11. International product life cycle theory.
- raymond Vernon initially proposed the product life cycle theory for manufactured goods in the mid- 1960s.
- the product life cycle theory suggests that a innovating firm’s country will begin by exporting its product and later undertake foreign direct investment and eventually become its import.
- there are 3 stages of the international product life cycle:
// (1) new product,
// (2) maturing product, and
// (3) standardized product.
- as products become more mature, both the location of sales and production changes.
- stage 1: new product.
// the high purchasing power and demand of buyers in an industrialized country spur a company to design and introduce a new product concept. The demand for most new products tends to be based on non- price factors. Innovative firms can charge relatively high prices for new products, which is no need to look for low- cost production sites in other countries.
// the pioneering firms believe it is better to keep production facilities close to the market and to the firm’s center of decision making, given the predicted demand in the domestic market is uncertainty keeping production where initial research and development (r&d) occurred and staying in contact with customers allows managers to monitor buyer preferences and to modify the product as needed.
// while demand grows rapidly in innovating country, demand in other advanced countries is limited to high- income groups. Due to 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 stimulate some exports from the initiative firm’s country to those other advanced countries.
- stage 2: maturing product.
// overtime, demand for the new product starts to grow in other advanced countries. As it does, it becomes worthwhile for foreign producers to begin producing for their home markets.
// the innovating firms set up production facilities in those advanced countries where demand is growing. Consequently, production within other advanced countries begins to limit the potential for expects from the innovating country.
// near the end of the maturity stage, the product begins generating sales in developing nations.
- stage 3: standardized product.
// as the market in innovating country and other advanced nations matures, the product becomes more standardized, and price becomes the main competitive weapon. Cost considerations start to pressure companies to lower prices in order to maintain sales levels.
// producers based in advanced nations where labor costs are lower than the innovating country are now able to export to the innovating country and developing countries.
// as cost pressures become intense, the cycle by which the innovating country lost its advantage to other advanced countries will be repeated once more to developing countries beginning to get a production advantage over the advanced countries.
// as the market becomes more price- sensitive, the company begins searching aggressively for low- cost production based in development nations to supply a growing worldwide market.
// thus, the global production initially switches from the innovating country to other advanced nations, and then from those advanced nations to developing countries.
// as most production now takes place outside the innovating country, demand in the innovating country is supplied with imports from developing counters and other industrialized nations.
// the consequence of these trends for the pattern of world trade is that over time the us. Switches from being an exporter of the product to an importer of the product as production becomes concentrated in lower- cost foreign locations.