Firm heterogeneity and location choice of German multinational firms

Abstract

In this paper we examine how different host country characteristics affect the location decisions of German multinational firms in developing and transition countries, paying particular attention to the sectoral composition of foreign direct investment (FDI). The study is focused on a broad sample of 22,533 foreign affiliates established in 145 countries over the period 1990 to 2015. A logit model has been employed to carry it out. The results suggest that market size, human capital, information and communication technology (ICT) infrastructures and surprisingly, the level of corruption, have a positive effect on the decisions of German multinationals to engage in FDI in both developing and transition economies. However, labor costs, distance between parent and host country and macroeconomic instability are factors which avoid the entrance of German firms in those countries. Finally, as for the agglomeration effects, interesting differences between manufacturing and services sector have been found.