What are the main elements of Raymond Vernons product life c

What are the main elements of Raymond Vernon’s product life cycle theory of international trade and investment? Is Vernon’s theory still relevant in the 2010s?

Solution

Vernon\'s theory of product life cycle (PLC) of international trade is an alternate theory developed from the failure of Hecksher-Ohlin model in the pattern of trade.

Essentially, the Vernon model is a dynamic comparative advantage theory and states that each product has 5 phases in its life cycle:

1. Introduction

In this phase, a new product is introduced to meet domestic needs & new products are exported to meet global needs.

2. Growth

In this phase, the product is re-engineered in some other country & then is introduced in the domestic market to capture domestic market share. Therefore, production of the good is shifted from domestic economy to some other country where low-cost production is possible.

3. Maturity

In this phase, more market layers enter the market and therefore market concentration decreases, leading to the lowest-cost producers gaining the most. Costing more than pricing is the determinant of profit and success.

4. Saturation

In this phase, the market is at the peak of its sales and further sales increase is not possible. In this phase, substitute products start entering the market and firms start diversifying from current product/market mix.

5. Decline

In the originating country as well as in developed countries, the product sales start declining. The only markets where the product remains in high or stable demand are the less developed countries.

In the current economic situation, Vernon model has assumed less relevance because, the PLC phases are very likely to overlap due to high degree of substitution made possible at a fast time, leading to lower shelf-life of a product. The higher the number of players in a mrket, the faster that a product\'s life is burned. Also, the idea of costs being the primary determinant of profit and market share may not be correct. Consumer atstes and preferences are more varied than before and they may be willing to pay same (or more) for the product if it can be made differentiated than others, either in terms of products features or in terms of after-sales service and support. However, it cannot be denied that the PLC model still is a basic building block of product building and development stages.