Model Answer
0 min readIntroduction
The International Product Life Cycle (IPLC) theory, developed by Raymond Vernon in 1966, explains the pattern of international trade based on the stage of a product’s life cycle. It posits that the location of production and trade patterns shift over time as a product matures. Initially, new products are born in developed countries, benefiting from innovation and high income elasticity of demand. As the product gains popularity, production shifts to less developed countries to leverage lower labor costs. Understanding this cycle is crucial for formulating effective trade and industrial policies.
Stage 1: New Product
The IPLC begins with the introduction of a new product, typically in a developed country like the US, Germany, or Japan. This stage is characterized by high research and development (R&D) costs, sophisticated production processes, and a relatively small market size. Demand is concentrated among high-income consumers. The innovating country enjoys a monopoly and exports the product to other developed nations. Production is highly centralized and focused on quality and innovation. For example, the initial production of smartphones was concentrated in the US and Japan.
Stage 2: Growing Export
As demand for the product increases, exports expand beyond developed countries to include less developed countries (LDCs). The innovating country continues to dominate production, but some competition begins to emerge from other developed nations. Economies of scale are realized, leading to lower production costs. The focus shifts from product innovation to process innovation to maintain competitiveness. The initial export of LCD televisions from Japan to various countries exemplifies this stage.
Stage 3: Mature Product
This stage witnesses a significant increase in competition, with firms from LDCs beginning to enter the market. Production starts shifting to LDCs due to lower labor costs and the standardization of the product. The innovating country’s share of production and exports declines. Price competition intensifies, and the product becomes more commoditized. The focus shifts to cost reduction and marketing. The production of textiles and garments moved from developed countries to countries like Bangladesh and Vietnam during this stage.
Stage 4: Declining Product
In the final stage, demand for the product declines in both developed and developing countries. Production shifts almost entirely to LDCs with the lowest labor costs. The innovating country may import the product from LDCs. Competition is fierce, and firms struggle to maintain profitability. Eventually, the product may be discontinued. The production of basic toys and simple electronics largely shifted to China and other Southeast Asian countries in this stage.
Limitations of the IPLC Model
- The model doesn’t account for rapid technological advancements that can shorten product life cycles.
- It assumes a unidirectional flow of trade from developed to developing countries, which isn’t always the case.
- Global value chains and fragmented production processes challenge the model’s assumption of centralized production.
- The rise of emerging economies as innovation hubs contradicts the model’s initial premise.
Despite its limitations, the IPLC provides a valuable framework for understanding the dynamic relationship between trade, innovation, and economic development.
Conclusion
The International Product Life Cycle theory, while facing challenges in the modern globalized economy, remains a useful tool for analyzing trade patterns and understanding the evolution of industries. The shift in production locations, driven by cost considerations and technological advancements, continues to shape international trade. However, policymakers must consider the model’s limitations and adapt strategies to address the complexities of global value chains and emerging economies’ increasing role in innovation.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.