Export vs. FDI: Sandwich Sorting with Quadratic Preferences
15 Pages Posted: 24 Mar 2016
Date Written: March 23, 2016
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. Evidene for this type can be observed for investment and services trade patterns.
Keywords: Quadratic preferences, heterogeneous firms, exporting, FDI, unconventional sorting
JEL Classification: F10, F12
Suggested Citation: Suggested Citation