Regional Portfolios and the Affiliate Location Decision of Multinational Firms∗

Wholesale affiliates account for a significant share of the foreign earnings of multinational firms. Yet little is known about them since empirical work on multinationals typically focuses on manufacturing affiliates. Instead, it has been presupposed that wholesale affiliates are a form of exporting by the parent company, and not a form of foreign direct investment. This paper presents evidence to the contrary. Using hand-collected data on French multinationals, I show that wholesale affiliates are strategically located in proximity to a multinational firm’s manufacturing affiliates. The purpose of many wholesale affiliates is to serve as conduits for the exports of nearby manufacturing affiliates, not those of the parent company. Extensive case study evidence on the prevalence of this mechanism is presented. My findings indicate that wholesale affiliates are a form of foreign direct investment that complements manufacturing affiliates. This conclusion is further reinforced by the finding that a firm is more likely to establish a wholesale affiliate than a manufacturing affiliate in a more distant country once I condition on its operations in geographic proximity. Since a firm’s preference for a manufacturing affiliate over exporting is greater in more distant countries, the latter finding further dispels the notion that wholesale subsidiaries are simply a means of exporting by the parent company.