Chapter 3
Modern Firm-Based Theories
of International Trade
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.
LESSON 3/CHAPTER 3
Lesson 3.1
Porter’s National
Competitive Advantage
LESSON 3.1/CHAPTER 3
Lesson Objectives
At the end of the lesson, the students should be able to:
1. differentiate absolute advantage, comparative advantage,
and competitive advantage from each other;
2. discuss what Porter’s national competitive advantage is all
about;
3. elaborate on the four stages of development as posited
by Porter;
4. explain the four determinants in Porter’s diamond model;
and
5. elucidate Porter’s competitive advantage chain value.
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
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.
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.
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.
LESSON 3.1/CHAPTER 3
Lesson 3.2
Country Similarity Theory
LESSON 3.2/CHAPTER 3
Lesson Objectives
At the end of the lesson, the students should be able to:
1. differentiate the traditional trade theories from the country
similarity theory;
2. discuss the country similarity theory;
3. explain the features common to certain countries that will make
them trade with each other;
LESSON 3.2/CHAPTER 3
Lesson Objectives
At the end of the lesson, the students should be able to:
4. distinguish between inter-industry trade and intra-industry trade;
and
5. elaborate on the Geert-Hofstede model to determine the similarity
of countries.
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.
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.
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.
LESSON 3.2/CHAPTER 3
Lesson 3.3
Product Life Cycle Theory
LESSON 3.3/CHAPTER 3
Lesson Objectives
At the end of the lesson, the students should be able to:
1. compare life cycle with product life cycle;
2. discuss the product life cycle theory;
3. explain what goes on at each of the stages of the product life
cycle;
4. differentiate price skimming from price penetration; and
5. elaborate on the strategies that can be employed in the
decline stage.
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.
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.
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.
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.
LESSON 3.3/CHAPTER 3
Lesson 3.4
Global Strategic Rivalry Theory
LESSON 3.4/CHAPTER 3
Lesson Objectives
At the end of the lesson, the students should be able to:
1. discuss the global strategic rivalry theory;
2. elaborate on the different barriers to entry in trade; and
3. elucidate how the different barriers will actually lead to competitive
advantage.
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.
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.
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.
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.
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.
LESSON 3.4/CHAPTER 3
Concluding Slide
Modern international trade-based theories show how a firm can gain a
competitive advantage over others in different countries.
According to CJ Cherryh, “Trade isn’t about goods. Trade is about
information. Goods sit in the warehouse until information moves them.”
LESSON 3/CHAPTER 3
Reference
Lopez-Mariano, Norma. 2023. International Business and Trade.
Manila: Rex Book Store, Inc.
LESSON 3/CHAPTER 3