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hello everyone welcome to business school 101 the international product life cycle theory was authored by raymond vernon an american economist from harvard university in the 1960s to explain the cycle the products go through when exposed to an international market the cycle describes how a product matures and declines because of internationalization as you can see in the picture there are three stages contained within vernon siri namely the new product stage the maturing product stage and the standardized product stage in addition vernon categorized the world into three different groups the innovating country other advanced countries and less developed countries in the graph the blue line indicates the amount of production for the new product the green line indicates the amount of consumption the blue area means that the country has a net export for the product contrarily the green area means the country has a net import for the product vernon's theory suggests that early in a product's life cycle all the parts and labor associated with that product come from the area where it was invented after the product is adopted and used in the global market production gradually moves away from the point of origin in some situations the product becomes an item that is imported by its original country of invention let's discuss each of these stages separately first the new product stage the cycle always begins with the introduction of a new product in this stage a corporation in a developed country will innovate a new product the market for this product will be small and sales will be relatively low as a result vernon deduced that innovative products are more likely to be created in a developed nation because the buoyant economy means that people have more disposable income to use on new products to offset the impact flow sales corporations will keep the manufacturer of the product local so that as process issues arise or need to modify the product in its infancy stage changes can be implemented without too much risk and without wasting time as sales increase corporations may start to export the product out to other developed nations to increase sales and revenue this is a straightforward step towards the internationalization of a product because the appetites of people within developed nations tend to be quite similar second the maturing product stage at this point when the product has firmly established demand in the innovating country and other advanced countries the manufacturer of the product will need to consider opening up production plants in other advanced countries to reduce the production cost and meet the increasing demand meanwhile the product development in the innovating country can still occur at this stage because there is still some room to adapt and modify the product if needed although the unit costs have decreased due to the decision to produce the product in other advanced countries the manufacturer of the product will still require a highly skilled labor force local competition to offer alternatives start to form as the product becomes more matured and affordable it begins to reach the countries that have a less developed economy and demand from those nations start to grow last the standardized product stage at this stage exports to nations with the less developed economy begin in earnest competitive product offers saturate the market which means that the original purveyor of the product loses their competitive edge on the basis of innovation in response to this the corporation focuses on driving down the production cost by moving facilities to nations where the average income is much lower and by standardizing and streamlining the manufacturing methods needed to make the product the local workforce and lower income nations are then exposed to the technology and methods to make the product and competitors begin to rise as they did in developed nations previously meanwhile demand in the original nation where the product came from begins to decline and eventually dwindles as a new product grabs the attention of the people the market for the new product is now completely saturated and the innovating corporation leaves the manufacture of the product in low-income countries and switches its focus to a new product as it bows gracefully out of the market what is left of the market share is divided up between predominantly foreign competitors and people in the original country who want the product at this point will most likely buy an imported version of the product from a nation where the incomes are lower meanwhile developed countries are investing in innovating new technologies with new products then another new cycle starts historically the product life cycle theory seems to be an accurate explanation of international trade patterns let's use a photocopier as an example the photocopier was first developed in the early 1960s by xerox in the united states and sold initially to american users originally xerox exported photocopiers from the united states primarily to japan and the advanced countries of western europe as demand began to grow in those countries xerox entered into joint ventures to set up production in japan and great britain in addition once xerox's patents on the photocopier process expired other foreign competitors such as canon in japan began to enter the market as a consequence exports from the united states declined and the u.s users began to buy some of the photocopiers from lower-cost foreign sources particularly japan in the 90s japanese companies found that manufacturing costs are too high in their own country so they switch production to some developing countries such as vietnam and thailand thus initially the united states and then other advanced countries like japan have switched from being exporters of photocopiers to importers this evolution and the pattern of international trade in photocopiers is consistent with the predictions of the product lifecycle theory however the product life cycle theory is not without weaknesses it suffers from two major limitations first viewed from an asian or european perspective vernon's argument that most new products are developed and introduced in the united states seems ethnocentric and increasingly dated although it may be true that during us dominance of the global economy most new products were introduced in the united states there have always been important exceptions these exceptions appear to have become increasingly common in recent years for example video game consoles were first introduced in japan and new wireless phones were first introduced in europe second with the increased integration of the world economy a growing number of new products such as laptop computers cars and smartphones are now introduced simultaneously in both developed and developing countries this may be accompanied by multinational corporations globally dispersed production and marketing strategies so what do you think of the international product lifecycle theory do you think it is still a valuable theory please leave your thoughts in a comment below thanks for watching and i will see you next