International Product Cycle Definition
The international product cycle is a model that patterns international trade of products. It focuses on the idea of primary benefit and production characteristics. As a product reaches mass production, the production process tends to shift outside of the creating country. The country that generates a product idea often becomes the consumer of that product.
A Little More on What is the International Product Cycle
Following a failure by Heckscher-Ohlin model to adequately illustrate the pattern of international trade, Raymond Vernon came up with the Product Life Cycle theory. Raymond Vernon applies two methods in coming up with his theory, the model of labor-saving and capital-using products that cater to high-income groups.
The author uses the US to illustrate the changes in the trade market. Products that are produced and consumed at a new stage are from the US. However, when production reaches the point of mass volume production, most techniques used will be foreign. At the third stage of production, shifts to the developing countries.
In summary, this model shows the comparative changes in the trade market. The country that benefits most shifts from a country that comes up with the idea to the country where the actual production takes place.
According to Raymond Vernon, products can be categorized into three stages depending on product life and trade behavior in the international trade market.
- Standardized products,
- New Products
- Maturing Products.
The Product Cycle Theory then introduces five stages of production: Introduction, Growth, Maturity, Saturation, Decline.
Stage 1: Introduction
The first for any producer is to promote a new product in the market. At this stage customers are not aware of the product; hence sales and profits will below. The competition will also be low in the market.
Stage 2: Growth
At this stage, the popularity of the product in the market will have increased. The production company has to increase its promotional budget. The number of sales will also increase hence the cost of production decreases.
Stage 3: Maturity
Compared to the growth stage, the increase in the sale volume and demand level is relatively low at this stage. Many consumers are aware of the product and finding new customers is difficult. Even though the number of competitors have increased at this stage, business is still juicy at this stage; everything seems to be favorable to the producers. Foreign demand will also increase at this stage especially in the developed countries. The increase in foreign demand will see the producer country setting up similar companies in foreign countries.
Stage 4: Saturation
At this stage, competing companies will have taken some portion of the market. Producer companies do their best to attract new customers, but there will neither be an increase nor decrease in the sales volume at this stage.
Stage 5: Decline
At this stage, the product begins a downward decline in terms of sales which eventually affects the profit margins. The economic viability of continuing with the business declines drastically. At this point, the company can choose to discontinue the production or sell the company. Another possible scenario is for the production company to shift its business to a developing country.
Academic Research on International Product Cycle
- The international product cycle and globalization of production, Lai, E., & Federal, S. (2008). This article looks at the globalization of production in relation to the international product cycle.
- Foreign Investment and Asia’s, Particularly China’s, Rise in the Television Industry: The International Product Life Cycle Reconsidered, Gao, Z., & Tisdell, C. (2005). Journal of Asia-Pacific Business, 6(3), 37-61. The article illustrates five international investment cycles. It also looks at waves and direct investment in the TV industry. The two models of investments can be looked at using the international product cycle of Vernon’s model. The model contributed to the rapid rise of the television industry in Asian countries. International product cycle theory ignored FDI in Asian countries.
- International investment and international trade in the product cycle, Vernon, R. (1992). In International Economic Policies and their Theoretical Foundations (Second Edition) (pp. 415-435).
- The product cycle hypothesis in a new international environment, Vernon, R. (1979). Oxford Bulletin of economics and statistics, 41(4), 255-267. The writer looks at the product cycle hypothesis a new international environment.
- Test of a product cycle model of international trade: US exports of consumer durables, Wells Jr, L. T. (1969). The Quarterly Journal of Economics, 152-162. The article looks at factors such as a test of the product cycle model of international trade and US exports of consumer durables.
- The globalization of technology: what remains of the product cycle model?, Cantwell, J. (1995). Cambridge Journal of Economics, 19, 155-155. The article looks at the hypothesis of innovation that is located in the parent company’s home country. In the US, this hypothesis is rejected by evidence drawn from 100 years of official data. In the second hypothesis technology, leaders lead the international dispersion. Technology leaders have been ahead for the last 20 years instead of globalization taking center stage.
- Intellectual property rights, licensing, and innovation in an endogenous product-cycle model, Yang, G., & Maskus, K. E. (2001). Journal of International Economics, 53(1), 169-187. Innovation and licensing are processes that require resources. This article looks at the product cycle and its effects on Intellectual Property Cycle incentive firms in the South. Having a strong IPR not only reduces the cost of licensing contracts but also increases the licensor’s rent share. Through all this, innovation and technology will rise. Strong IPRs effects on wages between region are not clear.
- A product life cycle for international trade?, Wells Jr, L. T. (1968). The Journal of Marketing, 1-6. It is important to understand the pattern of the international product cycle since many products’ patterns are predictable in international trade. Through these companies will come up with improved policies which will lead to improved profit margins.
- The Product Cycle Model of International Trade—a Multi‐country Cross‐section Analysis, Hirsch, S. (1975). Oxford Bulletin of Economics and Statistics, 37(4), 305-317. The author looks at a multi-country Cross-section analysis of the Product Cycle Model of International Trade.
- International product life cycle: a reassessment and product policy implications, Ayal, I. (1981). The Journal of Marketing, 91-96. The product life cycle examines the international trade pattern using the US market as a case study. It is one of the best theories that explain the international trade pattern. The applicability of this theory uses export and import patterns of the US and Israel. The study helped to come up with the marked deviation and in planning the international market.
- The product cycle and the world distribution of income A reformulation, Lai, E. L. (1995). The product cycle and the world distribution of income A reformulation. Journal of International Economics, 39(3-4), 369-382.
- A study conducted in the North and South Korea shows that an oversupply of unskilled labor in a country leads to a decline in relative wage. An oversupply of skilled labor, on the other hand, leads to an increase in relative wage. Even though Grossman-Helpman’s and Krugman’s models are related, both are unique in a special way.