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Product Cycle Theory

The document summarizes the product life cycle theory, which explains how trade patterns change over time for a given product. It posits that a company will initially export a new product, then undertake foreign direct investment as the product matures through different stages: introduction and growth where exports increase, maturity with worldwide production and declining exports, and eventual decline where markets shift to developing countries. The theory suggests production moves away from the place of origin as a product becomes standardized globally over its lifecycle.

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Palak Sonam Paryani
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386 views10 pages

Product Cycle Theory

The document summarizes the product life cycle theory, which explains how trade patterns change over time for a given product. It posits that a company will initially export a new product, then undertake foreign direct investment as the product matures through different stages: introduction and growth where exports increase, maturity with worldwide production and declining exports, and eventual decline where markets shift to developing countries. The theory suggests production moves away from the place of origin as a product becomes standardized globally over its lifecycle.

Uploaded by

Palak Sonam Paryani
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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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

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