BA CORE 6 | INT’L TRADE & AGREEMENT

2nd SEMESTER REVIEWER


UNIT 3: MODERN FIRM-BASED
Development based on (production)
factors
THEORIES OF  Development based on investments
(capital)
INTERNATIONAL
INTRODUCTION
TRADE  Development based on innovation
(creativity)
 Development based on prosperity
(economic growth and development)
The modern firm-based theories of
international trade emerged after World War II and Four determinants to form Porter's diamond:
were primarily developed by business school
professors rather than economists.  local market resources and
capabilities;
Unlike classical country-based theories, these  local market demand conditions;
modern theories were shaped by the growth of  local suppliers and complementary
multinational companies (MNCs). industries; and
Classical theories struggled to explain the  local firm characteristics.
expansion of MNCs and intra-industry trade, where PORTER’S DIAMOND MODEL
countries exchange goods produced within the same
industry. In contrast, firm-based theories go beyond I. Local market resources and capabilities
national borders and consider factors such as brand (factors condition)
and customer loyalty, technology, and quality in
Porter added to these basic factors a new list of
understanding trade flows.
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 in universities
d. technology
e. infrastructure

LESSON 3.1. PORTER'S NATIONAL II. Local market demand conditions

COMPETITIVE ADVANTAGE THEORY
Porter believed that a creative domestic
Competitive advantage refers to any benefit market is critical to ensuring ongoing innovation,
or advantage that one country or company has over thereby creating a sustainable competitive advantage.
others due to lower cost of material, lower cost of labor,
or easy access to raw materials resulting in the ability of Companies whose domestic markets are
the country or company to offer greater value to innovative, trendsetting, and sophisticated will pursue
customers, either by means of lower prices, or offering the development of new products and technologies.
more benefits and services at the same price. A country Strong demand conditions in the domestic country
with absolute advantage and comparative advantage persuade domestic businesses to constantly improve
has an edge over its competitors; therefore, it has their products. If the demand for a product is more in the
competitive advantage. domestic market, it can influence the demand of
customers in the foreign market.
Absolute Advantage + Comparative Advantage =
Competitive Advantage III. Local suppliers and complementary
industries
Michael Porter of Harvard Business School
developed a new model to explain national To remain competitive, large global firms benefit
competitive advantage in 1990. Porter introduces a from having strong and efficient supporting and related
model that allows analysis of why some nations are industries to provide the inputs required by the network.
more competitive than others and why some industries
To be competitive, firms must have an efficient
within nations are more competitive than others in the
and strong support network. Certain industries cluster
home front.
geographically, which provides efficiencies and
He did this in his book The Competitive Advantage of productivity. In addition, the growth of one industry
Nations. influences the growth of other industries.

This model of determining factors of national IV. Local firm characteristics

advantage has become known as Porter’s Diamond.
Local firm characteristics include firm strategy,
Porter's theory stated that a nation's industry structure, and industry rivalry.
competitiveness in an industry depends on the
The strategies help in setting new goals, the
capacity of the industry to innovate and upgrade.
structure helps in managing operations, and rivalry helps
Four stages of development in the evolution of a in generating innovation. Local strategy affects a firm's
country competitiveness, A healthy level of rivalry between
 BA CORE 6 | INT’L TRADE & AGREEMENT
2nd SEMESTER REVIEWER
domestic firms will spur innovation, competitiveness, and
growth in the domestic and global fronts. GEERT-HOFSTEDE MODEL

Porter also noted that government and chance

A. Power distance
play a part in the national competitiveness of industries.
B. Individualism
Governments can, by their actions and policies, C. Masculinity
increase the competitiveness of firms and occasionally D. Uncertainty avoidance
entire industries. And of course, there is chance. It a E. Long-term orientation
country or a company takes opportunities of chances F. Indulgence
open to them, they become more competitive.
LESSON 3.3. PRODUCT LIFE CYCLE THEORY
Porter's competitive advantage chain value
Everything in life has a life cycle, so do products.
shows how a company attains competitive
Life cycle is the series of stages through which a
advantage through its main activities that provide cost
living thing passes from the beginning of its life until
advantage and the support activities that will provide the
its death. Even if a product is not a living thing, it still
firm quality advantage.
has a life cycle. The term product life cycle refers to the
Cost advantage and quality advantage a length of time.
company, country, or industry has will bring about
There are 4 stages in the product life cycle:
competitive advantage. If all the business/companies
engaged in country’s industrial trade are competitively 1. Introduction
advantaged, the country will, in turn, have competitive 2. Growth
advantage in the global arena. 3. Maturity
4. Decline
Cost Advantage + Quality Advantage = Competitive
Advantage At the introduction stage. The need is to create
awareness, not profits. The underlying goal at this
stage is to gain widespread product awareness and
brand recognition as consumers try the product.
Marketing efforts are focused on the customer base of
innovators, those most likely to buy a new product big
money is spent on distribution and promotion.

There are two price-setting strategies at this stage:

A. Price skimming charging an initially high

price and gradually reducing (skimming") the
price as the market grows.
B. Price penetration charging a low price to
penetrate the market and capture market
share, before increasing prices in relation to
LESSON 3.2. COUNTRY SIMILARITY THEORY market growth.

