Vernon’s Product Life Cycle Theory

The product life-cycle theory is an economic theory that was developed by Raymond Vernon. It was based on the observation that most of the 20th century a high proportion of the world's new products had been introduced by U.S. firms and sold first in the U.S. market (e.g. televisions, instant cameras, photocopiers, personal computers, and semiconductor chips). The products could be produced abroad at some low-cost location and then exported back into the US. Overtime, demand for the new product starts to grow in other advanced countries (e.g., Great Britain, France, Germany, and Japan). As it does, it becomes foreign producers to begin producing for their home markets. In additions, U.S firms might set up production facilities in those advanced countries.

Exception to the typical pattern of the PLC would include

1. Products that have very short life cycles.

2. Luxury goods and service

3. Products that require specialized labour

4. Products that are differentiated from competitive offerings.

5. Products for which transportation costs are relatively high

Good points of Vernon’s PLC

1. Explains US movement into post-war Europe

2. Tries to explain both trade and FDI

Drawbacks of Vernon’s PLC

1. Less effective in explaining recent FDI trends

2. Helps explain location of production but not initial advantage of firm moving overseas

3. appears dynamic – actually only programmatic

4. Ignores licensing

firms undertake FDI at a particular stage in the life-cycle of the products that they initially introduced. When a new product is introduced, the firm chooses to keep production at home, close to customers. But when the product become mature and foreign demands develop, the firm may be induced to start production in foreign countries, especially in low-cost countries, to serve the local markets as well as to export the product back to the home country