14 Apr 2021

More than 30 years after German reunification, a persistent gap for various firm performance measures exists between East and West Germany. A particular role in that regard plays the location choice of plants.

New manufacturing plants base their decision to locate across the German district-free cities and districts on a variety of factors, most notably on the regional road infrastructure, structural funding, plant agglomeration and the population size. These are the main findings of new research by Astrid Krenz.

Among the main results, an important factor for a plant's decision to choose a production location is regional infrastructure in terms of travel time on roads and consequently the accessibility of a region. How long it takes to reach agglomeration centres by motor vehicles matters for transporting goods as well as for local amenities for consumers. A 10% decrease of travel time on roads increases the odds of a plant to locate by about 8% among East German regions and by around 26% in particular for large plants in East German regions.

Where and why new firms set up their economic activity is one of the most important questions for politics worldwide. Firms are local providers of employment. Regions that have successful firms operating can offer jobs and generate higher incomes.

The question where firms locate their activity has been prominent in German politics for many years and has been given renewed interest with the recent plan for a ‘German Industrial Strategy 2030’. The strategy paper discusses how large enterprises, the so called 'champions', can be supported to flourish (BMWi, 2019) and how the German government can cope with the rising economic power from the Asian countries, especially China, and the USA.

A longer-lasting debate exists about underinvestments in the German economy, involving spending on infrastructure - i.e. lack of investment in roads, digital infrastructure as well as energy infrastructure - , support for innovations and research, as well as support for new firms in terms of easing regulations, bureaucracy, and access to finance. These issues bear important influence on the investment decisions and setting-up of firm activities. In the light of the Covid19 pandemic, governments worldwide discussed the design of adequate investment packages to support firms.

For the analysis, the researcher compiled a novel, rich regional- and plant-level dataset based on the official firm statistics from the German Federal Statistical Office and the Offices of the Laender. These data have hitherto been unused to investigate location choices of plants and they constitute the most comprehensive German dataset for this kind of analysis. Including plant- and regional-level fixed effects, the regression analysis provides first-time evidence how in particular the location decision of plants in the German economy is influenced by regional road infrastructure and structural funding.

Policy implications arise if one wants to support the location of firm activities in favor of one region. The results point to benefits that come from supporting the agglomeration of plants and people and arising agglomeration externalities. Moreover, investments for the implementation and improvement of infrastructure, especially of the road network, appear to be an important factor. Most of Germany's passenger and goods transport is undertaken by road traffic.

Further consideration might be given to combine the request for accessibility with environmental issues and sustainability. Furthermore, regional structural funding on infrastructure has been found to be an important factor for the location decision between different East German regions which demonstrates the importance of that policy instrument for regional economic development in Germany.

Dr Astrid Krenz

Research Fellow | University of Sussex Business School |