Advantages Of Product Life Cycle Theory

Throughout history, a trend can be witnessed in the production of goods subject to international trade. Though the Heckscher–Ohlin (H-O) model is useful in predicting what a country is likely to produce, export, and import, it fails to explain how and why production of good is likely to switch from an exporting country to the importing country. Thus arose the Product Life Cycle (PLC) theory to address this pattern. In essence, the PLC theory states that production begins at the point of the product’s invention with the good being exported to foreign markets. Overtime, the production grows outward from the initial location and into foreign markets until the point that the role of exporter and importer is switched. Although exceptions exist

Though foreign manufactures typically are not able to produce the good at a lower cost because of the economies of scale, foreign producers due have many advantages that they can utilize to compete in the foreign country’s home market. Already, the original manufacturers have researched, developed, tweaked, and mostly perfected the product; thus the foreign manufacturer is saved time and money, allowing them to proceed almost straight to production. The foreign manufacturers also has home-field advantage given that their prices do not need to accommodate for import tariffs and freight costs. While the foreign manufacturer is not necessarily able to export the good at a price that can compete with the original country’s price, foreign manufacturers are able to chip away at the original country’s exports. As more foreign firms appear and grow in different markets, the original country will start to see their export growth slipping until the point their market share begins to

Mainly, there exist three scenarios in which the PLC model would deviate from the norm in international trade of the product. As already discussed, tariffs and transportation costs can have substantial effect on the growth of export/import markets. These types of trade barriers can be employed as a means to bolster international trade or as protectionist measures that discourage trade. Accordingly, high tariffs and high freight costs discourage trade while low tariffs and freight costs would encourage it. Countries that utilize protectionist measures typically see much more competition in their home markets early on. Similarly, the effect of scale economies largely affect how quickly foreign manufacturers are able to compete. In industries that lack strong gains from economies of scale, small production facilities are able to produce just as well as large production facilities; the advantage awarded to the original manufacturer’s country is negated, consequently leading foreign manufacturers to enter the market earlier and undercut prices, at home and abroad, sooner. Thus, products that are sooner able to compete on price routinely observe a significantly shortened cycle that may even skip some stages all together. Opposite to this shortening of the cycle stands high-income products, which are consistently subjected to an