INTERNATIONAL RELOCATION OF PRODUCTION: WHERE DO FIRMS GO? Leo Sleuwaegen n and Enrico Pennings nn Abstract The flexible relocation of capacity across countries by multinational enterprises has become an important source of concern. Using a unique sample of relocating firms in Belgium, we find that wages and market potential of host regions are important determinants for the location choice. Considering firm characteristics, we show that large firms have a higher propensity to relocate to remote countries. Public aid only plays a decisive role in the investment decision for relocations to adjacent countries, suggesting a potential harmful role in distorting competition. More proactive policies in line with changing comparative location advantages should be implemented to accommodate relocations. I Introduction International relocation of production is at the top of the policy agenda in small and open countries like Belgium, especially after two large-scale relocations of cloth manufacturers, Lee (1995) and Levi Strauss (1998), from Belgium to countries with lower wages. At Lee, 480 employees were dismissed, while at Levi Strauss 900 employees were laid off. In an interview, a spokesman of Levi Strauss claimed that ‘wages in Belgium are too high’. Data from Lee show that a worker at Lee Belgium receives 540 Belgium Francs (BEF) per hour, 1 while hourly wages at other factories of Lee in Europe are BEF 248 in Ireland and Northern-Ireland, BEF 171 in Malta, and BEF 72 in Poland. The importance of the wage costs is immediate when taking into account that wages amount to 78% of the value added in the clothing industry. But relocation can also hit particular counties of large countries. Levi’s recently (2002) closed down its last manufacturing plant in the US, so that now all production takes place in low- wage countries. According to the Brookings Institute in Washington DC, there has been a reduction of 371,000 jobs in the US apparel industry over the period 1995–2001. n VLGMS, Catholic University of Leuven and Erasmus University Rotterdam nn Erasmus University Rotterdam and Tinbergen Institute 1 40 BEF is approximately equal to 1 Euro. Scottish Journal of Political Economy, Vol. 53, No. 4, September 2006 r Scottish Economic Society 2006, Published by Blackwell Publishing, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA 430