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Product Cycle Theory
Product Cycle Theory
- 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
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