New trade theory: implications for industrial policy

The new trade theory, which emerged in the early 1980s, emphasised economies of scale and market failures as driving forces behind international trade. As opposed to the earlier theory, which mainly assumed perfect competition, the new trade theory provided a rationale for industrial policy. This article shows how industrial policy targeting specific firms or industries may be socially desirable within the new trade theory framework. Models from new economic geography and the more recent ‘new’ new trade theory with heterogeneous firms are also discussed. The main focus is put on models with pecuniary externalities. Published by Norwegian Institute of International Affairs ________________________________ * This article is based on the trial lecture held at the Norwegian Institute of International Affairs, 28 November 2013, for the defence of Medin’s Ph.D. degree at the Norwegian School of Economics.