1.0 Introduction
The U.S. trade date of mid 20th century indicated that the U.S. was always an exporter of
new products with a monopoly position initially, later overseas production began to
displace American exports in some markets, and then foreign manufactured products
became competitive in overseas markets, further reducing American exports, finally
foreign goods were competitive in the U.S. (Louis&Wells, 1969). The trade flow was
influenced by innovations and technical update along with the time running on. Based on
the trade flow, Vernon developed the theory of international product life cycle theory in
1966. Today, the theory has been diffusely implemented by MNEs throughout the world.
The theory claims that a company should locate its production in the original country of
invention (i.e. U.S.) during the growth of manufacturing process, and then the company
moves its production to other low developing countries gradually when the product has
been adopted and used in the world markets. The company will start from offering the
domestic market, and then exporting its new product to other markets of advanced
countries, finally importing its product back to those markets from own foreign based
assembly or manufacturing facilities. However, the worlds economy is a very important
factor for making the theory (Vernon, 1966). Today, international business came into a new
century, and the whole world economy has been changed. Hence, our international
businessmen have the obligation to evaluate the continuing utility of Vernons product
life-cycle theory of the MNE. This essay will explore and understand the utility of the
theory at first. And then, it will apply relevant case-studies and other data to evaluate the
continuing utility of the theory for MNEs.
2.0 The utility of product life cycle theory for MNEs
The product life cycle theory implicates the application of international trade pattern and
where locates the production to MNEs within its three phases which new product,
maturing product, and standardized product (Vernon, 1966). Therefore, below paragraphs
will identify the rationality and logic of these implications for each phases of product life
cycle.
* Phase I: New product
In the early stage of introduction of a new product, companies are better to be
non-multinational in its production and sales (Vernon, 1966). Thus, companies should
locate production in the original country of invention (Vernon, 1966). This is because the
new product is likely to be non-standardised in this early stage, which means they have not
decided the design of dominant product yet. And, the process of production requires a
great deal of coordination and high flexibility at the early stage. Hence, Manufacturers are
particularly concerned with the degree of freedom they have in changing their inputs at
this stage (Vernon, 1966). However, developed countries could support manufacturers with
the highest degree of freedom. For example, there are over seventy percentages of
acquainted workers in developed economies; and many factory workers use their brains
more than their hands (Rooney et al, 2005). Of course, companies also need to be concern
the cost of inputs. Although companies may be easy to obtain cheaper labours in other low
developed countries, but the consideration of cost is meaningless if those labours can not
implement our orders. Moreover, manufacturers highly require the swift and effective
communication to manufacturers for exchanging information with customers, suppliers
and competitors at the early stage (Vernon, 1966). Due to the infrastructure of developed
countries advanced, companies at the early stage are not hesitating to locate their
production there by this second reason. Relating above two factors, we can that efficient
production heavily relies on information and knowledge at the early stage. Accordingly,
the knowledge intensity needs to be mention. Vernon (1966) said that the demand for
different types of inputs such as knowledge/information and labour skills changes during
the life of a product. Lets take a look at figure 1, which well expresses the knowledge
intensity needed for production during the process of the product life cycle. We can see
that the knowledge-intensity tend to be high in the early stage of the product life cycle, and
it decreases over time (Johansson & Karlsson, 1987). Thus, companies at the early stage
are expected to require more qualified labours than other phases of a product life cycle.
The last locational implication is that the price elasticity of demand for the output of
individual firm is comparatively low at the early stage of development (Vernon, 1966).
This is because of products typically requires a large amount of skilled labour and
financial capital, both significant in research and development as well as set up of the
producing process. Due to the average income of developed countries is comparatively
high, most target audiences will be from these countries. Therefore, locating production in
developed countries would allow companies to communicate with their consumers
expediently. On the other hand, figure 1 indicates that less number of companies is
involved in the early stage of the product life cycle, and companies gradually reach to the
highest number in the mid stage, after companies exit step by step in the end of product
life (Johansson & Karlsson, 1987). Although the price elasticity is low at the early stage,
companies will not face too much competitive force, due to figure 1 points out that there
are not too many choices offer to consumers in the beginning of product life cycle.
Therefore, high price will not make big impacts on the sale of companies at the early stage.
Figure1 Knowledge intensity in a product life cycle (Johansson & Karlsson, 1987)
