Why European firms relocate to the United States?
Between 2007 and 2024, US labor productivity grew 18% more than the EU’s. Hugo Reichardt and Ricardo Reis, in this paper, use firms’ own location choices as revealed preference (analogous to how trade flows reveal comparative advantage in Ricardian models) to identify what makes the US more attractive for business.
Methodology
- Data: The authors constructed a new global database combining LinkedIn and Crunchbase, covering 2.1 million firms and 193.4 million workers, tracking where firms locate production workers, sales-and-management staff, funding sources, and headquarters (HQ), plus historical HQ relocation events.
- Model: Reichardt and Reis use a multi-region firm model where companies choose: a) where to source three input types (production labor, sales/management labor, and financing) trading off regional efficiency-per-cost against fixed costs of operating in additional regions, and b) where to locate their headquarters (HQ) given firm size and coordination benefits.
- Econometric strategy: An intensive-margin efficiency is estimated via linear regressions on firms’ regional input shares, with a novel Heckman-style selection correction for the extensive margin (which regions a firm operates in). Extensive-margin fixed costs and elasticities come from a conditional logit over the sets of regions firms choose, using an efficient sampling procedure to handle the huge combinatorial choice set. HQ relocation patterns identify the benefits/costs of headquarters location, including how these vary by firm size.
Findings
- Financing efficiency: Little difference exists between the EU and US in production or sales-worker efficiency, but the US holds a large advantage in funding markets.
- Market fragmentation: Costs of operating away from HQ are high in both regions, but EU firms face substantially higher costs operating across EU member states than US firms do across US states, a pattern that holds across production, sales/management, and funding.
- HQ relocation and firm size: Firms relocate HQ from the EU to the US far more often than the reverse, with strong positive selection on size only in the EU-to-US direction i.e. smaller firms see little difference, but the largest firms face a pronounced EU headquarters disadvantage.
Overall, the paper concludes the EU–US productivity gap is driven by three factors: superior US funding-market efficiency, greater EU internal-market fragmentation, and a scale-dependent penalty facing larger EU firms.
Why Do Firms Prefer the US over the EU?
Authors: Hugo Reichardt, Ricardo Reis
From: CREi and Barcelona School of Economics, London School of Economics
Answering Reichardt and Reis: How financial integration could close the US–EU gap
This IMF note identifies the specific policy barriers fragmenting EU banking and venture-capital markets. The authors combine gravity-model empirical analysis with structural macroeconomic simulation. They use granular bank-firm relationship data to estimate cross-border frictions in bank lending, and PitchBook deal-level data (VC-backed firms founded after 2010, 2015–2024) to estimate frictions in venture capital flows. Estimated policy “wedges” are then regressed on regulatory-distance indices to isolate which specific policy barriers (banking rules, deposit insurance, insolvency regimes, pension/insurance investment restrictions) drive fragmentation. Finally, a general equilibrium model translates these frictions into aggregate GDP effects under counterfactual reform scenarios.
Findings
EU financial markets remain fragmented and shallow: EU firms rely on bank credit for 26% of liabilities versus just 10% in the US, and EU venture capital is roughly one-quarter the size of the US market. Moderate financial reforms could raise long-run EU GDP by about 3%, with two-thirds of the gain from deeper banking integration and the rest from expanding and better allocating risk capital; these reforms also amplify gains from broader real-sector reforms by an additional percentage point of GDP, with smaller economies and younger firms benefiting disproportionately.
The solutions to the three problems Reichardt and Ricardo Reis have outlined:
- For the US funding-market efficiency advantage identified in the Reichardt and Reis paper, the IMF note’s proposed solution is to deepen EU capital markets by closing the venture capital scale gap (currently about one-fourth the size of the US market) and by harmonizing pension and insurance investment rules so that more long-term risk capital flows into equity and VC.
- For the EU market fragmentation problem, the proposed solution is to harmonize banking regulation, close gaps in deposit insurance schemes across member states, and align insolvency regimes so that genuine cross-border lending becomes viable, since only about 5% of EU corporate loans currently cross borders.
- For the EU firm-size penalty, the proposed solution is a broader package of financial integration reforms projected to lift long-run EU GDP by around 3%, with disproportionately larger benefits for younger and scaling firms, directly targeting the disadvantage facing larger EU-headquartered companies.
Deeper and More Integrated Financial Markets to Foster Growth and Resilience in Europe
Authors: Luis Brandao-Marques, Damien Capelle, Diego Cerdeiro, Adriano Fernandes, Alexandra Fotiou, Yueling Huang, Claire Yi Li, Rui C. Mano, Alberto Musso, Ese Onokpasa, Richard Varghese, Maryam Vaziri
From: IMF
