Monopolistic Competition Theory:In real life, especially the industrial goods are not homogenous contrary to the assumption in factor endowment theory because goods are different in terms of components, usage, outlook or at least brands.
World trade is traditionally thought as the exchange of goods that are produced by non-similar or completely different sectors. However, currently the majority of trade occurs between the differentiated goods of the same sector. This is called intra-industry trade (bi-directional trade). Monopolistic competition theory explains the case of bi-directional trade of industrial goods through economies of scale.
The idea of utilizing economies of scale forces firms to produce one or a few kinds of goods instead of various kinds or types of goods. In fact, the cause of this is the possibility of substitution among differentiated goods and the effort of firms to decrease costs for international competition. As production intensifies on few kinds or type specialization follows, more efficient machines are used and economies of scale is exploited. Thereby countries become exporters of that product and import other types of the good from other countries.
4.4. New Trade Theories
The theories that are called new trade theories are in fact the alternative theories themselves. New trade theories are those that internalize the concepts of scale, network, innovation and global competition.
Costs of a firm may be decreased by two ways. As the scale of production increases per unit fixed cost will decrease and the decrease in variable costs will boost it (internal scale economies); as the scale of the sector where a firm operates, the costs of that firm will decrease and the chance of it to find skilled-labor that enables quality inputs and exchange of experiences will increase (external scale economies).
Firms can avoid the factor endowment constraint of the country through innovation. Technologic progress and facilitator effect of R&D firms on innovation have converter effects on factor endowment, because knowledge has been included among the factors of production.
Networking enables firms to internalize the experiences attained through knowledge exchange, fast experiences, learning by looking and learning by doing.
The global competitiveness of firms depends not only on national factor endowment or the structure of the firm, but to a larger spectrum of variables that are mentioned in the Porter’s diamond such as factor conditions, demand conditions, related and collateral sectors and the strategies, structures and competitiveness of firms.
