This paper develops a multi-country, multi-sector general equilibrium model to explain how heterogeneous firms decide to serve foreign markets through exports or local subsidiary sales (FDI). The model considers different relative costs associated with these modes of market access, including sunk costs and variable costs such as transport costs and tariffs. In equilibrium, only the most productive firms choose to serve foreign markets, and among these, the most productive firms further choose to serve through FDI. The paper explores the implications of these firm-level decisions for aggregate export and FDI sales relative to domestic and foreign market sizes. It finds that firm-level heterogeneity is a significant determinant of the relative volume of export and FDI sales. The model's predictions are tested using data on US affiliate sales and exports across 38 countries and 52 sectors. The results confirm that sector/country-specific transport costs and tariffs have a strong negative effect on export sales relative to FDI, and that more firm-level heterogeneity leads to significantly more FDI sales relative to export sales. The paper also identifies a new industry characteristic—productivity dispersion—and shows that it plays a key role in determining the composition of trade.This paper develops a multi-country, multi-sector general equilibrium model to explain how heterogeneous firms decide to serve foreign markets through exports or local subsidiary sales (FDI). The model considers different relative costs associated with these modes of market access, including sunk costs and variable costs such as transport costs and tariffs. In equilibrium, only the most productive firms choose to serve foreign markets, and among these, the most productive firms further choose to serve through FDI. The paper explores the implications of these firm-level decisions for aggregate export and FDI sales relative to domestic and foreign market sizes. It finds that firm-level heterogeneity is a significant determinant of the relative volume of export and FDI sales. The model's predictions are tested using data on US affiliate sales and exports across 38 countries and 52 sectors. The results confirm that sector/country-specific transport costs and tariffs have a strong negative effect on export sales relative to FDI, and that more firm-level heterogeneity leads to significantly more FDI sales relative to export sales. The paper also identifies a new industry characteristic—productivity dispersion—and shows that it plays a key role in determining the composition of trade.