Special Issue: Issues in Asia. Guest Editor: Laixun Zhao

Using a North–South model of heterogeneous firms, the paper investigates the effects of the financial development of the South on the choice of international entry mode (export vs foreign direct investment [FDI]) of Northern firms. Such development facilitates the entry of local firms and thus intensifies product market competition. As a result, the intensive margins, extensive margins and total sales from export or FDI of Northern firms are all reduced. The paper provides conditions that determine whether export or FDI is affected more significantly. The results generate empirically testable hypotheses.