Product life-cycle theory

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The product life-cycle theory is an economic theory that was developed by Raymond Vernon in response to the failure of the Heckscher-Ohlin model to explain the observed pattern of international trade. The theory suggests that early in a product's life-cycle all the parts and labor associated with that product come from the area in which it was invented. After the product becomes adopted and used in the world markets, production gradually moves away from the point of origin. In some situations, the product becomes an item that is imported by its original country of invention.^[1] A commonly used example of this is the invention, growth and production of the personal computer with respect to the United States.

The model applies to labor-saving and capital using products that (at least at first) cater to high-income groups.

3 stages: New product stage: The product is produced and consumed in the US. No trade takes place. Maturing product stage: mass-production techniques are developed and foreign demand (in developed countries) expands. At this stage the US exports the product to other developed countries. Standardized product stage: Production moves to developing countries, which then export the product to developed countries.

The model demonstrates dynamic comparative advantage--the country that has the comparative advantage in the production of the product changes from the innovating (developed) country to the developing countries.

THE PRODUCT LIFE CYCLE (Raymond Vernon, 1966)

The logic here is straight forward --there are four stages in a

product's life cycle:

• introduction,
• growth,
• maturity, and
• decline,

and the location of production depends on the stage of the cycle.

Stage 1: Introduction New products are introduced to meet local (i.e., national) needs, and new products are first exported to similar countries, i.e., countries with similar needs, preferences, and incomes.. If we also presume similar evolutionary patterns for all countries, then products are introduced in the most advanced nations. (E.g., the IBM PCs were produced in the US and spread quickly throughout the industrialized countries.)

Stage 2: Growth A copy product is produced elsewhere and introduced in the home country (and elsewhere) to capture growth in the home market. This moves production to other countries, usually on the basis of cost of production. (E.g., the clones of the early IBM PCs were not produced in the US.)

Stage 3: Maturity The industry contracts and concentrates -- the lowest cost producer wins here. (E.g., the many clones of the PC are made almost entirely in lowest cost locations.)

Stage 4: Decline Poor countries constitute the only markets for the product. Therefore almost all declining products are produced in LDCs. (E.g., PCs are a very poor example here, mainly because there is weak demand for computers in LDCs. A better example is textiles.)

Note that a particular firm or industry (in a country) stay in a market by adapting what they make and sell, i.e., by riding the waves. For example, approximately 80% of the revenues of H-P are from products they did not sell five years ago.

[edit] Notes

1. ^ Hill, Charles (2007). International Business Competing in the Global Marketplace 6th ed.. McGraw-Hill, 168. ISBN 978-0-07-310255-9. 

[edit] References

• Hill, Charles W.L. International Business: Competing In The Global Marketplace. New York: McGraw-Hill, 2007.
• Appleyard, Dennis R. Alfred J. Field Jr., Steven L. Cobb. International Economics. Boston: McGraw-Hill, 2006.