Market Entry and Plant Location in Multiproduct Firms

There are significant differences in the set of products multinational firms sell in distinct countries. These differences may be driven by variation in consumer tastes or supply costs and may be magnified by cannibalization forces that push firms to reduce the set of products available in each market. In this paper, we use data on the global car industry with information by firm, country, and car model on production, sales, and prices. We use this data to estimate a quantitative model in which car manufacturers decide where to produce and sell the models in their portfolio. Cannibalization forces imply our model exhibits substitutabilities in the firm’s decision to sell different models in the same destination market; transport costs increasing in distance imply our model displays complementarities in the firm decision to produce and sell the same model in geographically close markets. We introduce a new algorithm to solve high-dimensional combinatorial discrete-choice problems that exhibit complementarities and substitutabilities across choices. Using this model, we determine the role demand and supply factors play in determining the observed differences in the set of products each firm sells in each country. We also study the effects of country-specific consumption or production subsidies on the global production location, products offered in each market, and prices. Our counterfactuals highlight the importance of taking interdependencies into account and show that, e.g., local consumption subsidies lead to changes in foreign outcomes through the firms' endogenous reallocation of production.