Export vs. FDI: Sandwich Sorting with Quadratic Preferences

Abstract

By applying quadratic instead of CES consumer preferences in a monopolistic competition model with heterogeneous firms, this paper investigates the robustness of the conventional sorting of cross-border active firms, first described by Helpman, Melitz and Yeaple (2004), and finds thereby an alternative type of sorting: While (sufficiently) productive firms export and more productive ones engage in foreign direct investment (FDI), the most productive firms do not undertake FDI, but export again, establishing the so-called sandwich sorting. Evidence for this type can be observed for investment and services trade patterns.