic Policy, George Washington University, Washington, DC. Email: [email protected].