What drives home market advantage?

In the automobile industry, as in many tradable goods markets, firms usually earn their highest market share within their domestic market. The goal of this paper is to disentangle the supply- and demand-driven sources of this home market advantage. While trade costs, foreign production costs, and taste heterogeneity all matter for market outcomes, we find that a preference for home brands is the single most important driver of home market advantage—even after controlling for brand histories and dealer networks. Furthermore, we also find that consumers favor domestically producing brands even if these brands originated from a foreign country. Therefore, our results suggest a novel demand effect of FDI: Establishing local production increases demand for the brand even in the absence of any cost savings.