24692909 International Product Life Cycle

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INTERNATIONAL PRODUCT

LIFE CYCLE



The life cycle begins when a developed

country, having a new product to satisfy

consumer needs, wants to exploit itstechnological breakthrough by selling abroad.

Other advanced nations soon start up their

own production facilities, and before longLDCs do the same.



Efficiency/ comparative advantage shifts

from developed countries to developing

nations. Finally, advanced nations, no longercost-effective, import products from their

former customers. The moral of this process

could be that an advanced nation becomes a

victim of its own creation.



There are five distinct stages (Stage 0 through Stage4) in the IPLC. It can be shown on a graph by threelife-cycle curves for the same innovation: one for the

initiating country (eg. The United States), one forother advanced nations, and one for LDCs.For each curve, net export results when the curve is

above the horizontal line; if under the horizontalline, net import results for that particular country.As the innovation moves through time, directions of

all three curves change.



Stage 0—Local Innovation Stage 0, depicted as time0 on the left of the vertical importing/exporting axis,represents a regular and highly familiar product life

cycle in operation within its original market.Innovations are most likely to occur in highlydeveloped countries because consumers in suchcountries are affluent and have rela-tively unlimited

wants. From the supply side, firms in advancednations have both the technological know-how andabundant capital to develop new products.



Stage 1—Overseas Innovation As soon as the new product iswell developed, its original market well cultivated, and localdemands adequately supplied, the innovating firm will look to overseas markets in order to expand its sales and profit.Thus, this stage is known as a "pioneering" or

"international introduction" stage.The technological gap is first noticed in other advanced

nations because of their similar needs and high incomelevels. Not surprisingly, English-speaking countries such asthe United Kingdom, Canada, and Australia account for

about half of the sales of U.S. innovations when suchproducts are first introduced overseas.Countries with similar cultures and economic conditions

are often perceived by exporters as posing less risk andthus are approached first before proceeding to less familiarterritories.



Competition in this stage usually comes from U.S. firms,since firms in other countries may not have much knowledgeabout the innovation. Production cost tends to be decreasingat this stage because by this time the innovating firm will

normally have improved the production process. Supportedby overseas sales, aggregate pro-duction costs tend to declinefurther because of increased economies of scale. A lowintroductory price overseas is usually not necessary becauseof the technological breakthrough; a low price is notdesirable because of the heavy and costly marketing effortneeded in order to educate consumers in other countriesabout the new prod-uct. In any case, as the productpenetrates the market during this stage, there will be moreexports from the United States and, correspondingly, anincrease in imports by other developed countries.



Stage 2—Maturity Growing demand in advanced nationsprovides an impetus for firms there to commit themselves tostarting Ibcal production, often with the help of theirgovernments' protective measures to preserve infantindustries. Thus, these firms can survive and thrive in spite of relative inefficiency.Development of competition does not mean that the initiating

country's export level will immediately suffer. The innovating

firm's sales and export volumes areKept stable because LDCs are now beginning to generate a

need for the product. In-troduction of the product in LDCshelps offset any reduction in export sales to ad-vancedcountries.



Stage 3—Worldwide Imitation This stage means tough times for theinnovating nation because of its continuous decline in exports. There is nomore new demand anywhere to cultivate. The decline will inevitably affectthe U.S. innovating firm's economies of scale, and its production costs thusbegin to rise again. Consequently, firms in other advanced nations usetheir lower prices (coupled with product-differentiation techniques) togain more consumer acceptance abroad at the expense of the U.S. firm. Asthe product becomes more and more widely disseminated, imi-tation picksup at a faster pace. Toward the end of this stage, U.S. export dwindlesalmost to nothing, and any U.S. production still remaining is basically forlocal con-sumption. The U.S. automobile industry is a good example of thisphenomenon. There are about thirty different companies selling cars inthe United States, with several on the rise, Of these, only three are U.S.

firms, with the rest being from Western Eu-rope, Japan, South Korea,Taiwan. Mexico. Brazil, and Malaysia.



Stage 4—Reversal Not only must all good things end, but misfortunefrequently accompanies the end of a favorable situation. The majorfunctional characteristics of this stage are product standardization and comparative disadvantage. The innovat-ing country's comparativeadvantage has disappeared, and what is left is comparative disadvantage.This disadvantage is brought about because the product is no longercapital-intensive or technology-intensive but instead has become labor-

intensive—a strong advantage possessed by LDCs. Thus, LDCs—the lastimitators—establish suf-ficient productive facilities to satisfy their owndomestic needs as well as to produce for the biggest market in the world,the United States. U.S. firms are now undersold in their own country.Black-and-white television sets, for example, are no longer man-ufacturedin the United States because many Asian firms can produce them muchless expensively than any U.S. firm. Consumers1 price sensitivity

exacerbates this prob-lem for the initiating country.

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