Product life cycle theory of fdi. Product life cycle theory of Foreign Direct Investment? 2022-10-27

Product life cycle theory of Foreign Direct Investment?

It can also be said that many new products are now produced in advanced economies such as Japan as evidence shows. At the Doha Ministerial it was agreed that the WTO would set up a working group to examine the relationship between Trade and Transfer of Technology and to report findings to the Fifth Session of the Ministerial Conference. A certain degree of standardisation takes place and the demand of the products will start to appear elsewhere. This is produced either by competitors in lesser developed countries or innovator has developed into multinational manufacturer by its foreign based production facilities. Labor can start to be replaced by capital. He looked at how US companies developed into Multinational Corporations at a time when these firms dominated global trade and per capita income in the US was by far the highest of all developed countries. This can lead to the underdeveloped countries offering competitive advantage for the location of production and finally they will become exporters.

Product Life Cycle (PLC) Theory

The producers internationally based in advanced countries then have the opportunity to export back to the US. The evidence suggests that the more standardised the product becomes the more likely the location of production will change. A certain degree of standardisation takes place and the demand of the products will start to appear elsewhere. Thus, in order to compete with the rival firms, the innovator decides to set up a production unit in the host country itself to eliminate transportation costs and tariff. The model can be used for product planning purposes in international marketing. Vernon's IPLC The theory Vernon's International Product lifecycle 1966 is based on the experience of the US market. Vernon himself observed and found that a large proportion of the world's new products came from the US for most of the 20th century.

These are price elasticity, the communication throughout the industry and also the location of the product itself. In additional, the model assumed that integrated firms begin producing in one nation, followed by exporting and then building facilities abroad. These kind of changes in barriers such as sharing technology can affect the normal process of the product lifecycle as some technological countries may now be forced to share technology with the LDC's to promote healthy competition between them. At the same time there is also evidence that unstandardised products will maintain there location in more phosphorus locations. The nature of the goods has implications. The production is also likely to start locally in order to minimize risk and uncertainty; in a location in which communication between the markets and the executives directly concerned with the new product is swift and easy, and in which a wide variety of potential types of input that might be needed by the production units are easy to come by. The key issue was essentially the difference of approach to technology transfer taken by developed and developing countries.

However, with changes in international environment, different stages of the product cycle did not necessarily follow in the same way. Some see technology transfer as taking place implicitly through routine trade relations, and especially through foreign direct investment FDI - countries should therefore create the conditions in which FDI can take place stable regulatory environment, intellectual property protection etc and technology will follow trade. As the demand starts to increase, the overseas markets then start producing for themselves generally at a cheaper labour and overall cost. The developments of the life cycle are once again changing. The nature of the goods has implications. The second stage is known as maturing product stage. The worlds trading importing and exporting has changed immensely over the years.

Technology transfer has been an issue in some parts of the WTO such as TRIPS , and before that in the GATT and in a great many other international negotiations especially environmental negotiations for many years. The product cycle theory clearly explains the early Post —Second World War expansion of firms from developed countries like US and UK to other countries. Other weaknesses of this theory can be that Vernon's view is ethnocentric. Technology transfer has been an issue in some parts of the WTO such as TRIPS , and before that in the GATT and in a great many other international negotiations especially environmental negotiations for many years. How we bridge this gap is the key to a positive outcome. Vernon's international product life cycle is used to attempt to explain why this happened.

These kind of changes in barriers such as sharing technology can affect the normal process of the product lifecycle as some technological countries may now be forced to share technology with the LDC's to promote healthy competition between them. This leads to the low cost producers becoming exporters. This leads to the low cost producers becoming exporters. The final weakness of this theory is that this study was carried out in the 60s. The producers internationally based in advanced countries then have the opportunity to export back to the US. Vernon's international product life cycle is used to attempt to explain why this happened. In general, it is difficult to determine the phase of a product life cycle.

Others would prefer a more explicit approach with companies being pushed into transferring technology rather than pulled to a suitable location for FDI on confessional terms. At this stage the demand for the new product in other developed countries grows substantially and it becomes price elastic. Income differences between advanced nations had dropped significantly, competitors were able to imitate a product at much higher speed than previously envisioned and MNCs had built up an existing global network of production facilities that enabled them to launch products in multiple markets simultaneously. The key issue was essentially the difference of approach to technology transfer taken by developed and developing countries. As the demand starts to increase, the overseas markets then start producing for themselves generally at a cheaper labour and overall cost.

The producers internationally based in advanced countries then have the opportunity to export back to the US. Rival firms from the home country itself or from other developed countries put up stiff competition. Secondly, new product development in a country does not occur by chance; a country must have a ready market, an able industrial capability and enough capital or labor to make a new product flourish. This can lead to the underdeveloped countries offering competitive advantage for the location of production and finally they will become exporters. The relative simplicity of the model makes it difficult to use as a predictive model that can help anticipate changes. Based on data obtained from US corporate activities, Vermon 1966 tried to explain when, why and where foreign direct investment took place.