Page 44 - DMGT545_INTERNATIONAL_BUSINESS

Unit 2: Theories of International Trade

notes
figure 2.4: trade Patterns and Product cycle theory
United States
Consumption
Imports
Exports

Production

t 0 t 1 t 2 t 3 t 4 t 5 Time

Other Advanced Countries

Production
Exports
Consumption

Imports

Time
t 0 t 1 t 2 t 3 t 4 t 5
Less Developed Countries

Production
Exports
Consumption
Imports

t 0 t 1 t 2 t 3 t 4 t 5 Time
New Product Maturing Product Standardized Product

Historically, the product life cycle theory provides an accurate explanation of international trade
patterns. Consider photocopiers; the product was developed in the early 1960s by Xerox in the
United States and sold initially to US users. Xerox exported photocopiers from the United States,
primarily to Japan and the advanced countries of Western Europe. As demand began to grow in
those countries, Xerox entered in to joint ventures to set up production in Japan (Fuji-Xerox) and
Great Britain (Rank Xerox). In addition, once Xerox’s patents on the photocopier process expired,
other foreign competitors began to enter the market (e.g., Canon in Japan, Olivetti in Italy). As a
consequence, exports from the United States declined, and US users began to buy some of their
photocopiers from lower-cost foreign sources, particularly from Japan. More recently, Japanese
companies have found that their own country is too expensive to manufacture photocopiers, so
they have begun to switch production to developing countries such as Singapore and Thailand.
As a result, initially the United States and now several other advanced countries have switched

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