CHAPTER 3 - MODERN FIRM-BASED THEORIES OF INTERNATIONAL TRADE
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1. refers to the ability of the country or company to Competitive advantage
offer greater value to customers, either by means
of lower prices, or offering more benefits and ser-
vices at the same price.
2. Cost Advantage + Quality Advantage = Competitive True
Advantage
3. Michael Porter of Harvard Business School intro- True
duced a new model in his book, The Competitive
Advantage of Nations, known as Porter's diamond.
Porter's theory stated that a nation's competitive-
ness in an industry depends on the capacity of the
industry to innovate and upgrade.
4. Michael Porter identified four stages of develop- a. Development based on (pro-
ment in the evolution of a country duction) factors
b. Development based on in-
vestments (capital)
c. Development based on inno-
vation (creativity)
d. Development based on pros-
perity (economic growth and
development)
5. To explain his theory, Porter identified four deter- a. local market resources and
minants that he linked together to form Porter's capabilities;
diamond b. local market demand condi-
tions;
C. local suppliers and comple-
mentary industries; and
d. local firm characteristics.
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6. Porter added to these basic production factors a. human resources, including
(land, labor, and capital) a new list of advanced skilled labor
factors b. material resources, includ-
ing natural resources, vegeta-
tion, space, and the like
c. Investments In education,
including knowledge and re-
search
on universities
d. technology
e. infrastructure
7. Porter's competitive advantage chain value shows True
how a company attains competitive advantage
through its main activities that provide cost advan-
tage and the support activities that will provide the
firm quality advantage.
8. It is the theory that speak of differences in re- Traditional trade theories
sources and demand or supply conditions as a nec-
essary condition for trade between countries.
9. theory that is built upon similarities or identical The country similarity theory
features of nations for them to trade with each
other.
10. The country similarity theory, developed by Steffan Linder
Swedish economist _____________, tried to explain
the concept of intra-industry trade between and
among countries with identical characteristics.
11. a. stage of development
b. cultural milieu
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Linder's theory proposed that these features com- c. geographical features
mon to certain countries will make them trade with d. political and economic inter-
each other ests
12. is the exchange of goods produced in different Inter-industry trade
industries among countries.
13. is the exchange of goods produced in the same Intra-industry trade
industry.
14. To determine the similarity of countries, the Geert-Hofstede model
_______________ is a tool that was developed to com-
pare countries.
15. is the series of stages through which a living thing Life cycle
passes from the beginning of its life until its death.
16. The term product life cycle refers to the length of True
time a product is introduced in the market until it
is removed from the shelves.
17. is a marketing strategy developed by Raymond The product life cycle theory
Vernon in 1966 to help companies plan out the
progress of their new products and explain the
pattern of international trade and foreign direct
investment, which follows the product life cycle.
18. Vernon explained that from the invention of a True
product to its demise due to lack of demand, a
product goes through four stages: introduction,
growth, maturity, and decline. The length of each
stage can vary from product to product. Many fac-
tors go into determining how quickly a product
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goes through the four stages, including how the
product is marketed, the demand for the product,
and the product itself.
19. is the process of managing a product's life cycle Product life cycle management
from inception, through design and manufactur- (PLM)
ing, to sales, service, and eventually, retirement.
20. Prior to a product being introduced to the market, True
companies conduct research on which product is in
demand, how to produce the product, and conduct
market tests to see if the product will sell. If the
results of these research and tests are positive, that
is the time the company will begin production, and
the product will be introduced to the market.
21. At the introduction stage, the need is to create True
awareness, not profits, and the underlying goal is
to gain widespread product and brand recognition
as consumers try the product. Big money is spent
on distribution and promotion.
22. At the introduction stage, companies can expect True
sales to be low, but will gradually increase, and
profitability to be negative. Businesses can also
expect to have no direct competition during this
phase since competitors also do not have knowl-
edge about the product.
23. two price-setting strategies at introduction stage a. Price skimming
b. Price penetration
24. Price skimming
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charging an initially high price and gradually re-
ducing ("skimming") the price as the market grows.
