Almost twenty-five years after the appearance of Dixit and Stiglitz’s paper on

monopolistic competition and optimum product diversity, I try to take stock of the progress

which has been made in applying their approach to international trade theory. I review the

principal applications to trade theory and present a new one: by embedding DS preferences

in a specific-factors framework, I sketch a model which shows how multinational corporations

can emerge even between countries with similar factor endowments. Finally, I address some

limitations of the approach, including its treatment of variety, returns to scale, entry and

firms’ strategies.

JEL: F12, F23, F10

Keywords: Dixit-Stiglitz model; international trade with increasing returns and product

differentiation; monopolistic competition; multinational corporations.

Address for Correspondence: Department of Economics, University College Dublin,

Belfield, Dublin 4, Ireland; tel.: (+353) 1-706 8344; fax: (+353) 1-283 0068; e-mail:

peter.neary@ucd.ie.

conference, especially Avinash Dixit, Bill Ethier, Charles van Marrewijk and Jean-Marie

Viaene, for helpful comments. This research is part of the Globalisation Programme of the

Centre for Economic Performance at LSE, funded by the UK ESRC.