IBT Chapter 3: Modern Firm-Based Theories Of International Trade PDF

Chapter 3 Modern Firm-Based Theories of International Trade WWW.REX.COM.PH LESSON 3/CHAPTER 3 Introduction The modern firm-based theories evolved with the growth of multinational companies (MNCs). Unlike country-based theories, firm-based theo...

Chapter 3 Modern Firm-Based Theories of International Trade WWW.REX.COM.PH LESSON 3/CHAPTER 3 Introduction The modern firm-based theories evolved with the growth of multinational companies (MNCs). Unlike country-based theories, firm-based theories incorporate other product and service factors, including brand and customer loyalty, technology, and quality, into the understanding of trade flows. WWW.REX.COM.PH LESSON 3/CHAPTER 3  Lesson 3.1 Porter’s National Competitive Advantage WWW.REX.COM.PH LESSON 3.1/CHAPTER 3  Competitive advantage refers to the ability of the country or company to offer greater value to customers, putting the country or company in a favorable or superior business position than its competitors. Absolute advantage + comparative advantage = competitive advantage Cost advantage + quality advantage = competitive advantage WWW.REX.COM.PH LESSON 3.1/CHAPTER 3  Michael Porter, in his book, The Competitive Advantage of Nations, introduced Porter’s diamond that shows the four determinants that will help nations gain a competitive advantage: a. local market resources and capabilities; b. local market demand conditions; c. local suppliers and complementary industries; and d. local firm characteristics. WWW.REX.COM.PH LESSON 3.1/CHAPTER 3 Michael Porter identified four stages of development in the evolution of a country: development based on factors; development based on investments; development based on innovation; and development based on prosperity. WWW.REX.COM.PH LESSON 3.1/CHAPTER 3 Porter added a new list of advanced factors: a. human resources, including skilled labor; b. material resources, including natural resources, vegetation, space, and the like; c. investments in education, including knowledge and research on universities; d. technology; and e. infrastructure. WWW.REX.COM.PH LESSON 3.1/CHAPTER 3  Lesson 3.2 Country Similarity Theory WWW.REX.COM.PH LESSON 3.2/CHAPTER 3  Traditional trade theories speak of differences in resources and demand or supply conditions as a necessary condition for trade between countries. The country similarity theory is built upon similarities or identical features of nations for them to trade with each other. The country similarity theory, developed by Swedish economist Steffan Linder, tried to explain the concept of intra-industry trade between and among countries with identical characteristics. WWW.REX.COM.PH LESSON 3.2/CHAPTER 3 Linder’s theory proposed that the following features common to certain countries will make them trade with each other: stage of development; cultural milieu; geographical features; and political and economic interests. WWW.REX.COM.PH LESSON 3.2/CHAPTER 3  Inter-industry trade is the exchange of goods produced in different industries among countries. Intra-industry trade is the exchange of goods produced in the same industry. To determine the similarity of countries, the Geert-Hofstede model is a tool that was developed to compare countries. WWW.REX.COM.PH LESSON 3.2/CHAPTER 3  Lesson 3.3 Product Life Cycle Theory WWW.REX.COM.PH LESSON 3.3/CHAPTER 3  Life cycle is the series of stages through which a living thing passes from the beginning of its life until its death. Product life cycle refers to the length of time a product is introduced in the market until it is removed from the shelves. The product life cycle theory is a marketing strategy developed by Raymond Vernon in 1966 to explain the pattern of international trade and foreign direct investment that follows the product life cycle. WWW.REX.COM.PH LESSON 3.3/CHAPTER 3  Product life cycle management (PLM) is the process of managing a product’s life cycle from inception, through design and manufacturing, to sales, service, and eventually retirement. At the introduction stage, the underlying goal is to gain widespread product and brand recognition, and big money is spent on distribution and promotion, but sales are low and profitability is negative. WWW.REX.COM.PH LESSON 3.3/CHAPTER 3  Price skimming is charging an initially high price and gradually reducing (“skimming”) the price as the market grows. Price penetration is charging a low price to “penetrate” the market and capture market share. At the growth stage, sales usually grow exponentially and profitability reaches the highest level. WWW.REX.COM.PH LESSON 3.3/CHAPTER 3  At the maturity stage, sales increase continues in a decreasing pattern, product differentiation and generating brand awareness become a must, and retaining customer brand loyalty is the key. A product enters the decline stage when no amount of marketing or promotion can prevent the sales figures from declining. WWW.REX.COM.PH LESSON 3.3/CHAPTER 3  Lesson 3.4 Global Strategic Rivalry Theory WWW.REX.COM.PH LESSON 3.4/CHAPTER 3  Competitive advantage is a way that a firm can obtain a sustainable edge over competitors and break down the barriers to entry in a particular industry. Global strategic rivalry theory is a theory forwarded in 1980 by economists Paul Krugman and Kelvin Lancaster that focused on multinational corporations (MNCs) and how they get a competitive advantage over other firms in their industry. WWW.REX.COM.PH LESSON 3.4/CHAPTER 3  Barriers to entry refer to the obstacles a new firm may face when trying to enter an industry or a new market, and these barriers to entry are the exact means by which companies can gain a competitive advantage. Research and development (R&D) are activities engaged in by companies for the invention of new products or services to remain competitive. WWW.REX.COM.PH LESSON 3.4/CHAPTER 3  An intellectual property is a creation of the mind, a work or invention that is the result of creativity, such as a manuscript (book) or a design, to which one has rights and for which one may apply for a patent, copyright, trademark, brand name, and the like. A patent is an exclusive right granted for a new, inventive, and useful product, process, or technical improvement to an existing invention. WWW.REX.COM.PH LESSON 3.4/CHAPTER 3  A trademark or brand name is a word, a group of words, a sign, a symbol, or a logo that distinguishes your business’s goods or services from those of other traders. Economies of scale mean a proportionate saving in costs (cost advantage) gained by an increased volume of production. WWW.REX.COM.PH LESSON 3.4/CHAPTER 3  Internal economies of scale refer to economies that are unique to a firm. External economies of scale refer to economies of scale enjoyed by an entire industry. Experience produces a competitive advantage over those without experience in any endeavor. WWW.REX.COM.PH LESSON 3.4/CHAPTER 3