Discuss the product cycle theory as an explanation for why comparative advantage in

knowledge intensive products shifts rapidly .

THE PRODUCT LIFE CYCLE THEORY
A) Raymond Vernon initially proposed the prod!t li"e#!y!le theory in the mid#$%&'s( A!!ordin)
to the theory as prod!ts matre *oth the lo!ation o" sales and the optimal prod!tion lo!ation
+ill !han)e a""e!tin) the "lo+ and dire!tion o" trade(
,) A!!ordin) to Vernon- early in the li"e !y!le o" a typi!al ne+ prod!t- +hile demand is startin)
to )ro+ in the United .tates- demand in other ad/an!ed !ontries is limited to hi)h#in!ome
)rops( The limited initial demand in other ad/an!ed !ontries does not ma0e it +orth+hile "or
"irms in those !ontries to start prod!in) the ne+ prod!t- *t it does ne!essitate some e1ports
"rom the United .tates to those !ontries( O/er time- ho+e/er- demand "or the ne+ prod!t
starts to )ro+ in other ad/an!ed !ontries( As it does- it *e!omes *ene"i!ial "or "orei)n
prod!ers to *ein) prod!in) "or their home mar0ets( In addition- U(.( "irms mi)ht set p
prod!tion "a!ilities in those ad/an!ed !ontries +here demand is )ro+in)( Conse2ently-
prod!tion +ithin other ad/an!ed !ontries *e)ins to limit the potential "or e1ports "rom the
United .tates(
C) As the mar0et in the United .tates and other ad/an!ed nations matres- the prod!t
*e!omes more standardi3ed- and pri!e *e!omes the main !ompetiti/e +eapon( One reslt is
that prod!ers *ased in ad/an!ed !ontries +here la*or !osts are lo+er than the United .tates
mi)ht no+ *e a*le to e1port to the United .tates(
D) I" !ost pressres *e!ome intense- the pro!ess mi)ht not stop there( The !y!le *y +hi!h the
United .tates lost its ad/anta)e to other ad/an!ed !ontries mi)ht *e repeated on!e more as
de/elopin) !ontries *e)in to a!2ire a prod!tion ad/anta)e o/er ad/an!ed !ontries(
E) The !onse2en!es o" these trends "or the pattern o" +orld trade is that the United .tates
s+it!hes "rom *ein) an e1porter o" the prod!t to an importer o" the prod!t as prod!tion
*e!omes more !on!entrated in lo+er#!ost "orei)n lo!ations(
E/alatin) the Prod!t Li"e Cy!le Theory
F) 4hile the prod!t li"e !y!le theory a!!rately e1plains +hat has happened "or prod!ts li0e
photo!opiers and a nm*er o" other hi)h te!hnolo)y prod!ts de/eloped in the United .tates in
the $%&'s and $%5's- the in!reasin) )lo*ali3ation and inte)ration o" the +orld e!onomy has
made this theory less /alid in today6s +orld(
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