AbstractThe paper aims at identifying the variables that are significant in determining the choice of host countries for manufacturing subsidiaries of US transnational firms. The approach that is taken is to relate variables that on the basis ona prioritheoretical reasoning influence foreign location decisions, with (a) total market penetration by US firms and (b) the choice these firms make between exporting to their foreign markets and on site manufacturing. Location decisions are viewed as emerging from the interaction of characteristics typical to the industry of the transnational firm and factors specific to potential host countries. Particular attention is devoted to finding out whether locational choices and market shares are interdependent. The sample of observations under investigation consists of the activities of US majority‐owned subsidiaries, classified in fourteen industry groupings and operating twenty countries. Sub‐samples of countries are also studied. It is found that for the European countries, in particular EEC members, market penetration is dependent on local manufactur