The location of domestic and foreign production affiliates by French multinational firms

In this paper we combine two traditions in the analysis of firms' location patterns. One led by trade economists who try to understand why do firms invest abroad, and another one led by urban/regional economists, who frequently use patterns of inter-regional or inter-city choices to estimate agglomeration economies. We contribute to the trade-motivated set of papers on location choices by adding the domestic country in the choice set, while accounting for firm's heterogeneity in the choices. Our econometric results using French firm-level data show an important "home bias" in manufacturing investment decisions. A crucial finding, which bridges with our contribution to the agglomeration literature, is that the spatial clustering of affiliates belonging to the same industrial group accounts for the lion's share of this home bias. (C) 2010 Elsevier Inc. All rights reserved.