Combinatorial Discrete Choice: A Quantitative Model of Multinational Location Decisions
We introduce a general quantifiable framework to study the location decisions of multinational firms. In the model, firms choose in which locations to pay the fixed costs of setting up production, taking into account potential complementarities among production locations. The firm’s location choice problem is combinatorial because the marginal value of an individual production location depends on its complete set of production sites. We develop a computational method to solve such problems and aggregate optimal decisions across heterogeneous firms. We use our calibrated model to study Brexit and the recent sanctions war with Russia. In both counterfactuals, changes in the location decisions of multinationals are driving real wage responses.
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