Vernon’s International Product Life

Cycle: Development and Context

History of Vernon’s Product Life Cycle
The product life cycle theory of international trade was
created in 1966 by Raymond Vernon, who built it upon the
Posner’s imitation lag hypothesis, which states that trade
focuses on the development of new products. This theory
explains that a country can develop into a successful
exporter by constantly improving the innovation process.
Vernon develops the product life cycle theory in a way that
would solve the delay that would occur in the dispersion of
technology. Furthermore the theory clarifies a few other
assumptions of traditional trade theory (Heckscher-Ohlin
model, Ricardo’s theory) and is more comprehensive in its
conduct of trade patterns. (Posner 1961; Vernon 1966)
Vernon’s Life cycle theory investigates the impact on
international trade caused by the average new product’s life
cycle. The United States (US) failure, one of the main
countries to do so, to match empirically to Heckscher-
Ohlin’s model was part of the reason why Vernon created
the theory. The emphasis in the theory is put on
manufactured goods, and the PLC theory commences with
the creation and progress of a “new product” in the U.S. The
new product will be based upon its two main features:
accommodating the high-income demands (The U.S. is
considered to be a high-income focused country) and
fulfilling the condition to be utilizing its capital and being
labour- saving in its production process. Furthermore the
product in itself could be labour-saving for the customer .e.g.
white goods such as washing machines. The United States
being viewed as a labour – sparse country could be the
reason for mentioning the prospective labor-saving character
of the production process. The probability of being able to
conserve insufficient factor of production within the
production process would be emphasized by the
technological change. (Dung, Wright.Edu Website)
The product life cycle theory was later on modified by
Vernon in 1979. The main modification involves the site,
where the good was produced when it was first introduced.
The knowledge of the environment surrounding the U.S., the
subsidiaries and divisions across the world multinational
firms have today , are more inclusive than they were at the
time when Vernon first developed the product life cycle
theory in 1966. Hence the product’s first creation may occur
in a location outside of the U.S. Furthermore the US is not
the only country with high-income demands as other
developed countries now enter that equation, which would
have not been considered in 1966, hence providing for high-
income demands cannot be inclined towards the U.S.
demands only. However the prominent characteristics of
economies of scale, foreign direct investment, and the
dynamic comparative advantage still differentiates Vernon’s
theory from the Heckscher-Ohlin model. (Vernon, 1979)
Product Life Cycle Stages
There are three stages according to Vernon: new product
stage, maturing product and standardized product.
New Product Stage:
In this stage the US dominates the export of the product
because of its ‘market size, ready acceptance of innovations,
R&D resources and well developed marketing information
systems’ (Ayal, 1981 p 1). The reason why the U.S. is
highlighted as the more dominant country is because
according to Vernon, even though entrepreneurs in
advanced countries can secure access to knowledge, not all
of them can apply the acquired knowledge to generate new
products (Vernon, 1966). According to Vernon, the U.S.
market “ offers certain unique kinds of opportunities to those
who are in a position to be aware of them” (Vernon, 1966, pp
192).
Within the first stage, production will also start locally to
minimise risk and uncertainty as well as to encourage
communication between the markets. The New York
Metropolitan Region Studies of the 1950’s support claims
that when introducing a new product where the production
process is not standardised, having production done locally
is usually the norm. This is the case because producers
want flexibility when it comes to changing the input of the
product. Also because there is uncertainty about the
dynamics of the market, there
needs to be “ swift communication” (Vernon, 1966, pp195)
between the producer and consumers, suppliers and
competitors.
Therefore the reason for US as the choice of location for
production goes beyond the cost-benefit analysis. Consider
US companies such as Xerox and Apple who started
production in the US not to minimise cost but to meet the
market needs as well as minimise risk.
Maturing Product:
As the product starts to mature, a certain degree of
standardisation takes place and the demand for the product
will start to appear elsewhere thus causing an increase in
exports to other countries. This does not mean there is no
product differentiation because companies still want to avoid
a price competition so they intensify their product
differentiation. Vernon (1966) gives the example of radios
which have a general acceptance standard but production
differentiation still occurs in the form of “clock radios,
automobile radios, portable radios and so on” (Vernon, 1966,
pp.196).
The concern for production costs increases because there is
no longer a need for flexibility as production becomes
standardised. “Even if increased price competition is not yet
present, the reduction of the uncertainties surrounding the
operation enhances the usefulness of cost projections and
increases the attention devoted to cost” (Vernon, 1966,
pp.196). At this stage, US producers consider local
production in importing countries if the marginal production
cost plus the export cost is higher in the US. For example,
the elevator manufacturers Otis choosing to manufacture
abroad was mainly due to the
high cost involved when exporting assembled elevators to
long-distance locations. (Vernon, 1966)