25. charging a low price to "penetrate" the market and Price penetration
capture market share, before increasing prices in
relation to market growth.
26. At the ________________, demand for the product growth stage
begins to increase and sales usually grows expo-
nentially from the takeoff point. At this stage, prof-
itability reaches the highest level. Economies of
scale are now in order as sales revenue increases
faster than costs and production reaches capacity.
27. At the _____________, sales increase continues in a maturity stage
decreasing pattern, but the sales curve tends to de-
crease after the top selling point is reached. There
is intense competition and product differentiation
and generating brand awareness becomes a must.
Retaining customer brand loyalty is the key. The
biggest challenge is maintaining profitability and
preventing sales from further decline.
28. A product enters the _________________ when no decline stage
amount of marketing or promotion can keep the
sales figures from declining. Other innovative or
substitute products that satisfy customer needs
better have entered the market. Sales likely con-
tinue until the cost to produce the product rises
higher than the profits generated from it.
29. Some of the strategies that can be employed in the True
decline stage are:
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a. milking or 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 geo-
graphic areas allowing the company to pull the
product out and attempt to introduce a replace-
ment product; and
c. selling the product to a niche operator or sub-
contractor to allow the company to dispose of a
low-profit product, while retaining loyal customers.
30. is a way that a firm can obtain a sustainable edge Competitive advantage
over competitors and break down the barriers to
entry in a particular industry.
31. is a theory forwarded in 1980 by economists Paul Global strategic rivalry theory
Krugman and Kelvin Lancaster that focused on
multinational corporations (MNCs) and how they
get a competitive advantage by taking advantage
of the barriers to entry for a particular industry.
32. refer to the obstacles a new firm may face when Barriers to entry
trying to enter into an industry or a new market.
33. These barriers to entry are the following: True
a. research and development
b. ownership of intellectual property rights
c. economies of scale
d. unique business processes or methods
e. extensive experience in the industry or exploit-
ing the experience curve and
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f. control of resources or favorable access to raw
materials.
34. are activities engaged in by companies for the Research and development
invention of new products or services to remain (R&D)
competitive. It is an important driver of economic
growth. Companies have their own R&D depart-
ments to be able to actually gain competitive ad-
vantage.
35. refers to creations of the mind, a work or invention An intellectual property
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.
36. is an exclusive right granted for a new, inventive, A patent
and useful product, process, or technical improve-
ment to an existing invention. A patent may be
used for licensing.
37. is a word, a group of words, sign, symbol, or a logo A trademark/brand name
that distinguishes your business' goods or services
from those of other traders. These are used for
franchising.
38. is the exclusive legal right to reproduce, publish, Copyright
sell, or distribute the matter and form of some-
thing (such as a literary, musical, or artistic work).
39. It means a proportionate saving in costs (cost ad- Economies of scale
vantage) gained by an increased volume of produc-
tion.
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40. is a result of spreading the total fixed overhead the cost advantage
cost among a greater number of units produced,
which, therefore, reduces the unit fixed cost for the
product.
41. economies of scale also result in a lower average True
variable cost for the product. Overall, operational
efficiencies and synergies are attained.
42. There are two economies of scale a. Internal economies of scale
b. External economies of scale
43. refers to economies that are unique to a firm. For Internal economies of scale
instance, a firm may hold a patent over a mass.
production machine, which allows it to lower its
average cost of production more than other firms
in the industry.
44. refers to economies of scale enjoyed by an entire External economies of scale
industry. If studies indicate that cotton production
will need 1,000 workers to be able to enter a trade
with a foreign country, all those engaged in cotton
production will try their best to employ 1,000 work-
ers to become competitively advantaged
45. Experience produces competitive advantage over True
those without experience in any endeavor. There-
fore, experience will also count in engaging in in-
ternational trade as those with experience become
conversant with what is going on in the global
trade arena. Employing experienced employees is
equally advantageous for firms.
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