5/23/2018 Discuss the Product Cycle Theory as an Explanation for Why Comparative Advanta...

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Discuss the product cycle theory as an explanation for why comparative advantage in

knowledge intensive products shifts rapidly .

THE PRODUCT LIFE CYCLE THEORY

A) Raymond Vernon initially proposed the prod!t li"e#!y!le theory in the mid#$%&'s( A!!ordin

to the theory as prod!ts matre *oth the lo!ation o" sales and the optimal prod!tion lo!ation

+ill !hane a""e!tin the "lo+ and dire!tion o" trade(

,) A!!ordin to Vernon- early in the li"e !y!le o" a typi!al ne+ prod!t- +hile demand is startin

to ro+ in the United .tates- demand in other ad/an!ed !ontries is limited to hih#in!ome

rops( The limited initial demand in other ad/an!ed !ontries does not ma0e it +orth+hile "or

"irms in those !ontries to start prod!in the ne+ prod!t- *t it does ne!essitate some e1ports

"rom the United .tates to those !ontries( O/er time- ho+e/er- demand "or the ne+ prod!t

starts to ro+ in other ad/an!ed !ontries( As it does- it *e!omes *ene"i!ial "or "orein

prod!ers to *ein prod!in "or their home mar0ets( In addition- U(.( "irms miht set p

prod!tion "a!ilities in those ad/an!ed !ontries +here demand is ro+in( Conse2ently-

prod!tion +ithin other ad/an!ed !ontries *eins to limit the potential "or e1ports "rom the

United .tates(

C) As the mar0et in the United .tates and other ad/an!ed nations matres- the prod!t

*e!omes more standardi3ed- and pri!e *e!omes the main !ompetiti/e +eapon( One reslt is

that prod!ers *ased in ad/an!ed !ontries +here la*or !osts are lo+er than the United .tates

miht no+ *e a*le to e1port to the United .tates(

D) I" !ost pressres *e!ome intense- the pro!ess miht not stop there( The !y!le *y +hi!h the

United .tates lost its ad/antae to other ad/an!ed !ontries miht *e repeated on!e more as

de/elopin !ontries *ein to a!2ire a prod!tion ad/antae o/er ad/an!ed !ontries(

E) The !onse2en!es o" these trends "or the pattern o" +orld trade is that the United .tates

s+it!hes "rom *ein an e1porter o" the prod!t to an importer o" the prod!t as prod!tion

*e!omes more !on!entrated in lo+er#!ost "orein lo!ations(

E/alatin the Prod!t Li"e Cy!le Theory

F) 4hile the prod!t li"e !y!le theory a!!rately e1plains +hat has happened "or prod!ts li0e

photo!opiers and a nm*er o" other hih te!hnoloy prod!ts de/eloped in the United .tates in

the $%&'s and $%5's- the in!reasin lo*ali3ation and interation o" the +orld e!onomy has

made this theory less /alid in today6s +orld(

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