Standardised Product:
The principal market has become saturated and the firm
standardises the product by focusing more on cost efficiency
rather than product differentiation. Therefore less developed
countries may offer the producer competitive advantage in
the form of cheaper labour costs. The Heckscher-Ohlin
theorem is in support of this because it suggests that
products exports by less developed countries are labour
intensive products. Local companies in the developing
countries then get first hand information about the production
of the product so they are able to copy and sell the product.
(Vernon, 1966)
The demand for the original product in the US dwindles from
the arrival of new products. Whatever market is left is shared
between competitors who are predominantly foreign. MNC’s
will internally transfer production to low labour cost countries,
because while capital and technology are flexible, labour is
not.

Changes to the Global Environment

Vernon expanded on his paper by identifying changes in the
global market that has affected his original findings.

He identified changes in the process of innovation, export

and investment. He gives the example of the chemical and
electronics industry choosing to spread their network of
subsidiaries rather than being limited to their home markets.
Evidence of this is seen in the decrease in the “interval of
time between the introduction of any new product and its first
production in a foreign location” (Vernon, 1979, pp.194).
Other changes that Vernon identifies are achievement of
similar income level of the USA by other countries as well as
the relative labour costs, which the USA previously had. “In
1949, for instance, the per capita income of Germany and of
France was less than one-third that of the USA; but by the
latter 197O's, the per capita income of all three countries
was practically equal”(Vernon, 1979, pp.195). Differences in
factor costs further decreased when the USA started to
import raw material needed for the production of its goods.
(Vernon, 1979)

Strengths of the IPLC Theory:

The model explains how a product may emerge as a
country’s export and work through the life cycle to ultimately
become an import. The model can be considered a useful
tool for companies who are beginning their international
expansion for understanding how the competitive

“playground” they operate in changes over time. Also, it can

be used for product planning purposes in international
marketing. (Morgan, 1997;Deardorff, 2000)
The model was widely adopted as the explanation of the
ways certain industries, such as the textile industry, migrated
across borders over time. The 1960s witnessed significant
technological progress and the rise of the multinational
enterprise, which resulted in a call for new theories of
international trade to reflect changing commercial realities
(Leontief, 1966). At that time, the product life cycle theory of
international trade was found to be a useful framework for
explaining and predicting international trade patterns as well
as multinational enterprise expansion. (Morgan,
1997;Deardorff, 2000)
The theory has proved to be valid as empirical evidence
shows. (tele- transmission equipment industry in the post-
war years). The model has been best applied to consumer-
orientated physical products based on a new technology -
when the products functionality was more important to
consumer than the cost. (Morgan, 1997)
Conclusion
However Vernon’s product life cycle does have its
weaknesses. The new products developed in the U.S.
according to Vernon’s argument, from a European or Asian
perspective are rather ethnocentric. New products may have
been introduced in the U.S during its ascendancy of the
global economy for the period of 1945 to 1975, however now
many new products are being introduced in many other
developed countries. Furthermore now that globalisation and
integration is increasing between countries, new goods are
launched simultaneously in many different nations.
Moreover, with globalisation, the production of new goods
has been transferred to many under developed countries,
where labour and factory costs are lower. Hence, while
Vernon’s product life cycle theory is valuable for the
explanation of the period, when America’s successfully
dominated over the international trade, it has little application
in the world of today. (Hill, 2009)

Reference:
Ayal, I. (1981) “Life Cycle: A Reassessment and Product
Policy Implications” Journal of Marketing Vol. 45 pp. 91-96.
Deardorff, Alan V. (2000). “Market Access for Developing
Countries.” Processed.
Dung, T. (2005). The Product Cycle Theory[online].
Available
from:http://www.wright.edu/~tdung/product_cycle.htm
[Accessed 2 Nov 2011].
Hill, C. W. (2009). “International Business: competing in the
global marketplace” (7th Edition ed.). Boston: McGraw-Hill
Irwin
Morgan, R. E. and Katsikeas, C. S. (1997) “Theories of
international trade, foreign direct investment and firm
internationalization: a critique” Management Decision Vol
35 (1) pp. 68–78
Mullor-Sebastian, A.(1983) ”< /span>The product life cycle
theory: Empirical evidence” Journal of International Business
Studies Vol 14, pp. 95
Posner M. V.(1961), “International Trade and Technical
Change”, Oxford Ecorumiic Papers, October, pp. 323-341
Vernon, R (1966) “International Investment and International
Trade in the Product Cycle”, Quarterly Journal of Economics,
May, pp. 190-207
Vernon, R (1979) “ The Product Cycle Hypothesis in a
New International Environment” Oxford Bulletin of
Economics & Statistics Vol 41(4) pp 255-67