Page 43 - DMGT545_INTERNATIONAL_BUSINESS

International Business

notes As competitors increase their pressures on price, the innovating firm faces critical decisions on
how to maintain market share. Vernon argues that the firm faces a critical decision at this stage,
either to lose market share to foreign-based man ufacturers using cheaper labour or to maintain
its market share by exploiting the comparative advantages of factor costs by investing in other
countries. This is one of the first theoretical explanations of how trade and investment become
increasingly intertwined.

stage 3: the standardized Product

In this final stage, the product is completely standardized in its manufacture. Thus, with access
to capital in world capital markets, the country of production is simply the one with the cheapest
unskilled labour. Profit margins are thin and competition is fierce. The product has largely run
its course in terms of profitability for the innovat ing firm.
The country of comparative advantage therefore, shifts as the technology of the product’s
manufacture matures. The same product shifts in its pro duction location. The country producing
the product during that stage enjoys the benefits of net trade surpluses. But such advantages are
fleeting, according to Vernon. As knowl edge and technology continually change, so does the
com parative advantage of the producer country.

2.6.2 trade implications of the Product cycle theory

Product cycle theory shows how specific products were first produced and exported from one
country but, through product and competitive evolution, shifted their location of production and
export to other countries overtime. Figure 2.4 illustrates the trade patterns that Vernon visualized
as resulting from the maturing stages of a specific product cycle. As the product and the market
for the product mature and change, the countries of its production and export shift.

The product is initially designed and manufactured in the United States. In its early stages
(from time t to t ), the United States is the only country producing and consuming the product.
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Production is highly capital-intensive and skilled-labour inten sive at this time. At time t , the
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United States starts exporting the product to other advanced countries. These countries possess
the resources to purchase the product in its still. New Product Stage, in which it is relatively
high priced. These other advanced countries also commence their own production at time t but
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continue to be net importers. A few exports, however, do find their way to the less developed
countries at this time as well.
As the product moves into the second stage, the Maturing Product Stage, production capability
expands rapidly in the other advanced countries. Competitive variations (products) begin to
appear as the basic technology of the product becomes more widely known, and the need for
skilled labour in its production declines. These countries eventually also become net exporters
of the product near the end of the stage (time t ). At time t , the Less Developed Countries begin
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their own production, although they continue to be net importers. Meanwhile, the lower cost of
production from these growing competi tors turns the United States into a net importer by time
t . The competitive advantage for production and export is clearly shifting across countries at
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this time.
The third and final stage, the Standardized Product Stage, sees the comparative advantage of
production and exports shifting to the less developed countries. The product is now a relatively
mass-produced product that can be made with increasingly less-skilled labour. The United States
continues to reduce domestic pro duction and increase imports. The other advanced countries
continue to produce and export, although exports remain at peak as the less developed countries
expand production and become net exporters themselves. The product has run its course or life
cycle in reaching time t .
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