International Product Life Cycle

international product life cycle

Theory stating that a company will begin by exporting its product and later undertake foreign direct investment as the product
moves through its life cycle.

Raymond Vernon put forth an international trade theory for manufactured goods in the mid-1960s. His
international product life cycle theory says that a company will begin by exporting its product and later
undertake foreign direct investment as the product moves through its life cycle. The theory also says that, for a
number of reasons, a country’s export eventually becomes its import. 9 Although Vernon developed his model
around the United States, we can generalize it to apply to any developed and innovative market such as
Australia, the European Union, and Japan. Let’s examine how this theory attempts to explain international trade
flows.

stages of the Product Life Cycle

The international product life cycle theory follows the path of a good through its life cycle (from new to
maturing to standardized product) in order to determine where it will be produced (see Figure 5.4). In Stage 1,
the new product stage, the high purchasing power and demand of buyers in an industrialized country drive a
company to design and introduce a new product concept. Because the exact level of demand in the domestic
market is highly uncertain at this point, thecompany keeps its production volume low and based in the home
country. Keeping production where initial research and development occurred and staying in contact with
customers allow the company to monitor buyer preferences and to modify the product as needed. Although
initially there is virtually no export market, exports do begin to pick up late in the new product stage.
In Stage 2, the maturing product stage, the domestic market and markets abroad become fully aware of the
existence of the product and its benefits. Demand rises and is sustained over a fairly lengthy period of time. As
exports begin to account for an increasingly greater share of total product sales, the innovating company
introduces production facilities in the countries with the highest demand. Near the end of the maturity stage, the
product begins generating sales in developing nations, and perhaps some manufacturing presence is established
there.
In Stage 3, the standardized product stage, competition from other companies selling similar products pressures
companies to lower prices in order to maintain sales levels. As the market becomes more price sensitive, the
company begins searching aggressively for low-cost production bases in developing nations to supply a growing
worldwide market. Furthermore, as most production now takes place outside the innovating country, demand in
the innovating country is supplied with imports from developing countries and other industrialized nations. Late
in this stage, domestic production might even cease altogether.

Limitations of the Theory

Vernon developed his theory at a time when most new products were being developed and sold first in the
United States. One reason U.S. companies were strong globally in the 1960s was that their domestic production
bases were not destroyed during the Second World War, as was the case in Europe (and to some extent Japan).
In addition, during the war, the production of many durable goods in the United States, including automobiles,
was shifted to the production of military transportation and weaponry. This laid the foundation for enormous
postwar demand for new capital-intensive consumer goods, such as automobiles and home appliances.
Furthermore, advances in technology that were originally developed with military purposes in mind were
integrated into consumer goods. A wide range of new and innovative products like TVs, photocopiers, and
computers met the seemingly insatiable appetite of consumers in the United States.
The theory seemed to explain world trade patterns quite well when the United States dominated world trade. But
today, the theory’s ability to accurately depict the trade flows of nations is weak. The United States is no longer
the sole innovator of products in the world. New products spring up everywhere as companies continue to
globalize their research-and-development activities.
Furthermore, companies today design new products and make product modifications at a very quick pace. The
result is quicker product obsolescence and a situation in which companies replace their existing products with
new product introductions. This is forcing companies to introduce products in many markets simultaneously in
order to recoup a product’s research-and development costs before sales decline and the product is dropped. The
theory has a difficult time explaining the resulting trade patterns.
In fact, older theories might better explain today’s global trade patterns. Much production in the world today
more closely resembles what is predicted by the theory of comparative advantage. Boeing’s (www.boeing.com)
assembly plant in Everett, Washington, assembles its 787 Dreamliner wide-body aircraft. But companies around
the world build the parts used in the 787. Cargo doors arrive stamped “Made in Sweden” and are supplied by
Saab Aerostructures. The plane’s lavatories are made by Jamco in Japan, its flight deck seats are supplied by
Ipeco of theUnited Kingdom, its landing gear is made by Messier-Bugatti-Dowty of France, and so forth. 10
Components are later assembled in a chosen location. This pattern resembles the theory of comparative
advantage in that a product’s components are made in the country that can produce them at a high level of
productivity.
Finally, the theory is challenged by the fact that more companies are operating in international markets from
their inception. Many small companies are teaming up with companies in other markets to develop new products
or production technologies. This strategy is particularly effective for small companies that would otherwise be
unable to participate in international production or sales. French company Ingenico (www.ingenico.com) is a
leading global supplier of secure transaction systems, including terminals and their associated software. The
company began small and worked with a global network of entrepreneurs who acted as Ingenico’s local agents
and helped it to conquer local markets. The cultural knowledge embedded in Ingenico’s global network helped it
to design and sell products appropriate for each market.
The Internet also makes it easier for companies of all sizes to reach a global audience. For a discussion of several
pitfalls companies can avoid in fulfilling their international orders taken on the Internet, see the Manager’s
Briefcase, titled “Five Fulfillment Mistakes.”

