Helpman, Melitz, and Yeaple (2004) analyze the decision of heterogeneous firms to serve foreign markets through exports or foreign direct investment (FDI). The paper presents a multi-country, multi-sector general equilibrium model that explains how firms choose between these two modes of market access. Exporting involves lower sunk costs but higher per-unit costs, while FDI involves higher sunk costs but avoids transport costs. In equilibrium, only the most productive firms choose to serve foreign markets, and the most productive among them choose FDI. The paper shows that firm-level heterogeneity is a key determinant of relative export and FDI flows. Using the model, the authors derive testable empirical predictions about the relative aggregate export and FDI sales in a given country for a given sector, based on relative costs and firm-level heterogeneity. These predictions are tested on data on U.S. affiliate sales and exports in 38 countries and 52 sectors. The results show that sector-specific transport costs and tariffs have a strong negative effect on export sales relative to FDI. Additionally, more firm-level heterogeneity leads to significantly more FDI sales relative to export sales. The paper also explores the implications of the proximity–concentration tradeoff for the composition of trade and investment. The results confirm that firm heterogeneity plays an important role in determining the composition of international trade. The authors find that firms tend to substitute FDI sales for exports when transport costs are relatively high and when plant-level returns to scale are relatively weak. The paper concludes that intra-industry firm heterogeneity plays an important role in determining the composition of international trade. The authors test their model on U.S. export and affiliate sales data for 52 manufacturing industries and 38 countries. They show that productivity dispersion measures help to predict the composition of trade and investment in the manner suggested by the model. Industries with high productivity dispersion are characterized by a larger volume of FDI sales relative to exports. The results are robust across several measures of productivity dispersion. The paper also confirms the predictions of the proximity–concentration tradeoff. The authors find that firms tend to substitute FDI sales for exports when transport costs are relatively high and when plant-level returns to scale are relatively weak. The paper concludes that intra-industry firm heterogeneity plays an important role in determining the composition of international trade.Helpman, Melitz, and Yeaple (2004) analyze the decision of heterogeneous firms to serve foreign markets through exports or foreign direct investment (FDI). The paper presents a multi-country, multi-sector general equilibrium model that explains how firms choose between these two modes of market access. Exporting involves lower sunk costs but higher per-unit costs, while FDI involves higher sunk costs but avoids transport costs. In equilibrium, only the most productive firms choose to serve foreign markets, and the most productive among them choose FDI. The paper shows that firm-level heterogeneity is a key determinant of relative export and FDI flows. Using the model, the authors derive testable empirical predictions about the relative aggregate export and FDI sales in a given country for a given sector, based on relative costs and firm-level heterogeneity. These predictions are tested on data on U.S. affiliate sales and exports in 38 countries and 52 sectors. The results show that sector-specific transport costs and tariffs have a strong negative effect on export sales relative to FDI. Additionally, more firm-level heterogeneity leads to significantly more FDI sales relative to export sales. The paper also explores the implications of the proximity–concentration tradeoff for the composition of trade and investment. The results confirm that firm heterogeneity plays an important role in determining the composition of international trade. The authors find that firms tend to substitute FDI sales for exports when transport costs are relatively high and when plant-level returns to scale are relatively weak. The paper concludes that intra-industry firm heterogeneity plays an important role in determining the composition of international trade. The authors test their model on U.S. export and affiliate sales data for 52 manufacturing industries and 38 countries. They show that productivity dispersion measures help to predict the composition of trade and investment in the manner suggested by the model. Industries with high productivity dispersion are characterized by a larger volume of FDI sales relative to exports. The results are robust across several measures of productivity dispersion. The paper also confirms the predictions of the proximity–concentration tradeoff. The authors find that firms tend to substitute FDI sales for exports when transport costs are relatively high and when plant-level returns to scale are relatively weak. The paper concludes that intra-industry firm heterogeneity plays an important role in determining the composition of international trade.