Product life cycle theory of fdi. Product life cycle theory of Foreign Direct Investment? 2022-10-05

Product Life Cycle (PLC) Theory

The nature of the goods has implications. 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 nature of the goods has implications. Now that there is more demand and cheaper labour costs from overseas countries, the pricing becomes the main competitive tool and cost becomes more of an issue than previously. The worlds trading importing and exporting has changed immensely over the years.

Product life cycle theory of Foreign Direct Investment?

As the demand starts to increase, the overseas markets then start producing for themselves generally at a cheaper labour and overall cost. It can also be said that many new products are now produced in advanced economies such as Japan as evidence shows. The product manufactured in a low cost location is exported back into the home country or other developed countries. The evidence suggests that the more standardised the product becomes the more likely the location of production will change. The developments of the life cycle are once again changing. The US at the time was the initiator of the new technologically driven products of the time. The US overtime had become a major importer of many of the goods that it had once developed, produced and exported.

The US at the time was the initiator of the new technologically driven products of the time. 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 product is manufactured in the home country primarily to meet the domestic demand. 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. 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. This can lead to the underdeveloped countries offering competitive advantage for the location of production and finally they will become exporters.

The US firms may also decide to set up production facilities in these advanced economies and consequently the US exports are then limited. This leads to the low cost producers becoming exporters. At the same time there is also evidence that unstandardised products will maintain there location in more phosphorus locations. The firm begins to focus on the reduction of process cost rather than addition of new product features and as a result, the product and its production process become increasingly standardized. However, with changes in international environment, different stages of the product cycle did not necessarily follow in the same way.

The developments of the life cycle are once again changing. The discussion of the transfer of technology has changed greatly. A certain degree of standardisation takes place and the demand of the products will start to appear elsewhere. The first stage is known as innovation stage. The US overtime had become a major importer of many of the goods that it had once developed, produced and exported. Vernon's international product life cycle is used to attempt to explain why this happened. Other weaknesses of this theory can be that Vernon's view is ethnocentric.

Globalisation means that there is more dispersed and simultaneous production of comparative advantage. Countries with lower per capita incomes will focus on adapting existing products to create lower priced version. This can lead to the underdeveloped countries offering competitive advantage for the location of production and finally they will become exporters. 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. 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.

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. The theory was developed to provide a framework to explain the increasing FDI from US and its influence on trade flows. The relative simplicity of the model makes it difficult to use as a predictive model that can help anticipate changes. This leads to internalization. Competition comes from a few local or domestic players that produce their unique product variations. The second stage is known as maturing product stage.

The product design and production process becomes increasingly stable. Countries with high per capital incomes foster newly invested products. At this stage; price competitiveness becomes even more important and in view of this fact the innovation shifts the production to a low cost location, preferably a developing country where labor is cheap. Also the model assumed that technology can be captured in capital equipment and standard operating procedures. 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. As the product matures and becomes more of a commodity, the innovator from the advanced nation becomes challenged in its own home market making the advanced nation a net importer of the product. The nature of the goods has implications.