Cost heterogeneity and the destination of Japanese foreign direct investment: A theoretical and empirical analysis

► This is one of a very few papers that examines heterogeneous firms' choice between two types of foreign direct investments in an Oligopolistic model. ► A sorting equilibrium is established to show that less productive firms opt for export-oriented FDI. ► Hypotheses developed in a theoretical model are tested using a comprehensive firm-level data on 118,300 Japanese firms covering the entire manufacturing sector.