The Product Life Cycle Theory Essay

The Product Life Cycle Theory Essay

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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 that can distort this theory, the Product Life Cycle consists of four distinct stages the explain the intricate trend that almost all production experiences when international trade is involved.
The first stage of the Product Life Cycle theory involves a developed country’s rise to export dominance. In the first stage, a large and developed nation utilizes its size and resource availability to dominate a market; in effect a de facto monopoly takes place simply because no one is able to compete yet. This allows the developed country to rapidly grow their customer base and be the first to export to foreign countries. Typically, these products are high-cost items due to the fact that they are new inventions or innovations that have yet to be released to the market. For this reason, initial development and sales occur within a developed home country that has a large population of high-income individuals that are able to purchase the item. As sales grow in the home country, knowledge of the new produ...

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...ade. While the Product Life Cycle theory is subject to some exceptions and may not always follow the norm, the theory still maintains an ability to adequately account for such a pattern in production. The PLC theory shows that, overtime, capital-intensive goods with be invented in capital-abundant countries, gain worldwide traction, and gradually tip from a capital-intensive good to a labor-intensive good. At this point, the PLC theory asserts that manufacturing of the good moves to foreign countries, leading to the roles of exporter and importer flipping. This relationship has been seen in numerous products that were once manufactured in the capital-abundant US, but now manufactured in more labor-abundant countries. As the world evolves, new countries develop, and old countries fall, this cycle continues on and on down the line of developed to undeveloped countries.

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