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Product life-cycle theory


The product life-cycle theory is an economic theory that was developed by Raymond Vernon in response to the failure of the Heckscher-Ohlin model to explain the observed pattern of international trade. 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. A commonly used example of this is the invention, growth and production of the personal computer with respect to the United States.

The model applies to labor-saving and capital-using products that (at least at first) cater to high-income groups.

In the new product stage, the product is produced and consumed in the US; no export trade occurs. In the maturing product stage, mass-production techniques are developed and foreign demand (in developed countries) expands; the US now exports the product to other developed countries. In the standardized product stage, production moves to developing countries, which then export the product to developed countries.

The model demonstrates dynamic comparative advantage. The country that has the comparative advantage in the production of the product changes from the innovating (developed) country to the developing countries.

Raymond Vernon divided products into three categories based on their stage in the product life cycle and how they behave in the international trade market:


There are four stages in a product's life cycle in respect to the Product Life Cycle Theory:

The location of production depends on the stage of the cycle.


This is where the new product is introduced to the market, the customers are unaware about the product. In order to create demand, investments are made with respect to consumer awareness and promotion of the new product in order to get sales going. At this stage, profits are low and there are only few competitors. When more items of the product are sold, it enters the next stage automatically.

For example, a new product invented in the United States for the local consumers will first be produced in the United States because that is where demand is located, and these firms will wish to stay close to the market to detect consumer response to the product. The characteristics of the product and the production process are in a state of change during this stage as firms seek to familiarize themselves with the product and the market. No international trade takes place.


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