Product Cycle Theory

Module 3 – Trade Theories

- Shikha Malhotra
 The product life-cycle theory is an economic theory that was developed by Raymond Vernon.

 The intent of his International Product Life Cycle model (IPLC) was to advance trade theory
beyond David Ricardo’s static framework of comparative advantages.

 The product life cycle - explain how trade patterns change overtime.

 This trade theory holds that a company will begin by exporting its product and later undertake
foreign direct investment as the product moves through its lifecycle.

 As products mature, both location of sales and optimal (Ideal / best) production changes

 Affects the direction and flow of imports and export

 Globalization and integration of the economy makes this theory less valid
 The International Product Life Cycle
Introduction Early Late Decline
and Growth Maturity: Maturity
Stages:
Developing
MNC MNC Moves Country Developing Country
Manufactures Production to Competitor Markets Remain Viable
Product in Developing Exports Target Markets for
Developed Product
Country; MNC; MNC Home
To MNC Home
Countries; Begins Country; Country Market Is
Exports to Importing to Competes Diminishing
Developing Home with MNC
Countries Country Imports

Sales

Time
 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
 Stage 1: Introduction

 New products are introduced to meet local (i.e., national) needs, and
new products are first exported to similar countries, countries with
similar needs, preferences, and incomes.
 (E.g., the IBM PCs were produced in the US and spread quickly
throughout the industrialized countries.)
 Stage 2: Growth
Increase in sale of new product attracts competitors.
Increase of demand in advanced countries; exports –
increase
 further innovation in product, cost reduction
Shift manufacturing to foreign countries
 Stage 3: Maturity

 World wide production ;Export decline.

 Large scale production
 Low cost production – shift manufacturing to
developing countries
 Technology become standard
 Stage 4: Decline

 Markets for the product concentrate in less developed countries

as the customers in advanced countries shift their demand to
further new products –thus production in developing countries

 Original innovator becomes importer