Firm heterogeneity and the market scope of European multinational activity

Abstract

This paper examines the relationship between the characteristics of European firms and the market scope of their international activity. We show, theoretically, that when markets can be served by exports or through foreign affiliates, a strict hierarchy of firm characteristics and the number of markets they invest in or exports can only be established for firms engaged in foreign direct investment (FDI), but not for exporters. Empirically, our findings confirm the significant role of firm heterogeneity in the structure of European international activity, as well as the increasing relationship between firm characteristics and the number of markets in which they operate. Additionally, in line with our predictions, the estimates reveal the existence of heterogeneous effects and non-linearities in this relationship, with important differences between exporters and firms engaging in FDI.