GROWTH
Traditional trade theories speak of differences in
resources and demand or supply conditions as a At this stage, products are increasingly being
necessary condition for trade between countries. purchased by lower income groups, and profitability
reaches the highest level. This means that the market
The country similarity theory is built upon is growing.
similarities or identical features of nations for them
to trade with each other. MATURITY

The country similarity theory was developed When a product is widely known and
by Swedish economist Steffan Linder in 1961, as he customer demand has increased, the product enters
tried to explain the concept of intra-industry trade the maturity stage. Sales increase continues in a
Simply, this theory describes the idea that countries with decreasing pattern, but the sales curve tends to
comparable qualities are mainly likely to trade with each decrease after the top selling point is reached. At this
other. stage, the product is purchased by all income groups,
but the majority are in the low-income group. The
These qualities might include the stage of maturity phase is characterized by intense competition
development, per capital income, savings rates, natural due to the presence of many competitor brands in the
resources cultural milieu, geographical features, political market.
and economic interests and the like.
DECLINE
TWO TYPES OF TRADES
A product enters this stage when no amount
of marketing or promotion can prevent the sales
1. INTER-INDUSTRY TRADE - It is the exchange figures from dropping Sales drop a consumers may
of goods produced in different industries have changed and the product this no longer relevant or
among countries. useful. Price wars continue several products are
2. INTRA-INDUSTRY TRADE - It is the exchange withdrawn, and cost continue becomes the way out for
of goods produced in the same industry. most products in this stage.
 BA CORE 6 | INT’L TRADE & AGREEMENT
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The following are some of the strategies that can

be employed in the decline stage
(corporatefinanceinstituta.com 2021)

A. milking o harvesting, which means reducing

marketing efforts and attempt to maximize the
life of the product for as long as possible.
B. slowly reducing distribution channels and pulling
the product from underperforming geographic
areas allowing the company to pull theproduct
out and attempt to introduce a replacement
product, and selling the product to a niche
operator or subcontractor to allow the company
to dispose of a low-profit product, while retaining LAW TO PROTECT IP’S:
loyal customers
 Patent - covers inventions, new processes,
LESSON 3.4. GLOBAL STRATEGIC RIVALRY new machines, and new ways of
manufacturing.
 Copyright - art, music, writting, movies, and
Global strategic rivalry theory was forwarded in software.
1980 by economists Paul Krugman and Kelvin  Trademark/Brandname - business names,
Lancaster. logos, and slogans.
The theory focused on multinational corporations  Trade Secret - manufacturing processes,
(MNCs) and how they get a competitive advantage over formulas, and compilations of information.
other firms in their industry. Firms encounter global ECONOMIES OF SCALE
competition in their industries and in order to prosper,
they must develop competitive advantages. The theory Economies of scale means a proportionate
focuses, however, on planned decisions that firms saving in costs (cost advantage) gained by an
implement as they participate globally. These decisions increased volume of production.
Influence both international trade and international
Economies of scale occurs when more units of
investment.
a good or service can be produced on a larger scale with
(on average) fewer input costs.
BARRIERS TO ENTRY
The cost advantages company gain from increasing their
output.
Barriers to entry are like the bouncers at the
industry's exclusive club, making it tough for newbies INTERNAL
to join the party. But here's the plot twist: these barriers
refers to economies that are unique to a firm.
aren’t just roadblocks; they're secret passages for
For instance, a firm may hold a patent over a mass
companies to swoop in and snag that competitive
production machine, which allows it to lower its average
edge!
cost of production more than other firms in the industry.
Barriers to entry are the following:
EXTERNAL
A. Research and development;
refers to economies of scale enjoyed by an
B. Ownership of intellectual property rights;
entire industry. If studies indicate that cotton production
C. Economies of scale;
will need 1,000 workers to be able to enter a trade with a
D. Unique business processes or methods;
foreign country, all those engaged in cotton production
E. Extensive experience in the industry or
will try their best to employ 1,000 workers to become
exploiting the experience curve
competitively advantaged.
F. Control of resources or favorable access to raw
materials.

RESEARCH AND DEVELOPMENT

R&D are activities engaged in by companies

for the invention of new products or services to
remain competitive. R&D is an important driver of
economic growth. Companies have their own R&D
departments to be able to actually gain competitive
advantage.

OWNING INTELLECTUAL PROPERTY

An intellectual property refers to creations of UNIQUE BUSINESS PROCESSES OR METHODS

the mind, a work or invention that is the result of
A business process, business method or
creativity, such as a manuscript (book) or a designs, to
business function is a collection of related,
which one has rights and for which one may apply for a
structured activities or tasks performed by people or
patent, copyright, trademark, brand name, and the like.
equipment in which a specific sequence produces a
 BA CORE 6 | INT’L TRADE & AGREEMENT
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service or product (serves a particular business
goal) for a particular customer or customers.

EXTENSIVE EXPERIENCE IN THE INDUSTRY OR

EXPLOITING THE EXPERIENCE CURVE

Experience produces competitive advantage

over those without experience in any endeavor.
Therefore, experience will also count in engaging in
international trade, as those with experience become
more conversant with what is going on in the global trade
arena. Employing experienced employees is equally
advantageous for firms.

CONTROL OF RESOURCES OR FAVORABLE

ACCESS TO RAW MATERIALS

Monopolies have strong control over the

scarce resources, which will create barriers to entry for
the existing firms as they cannot utilize scarce resources
due to string control. New entrants may struggle to
secure the same advantageous terms, making it
harder for them to compete on pricing and operational
efficiency.