Network and border effects: Where do foreign multinationals locate in Germany?

This study assesses the determinants of location choices of foreign multinational firms at the level of German federal states. Adjacency and existing firm networks are assumed to influence the investors' profits in a given location by overcoming informational disadvantages when entering the new market. A nested logit model resembles the structure of the location choice process well, since it allows foreign investors to have differing perceptions about the substitutability among East and West German federal states. By using affiliate-level data between 1997 and 2005, the results confirm that firms react positively to local demand, a common border and existing firm networks, while unit labor costs exhibit the expected negative impact. In the sectoral estimations, it is shown that these effects vary in their relevance across manufacturing and service affiliates, and between upstream and downstream activities and that intersectoral linkages play an important role.