Sách 2
Raymond Vernon initially proposed the product life-cycle theory in the mid-1960s. 29 Vernon’s theory was
based on the observation that for most of the twentieth century, a very large proportion of the world’s new
products had been developed by U.S. firms and sold first in the U.S. market (e.g., mass-produced
automobiles, televisions, instant cameras, photocopiers, personal computers, and semiconductor chips). To
explain this, Vernon argued that the wealth and size of the U.S. market gave U.S. firms a strong incentive
to develop new consumer products. In addition, the high cost of U.S. labor gave U.S. firms an incentive to
develop cost-saving process innovations.
Just because a new product is developed by a U.S. firm and first sold in the U.S. market, it does not follow
that the product must be produced in the United States. It could be produced abroad at some low-cost
location and then exported back into the United States. However, Vernon argued that most new products
were initially produced in America. Apparently, the pioneering firms believed it was better to keep
production facilities close to the market and to the firm’s center of decision making, given the uncertainty
and risks inherent in introducing new products. Also, the demand for most new products tends to be based
on nonprice factors. Consequently, firms can charge relatively high prices for new products, which
obviates the need to look for low-cost production sites in other countries.
Vernon went on to argue that early in the life cycle of a typical new product, while demand is starting to
grow rapidly in the United States, demand in other advanced countries is limited to high-income groups.
The limited initial demand in other advanced countries does not make it worthwhile for firms in those
countries to start producing the new product, but it does necessitate some exports from the United States to
those countries.
Over time, demand for the new product starts to grow in other advanced countries (e.g., Great Britain,
France, Germany, and Japan). As it does, it becomes worthwhile for foreign producers to begin producing
for their home markets. In addition, U.S. firms might set up production facilities in those advanced
countries where demand is growing. Consequently, production within other advanced countries begins to
limit the potential for exports from the United States.
As the market in the United States and other advanced nations matures, the product becomes more
standardized, and price becomes the main competitive weapon. As this occurs, cost considerations start to
play a greater role in the competitive process. Producers based in advanced countries where labor costs are
lower than in the United States (e.g., Italy and Spain) might now be able to export to the United States. If
cost pressures become intense, the process might not stop there. The cycle by which the United States lost
its advantage to other advanced countries might be repeated once more, as developing countries (e.g.,
Thailand) begin to acquire a production advantage over advanced countries. Thus, the locus of global
production initially switches from the United States to other advanced nations and then from those nations
to developing countries.
The consequence of these trends for the pattern of world trade is that over time, the United States switches
from being an exporter of the product to an importer of the product as production becomes concentrated in
lower-cost foreign locations.
PRODUCT LIFE-CYCLE THEORY IN THE TWENTY-FIRST CENTURY
Historically, the product life-cycle theory seems to be an accurate explanation of international trade
patterns. Consider photocopiers: The product was first developed in the early 1960s by Xerox in the
United States and sold initially to U.S. users. Originally, Xerox exported photocopiers from the United
States, primarily to Japan and the advanced countries of western Europe. As demand began to grow in
those countries, Xerox entered into joint ventures to set up production in Japan (Fuji-Xerox) and Great
Britain (Rank-Xerox). In addi tion, once Xerox’s patents on the photocopier process expired, other foreign
competitors began to enter the market (e.g., Canon in Japan and Olivetti in Italy). As a consequence,
exports from the United States declined, and U.S. users began to buy some photocopiers from lower-cost
foreign sources, particularly Japan. More recently, Japanese companies found that manufacturing costs are
too high in their own country, so they have begun to switch production to developing countries such as
Thailand. Thus, initially the United States and now other advanced countries (e.g., Japan and Great
Britain) have switched from being exporters of photocopiers to importers. This evolution in the pattern of
international trade in photocopiers is consistent with the predictions of the product life-cycle theory that
mature indus tries tend to go out of the United States and into low-cost assembly locations.
However, the product life-cycle theory is not without weaknesses. Viewed from an Asian or European
perspective, Vernon’s argument that most new products are developed and introduced in the United States
seems ethnocentric and increasingly dated. Although it may be true that during U.S. dominance of the
global economy (from 1945 to 1975), most new products were introduced in the United States, there have
always been important exceptions. These exceptions appear to have become more common in recent years.
Many new products are now first introduced in Japan (e.g., video-game consoles) or South Korea (e.g.,
Samsung smartphones). Moreover, with the increased globalization and integration of the world economy
discussed in Chapter 1, an increasing number of new products (e.g., tablet computers, smartphones, and
digital cameras) are now introduced simultaneously in the United States and many European and Asian
nations. This may be accompanied by globally dispersed production, with particular components of a new
product being produced in those locations around the globe where the mix of factor costs and skills is most
favorable (as predicted by the theory of comparative advantage). In sum, although Vernon’s theory may be
useful for explaining the pattern of international trade during the period of American global dominance, its

relevance in the modern world seems more limited.

Sách 3
Product life cycle
product life cycle theory A theory that accounts for changes in the patterns of trade over time by focusing on product life cycles.

In the 1960s, Raymond Vernon of Harvard and Seev Hirsch of Tel Aviv developed the product life cycle
theory, which was the first dynamic theory to account for changes in the patterns of trade over time. 7 Vernon
divided the world into three categories: (1) lead innovation nation (which, according to him, is typically the
USA), (2) other developed nations and (3) developing nations. Further, every product has three life cycle stages:
new, maturing and standardized. In the first stage, production of a new product that commands a price premium
will concentrate in the USA, which exports to other developed nations. In the second, maturing stage, demand
and ability to produce grow in other developed nations (such as Australia and Italy) so it is now worthwhile to
produce there. In the third stage, the previously new product is standardized (or commoditized). Therefore,
much production will now move to low-cost developing nations, which export to developed nations. In other
words, comparative advantage may change over the lifetime of a product.

This theory was first proposed in the 1960s, and some later events (such as the migration of PC production)
have supported its prediction. However, the theory has been criticized on two accounts. First, it assumes that the
USA will always be the lead innovation nation for new products. This was probably true in the immediate post
WWII period, but that was an exceptional period, as Vernon acknowledged already in 1978.8 For example, the
fanciest mobile phones are now routinely pioneered in Asia and Europe. Second, this theory assumes a stage-
by-stage migration of production that takes several years (if not decades). The reality of the 21st century,
however, is an increasing number of firms now simultaneously launch new products (such as the latest

electronic gadgets) around the globe.