Product Life Cycle Hypothesis Essay ⋆ Business Essay Examples ⋆ EssayEmpire

Attempting to explain patterns of international trade, Raymond Vernon observed a circular phenomenon in the composition of trade between countries in the world market. Advanced countries, which have the ability and competence to innovate as well as high-income levels and mass consumption, become initial exporters of goods. However, they lose their exports initially to developing countries and subsequently to less-developed countries and eventually become importers of these goods. Vernon’s hypothesis was an attempt to advance the trade theory beyond the static framework of the comparative advantage of David Ricardo and other classical economists to explore hitherto ignored or unexplained areas of international trade theory such as timing of innovation, effects of scale economies, and the role of uncertainty and ignorance in trade patterns. His intent was not to propose a biological analogy such as is understood by the theory of product life cycle as commonly understood by marketing theorists.

Vernon’s product cycle is a macro-level attempt to generalize patterns of trade between nations based on empirical data. It offers innovation and economies of scale as predominant explanatory variables. Vernon hypothesized a circular pattern of trade composition that occurs between trading partners in different stages of economic growth. Vernon’s hypothesis identifies four stages that the trade patterns go through.

Introduction: New products are introduced to meet local or national needs, and new products are first exported to similar countries, that is, 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. This is the traditional idea of the home country as the producer of first-of-a-kind products and the exporter of products to countries with similar needs, preferences, and incomes.
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. At this stage foreign production starts.
Maturity: The industry contracts and concentrates—the lowest cost producer wins here. At this stage, foreign production is competitive in export markets.
Decline: Poor countries constitute the only markets for the product. Therefore, almost all declining products are produced in lesser-developed countries at this stage, import competition begins.

Vernon stresses degree of standardization as evidence of product maturation: a mature product typically may become standardized across international markets.

Vernon’s product cycle model is fundamentally production oriented and based on industrial goods in manufacturing sectors, virtually ignoring trade in intangibles such as services or brand names. While it provides a broad, long-term macro frame of reference, it is not particularly valuable in making micro level and short-term managerial decisions in firms. His approach is more likely to provide insights for national policy formulation at macro levels.

Cornelia Navari acknowledges the theory’s important implications for thinking about processes of industrial growth in a one-world-system in which industrialization was, at least in part, an autonomous, dynamic process, not a product of special talents, and in which the less developed depended on the more developed to develop and simplify technology, allowing them to evade the costs of innovation, while the more developed were pushed by the less developed into new product innovation, allowing them to stay in the advance of industrial growth.

Vernon’s hypothesis also had its critics. Edward K. Y. Chen and Peter Drysdale argue that product life cycle theory has been called into question by four main forces: the narrowing of the income gap between countries to the extent that there is no longer a hierarchical sequence with respect to investment location, the shortening of the product life cycle because of the growing emphasis on technology as the basis for competition, the compression of time to market for competitive advantage, and the rising cost of investment to create new technologies and product innovations. Those firms that are the technological leaders and that are first to get their products onto the market set the rules of the game, establish the critical standards, and thus define the overall terms of competition. Certainly, rising investment costs have forced firms to develop and produce first-of-a-kind products outside the home market and often to sell first of the kind conterminously in many markets to achieve first mover advantage and delay competitive response.

Other critics have found difficulty with Vernon’s hypothesis as an explanation of growth after World War II on grounds such as the theory’s inability to explain no export-substituting investments, the appearance of no standardized products being produced abroad, and the case of carefully differentiated products to suit the local market. Christos Pitelis and Roger Sugman point out another criticism of the theory: the decline in the rate of growth of demand in the maturity phase can be avoided through unrelated diversification to products at a different phase of their cycle.

Bibliography:

Edward K. Y. Chen and Peter Drysdale, Corporate Links and Foreign Direct Investment in Asia and the Pacific: Pacific Trade and Development Conference (Harper Collins, 1995);
Debra Johnson and Colin Turner, International Business: Themes and Issues in the Modern Global Economy (Routledge, 2003);
Ram Narasimhan, Soo Wook Kim, and Keah Choon Tan, “An Empirical Investigation of Supply Chain Strategy Typologies and Relationships to Performance,” International Journal of Productions Research (v.46/18, 2008);
Cornelia Navari, Internationalism and the State in the Twentieth Century (Routledge, 2000);
Evan Osborne, “Rethinking Foreign Aid,” The Cato Journal (v.22, 2002);
Christos N. Pitelis and Roger Sugden, The Nature of the Transnational Firm (Routledge, 1991).

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