Vernon’s Product Life-Cycle

1.0 Introduction

The U.S. trade date of mid 20th century indicated that the U.S. was always an exporter of new products with a monopoly position initially, later overseas production began to displace American exports in some markets, and then foreign manufactured products became competitive in overseas markets, further reducing American exports, finally foreign goods were competitive in the U.S. (Louis&Wells, 1969). The trade flow was influenced by innovations and technical update along with the time running on. Based on the trade flow, Vernon developed the theory of international product life cycle theory in 1966. Today, the theory has been diffusely implemented by MNEs throughout the world. The theory claims that a company should locate its production in the original country of invention (i.e. U.S.) during the growth of manufacturing process, and then the company moves its production to other low developing countries gradually when the product has been adopted and used in the world markets. The company will start from offering the domestic market, and then exporting its new product to other markets of advanced countries, finally importing its product back to those markets from own foreign based assembly or manufacturing facilities. However, the world’s economy is a very important factor for making the theory (Vernon, 1966). Today, international business came into a new century, and the whole world economy has been changed. Hence, our international businessmen have the obligation to evaluate the continuing utility of Vernon’s product life-cycle theory of the MNE. This essay will explore and understand the utility of the theory at first. And then, it will apply relevant case-studies and other data to evaluate the continuing utility of the theory for MNEs.

2.0 The utility of product life cycle theory for MNEs

The product life cycle theory implicates the application of international trade pattern and where locates the production to MNEs within its three phases which new product, maturing product, and standardized product (Vernon, 1966). Therefore, below paragraphs will identify the rationality and logic of these implications for each phases of product life cycle.

пЃ¬ Phase I: New product

In the early stage of introduction of a new product, companies are better to be non-multinational in its production and sales (Vernon, 1966). Thus, companies should locate production in the original country of invention (Vernon, 1966). This is because the new product is likely to be non-standardised in this early stage, which means they have not decided the design of dominant product yet. And, the process of production requires a great deal of coordination and high flexibility at the early stage. Hence, Manufacturers are particularly concerned with the degree of freedom they have in changing their inputs at this stage (Vernon, 1966). However, developed countries could support manufacturers with the highest degree of freedom. For example, there are over seventy percentages of acquainted workers in developed economies; and many factory workers use their brains more than their hands (Rooney et al, 2005). Of course, companies also need to be concern the cost of inputs. Although companies may be easy to obtain cheaper labours in other low developed countries, but the consideration of cost is meaningless if those labours can not implement our orders. Moreover, manufacturers highly require the swift and effective communication to manufacturers for exchanging information with customers, suppliers and competitors at the early stage (Vernon, 1966). Due to the infrastructure of developed countries advanced, companies at the early stage are not hesitating to locate their production there by this second reason. Relating above two factors, we can that efficient production heavily relies on information and knowledge at the early stage. Accordingly, the knowledge intensity needs to be mention. Vernon (1966) said that the demand for different types of inputs such as knowledge/information and labour skills changes during the life of a product. Let’s take a look at figure 1, which well expresses the knowledge intensity needed for production during the process of the product life cycle. We can see that the knowledge-intensity tend to be high in the early stage of the product life cycle, and it decreases over time (Johansson & Karlsson, 1987). Thus, companies at the early stage are expected to require more qualified labours than other phases of a product life cycle. The last locational implication is that the price elasticity of demand for the output of individual firm is comparatively low at the early stage of development (Vernon, 1966). This is because of products typically requires a large amount of skilled labour and financial capital, both significant in research and development as well