Product Life Cycle Hypothesis

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 [Page 1317]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. Vernons hypothesis identifies four stages that the trade patterns go through.

• 1.
  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.
• 2.
  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.
• 3.
  Maturity: The industry contracts and concentrates—the lowest cost producer wins here. At this stage, foreign production is competitive in export markets.
• 4.
  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.

Vernons 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.

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