Locating foreign affiliates in Germany : the case of Swedish MNEs

This paper uses a dataset on the foreign activities by Swedish manufacturing firms to examine the performance of German affiliates compared with affiliates in other locations. It is found that German affiliates, on average, have higher labour productivity, R&D expenditure per employee and skill-intensity. There is also evidence suggesting that German affiliates are more oriented towards selling in the local market than affiliates in other European countries. We also analyse the effect of labour costs in the Swedish multinational enterprises? (MNEs?) decision to locate in Germany. We find that the location decision is sensitive to the level of wage costs in Germany and in other potential locations in high-income Europe, but not to the level of wage costs in Sweden or low-income countries in Europe. Finally, we find that the cross-wage elasticity showing the effect of increases in labour costs in other high-income locations in Europe on employment in German affiliates of Swedish MNEs is positive, indicating substitutability between the German workers and the workers employed in other high-income countries in Europe.