Determinants of Inward FDI into German Federal Statesa

Abstract This study assesses the determinants of location choices of foreign multinational firms at the level of German federal states. Based on a monopolistic competition model, firms decide for a certain location if the expected profits are higher than the profits associated with all other available locations. A conditional and a nested logit model resemble the structure of the location choice process of individual investors well. By using plant-level data between 1997 and 2005, the results confirm that firms react positively to local demand, infrastructure and existing firm networks, while business taxes and unit labour costs exhibit the expected negative impact. In the individual country estimations, it is shown that these effects vary in their relevance for the most important countries of origin