Research at the aggregate level has further pointed to the role of physical
capital for MNEs’ plant set-up (see Bergstrand and Egger, 2007). Since
data on capital stocks are not available at the regional level, the best we
can do to proxy for capital is to include log gross investment share (in total
expenditures) of a municipality. In line with previous theoretical work, we
expect that larger gross investments - reflecting bigger local stocks of capital
in equilibrium - positively affect the inclination of foreign MNEs to locate
their regional headquarters in a municipality. For similar reasons, we include
the fraction of land area covered with infrastructure (buildings and streets).
Finally, we may be concerned about structural differences between West-
ern and Eastern German municipalities in their ability to attract foreign
MNEs’ headquarters. To capture the latter, we include an indicator variable
which takes a value of zero for municipalities in the former Western Germany
and a value of one for municipalities in the New Lander.8 Since the available
infrastructure in Germany’s New Lander was and still is of a lower quality,
on average, in the sample period, we expect the parameter of this variable
to take a negative sign.
3 Data
The data on the count of multinational firms per municipality come from
Deutsche Bundesbank’s Micro-Database Direct Investment (MiDi). All Ger-
man firms with a balance sheet total of more than 3 million Euros in which
foreign investors hold 10% or more of the shares or voting rights are required
by law to report to the Deutsche Bundesbank balance sheet information as
well as information on the sector, legal form, and number of employees.9 In-
Head and Mayer, 2004). However, we employ such a population-based variable as an
instrument for business tax rates in some of the empirical models. The respective tests do
not reject this choice as compared against a model which includes weighted population of
neighboring regions as a direct determinant of the number of foreign MNE headquarters
located in a municipality.
8Overall, Germany consists of 16 Lander. Of those, the following 11 are located in the
former Western German part of the country (the Old Lander): Baden-Württemberg, Bay-
ern, Berlin, Bremen, Hamburg, Hessen, Niedersachsen, Nordrhein-Westfalen, Rheinland-
Pfalz, Saarland, and Schleswig-Holstein. The following 5 Laünder are located in the for-
mer Eastern German part of the country (the New Lüander): Brandenburg, Mecklenburg-
Vorpommern, Sachsen, Sachsen-Anhalt, and Thuüringen.
9 The reporting requirements are set by the Foreign Trade and Payments Regulation.
Reporting thresholds have been changed in the past, for details and a documentation on