How the West was Settled. The Location Choice of East German Companies Migrating to West Germany after World War II

The division of Germany into a free-market West and a socialist East that followed the military defeat in spring 1945 induced thousands of East German companies to relocate to the West in the following years. This exogenous mass exodus allows us to identify the motives for the choice of firm location in a natural experiment. We test whether the East German firms were primarily attracted by existing West German agglomeration economies or rather sought new locations geographically close to their original homes, which allowed them to retain their access to pre-existing local networks. To test the determinants of the firms’ location choices, we use a newly constructed data set including information for over 4,200 relocated Eastern German firms, which we combine with county-level data on local economic activity and other socio-economic characteristics. By applying a mixed logit choice model, we find a negative effect of distance. Firms preferred places close to their original locations with market conditions they already knew. The fact that this negative distance effect is stronger for firms from original places close to the inner-German border strengthens our hypothesis that “home advantages” mattered. We also provide evidence for the attractiveness of agglomerations showing that firms favored places with high productivity and market potential. There are heterogeneous effects across industries: For companies in global market-oriented industries, the agglomeration effect is stronger and the location advantage smaller than for companies in industries with a more local customer or supplier base