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Once trade is allowed, profit-seeking firms will move their products to the markets that temporarily result in higher price. Thus the capital-abundant country will export the capital-intensive good since the price will be tem- porarily higher in the other country. Likewise, the labor-abundant country will export the labor-intensive good. Trade flows will rise until the price of both goods are equalized in the two markets.
The H-O theorem demonstrates that differences in resource endowments8 as defined by national abundancies are one reason that international trade may occur.
Overall, the H-O factor proportions theory of comparative advantage states that international commerce compensates for the uneven geographic distribution of productive resources, that traded commodities are really bun- dles of factors (land, labor, and capital), and that the exchange of commodi- ties internationally is therefore indirect arbitrage, transferring the services of otherwise immobile factors of production from locations where these factors are abundant to locations where they are scarce. Under some circum- stances, this indirect arbitrage can completely eliminate price differences.
Despite new models in trade theory, the H-O theory is still extraordinarily useful: pedagogically, in correcting the assumptions of the partial equilib- rium with regard to labor supply and wage rates; politically, in showing that although tariffs and quotas have redistributive effects, they reduce effi- ciency; and, empirically, in explaining important aspects of the pattern of international trade.
Raymond Vernon and the Product Life Cycle
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Keagan, a marketing scholar, on the other hand, refers to the international product life cycle in the following manner: “The international product life cycle model suggests that many products go through a cycle during which high-income, mass consumption countries are initially exporters, then lose their export markets, and finally become importers of the product.”11These are clear instances where trade cycle and product life cycle have been defined almost identically in the international context.
There could be several possible explanations for the interchangeable use of the product cycle and product life cycle concepts. One explanation is that the product cycle, developed by economists as part of the international framework, was initially unknown to marketers when they developed the product life cycle concept.12 Another possibility is that marketers, in order to extend the product life cycle concept to international markets, borrowed the product cycle concept from economists who employed the concept to explain the patterns of international trade. The interchangeable use has created conceptual fuzziness in the literature and has overshadowed the differences between the two.
Product Cycle and Product Life Cycle: The purpose of the following section is to make a distinction between the product cycle and product life cycle concepts, to clarify the relationship between the two, and to redefine the international product life cycle (IPLC). Raymond Vernon, attempting to explain patterns of international trade, observed a circular phenomenon in the composition of trade between countries in the world market. Advanced countries, which have the ability and the competence to innovate besides having high-income levels, and engage in mass consumption become initial exporters of goods. However, they lose their exports initially to develop- ing countries and subsequently to less developed countries and eventually become importers of these goods. Vernon’s hypothesis was an attempt to advance the trade theory beyond the static framework of the comparative advantage of David Ricardo and other classical economists. It explored hitherto ignored or unexplained areas of international trade theory such as timing of innovation, effects of scale economies, and the role of uncertainty and ignorance in trade patterns. His intent was not to propose a theory of product life cycle as commonly understood by marketing theorists.
The product life cycle concept, typically expressed as an “S”-shaped curve in marketing literature, is based on the analogy of the human biological cycle.13Products, like living organisms, go through stages of birth, develop- ment, growth, maturity, decline, and demise. To be meaningful, the product life cycle concept has to be used in conjunction with its counterpart, market evolution, which consists of various stages of market development. Philip Kotler links both product life cycle and market stages in his concept of market evolution.14
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The product life cycle concept identifies four stages that the trade patterns go through. Louis Wells identifies these four phases as follows:
1. United States exports strength 2. Foreign production starts
3. Foreign production becomes competitive in export markets 4. Import competition begins.15
The product cycle is a macro-level attempt to generalize patterns of trade between nations based on empirical data. It offers innovation and economies of scale as predominant explanatory variables. Vernon hypothesized a cir- cular pattern of trade composition that occurs between trading partners in different stages of economic growth.
Unlike the product cycle with its macro orientation, the product life cycle concept in marketing theory is a micro-level explanation of stages of the life cycle a product or service goes through in the context of its market life.
Sales volume and profits become the critical micro variables in the product life cycle framework. In the introductory stage of a product’s life, sales are typically slow and profits negative. In the growth stage, both sales and profits rise at a rapid rate. During maturity, sales volume may continue to rise at a declining rate and profit may stay high. In the decline state, both sales and profit decrease.16 Sales and profits are the principal variables for marketing decisions. The product life cycle is essentially a tool for firms to design marketing mix strategies for different states of the life span of a product or service.
Vernon stresses the degree of standardization as evidence of maturation of the product. A mature product typically may become standardized across international markets. The yardstick for maturity in the product life cycle approach is the rate of sales growth. Changes in this rate mark the transition from one stage of the product life cycle to the next.
An interesting example of these differing perceptions of maturity can be found in the market for personal computers. In the past decade, many facets of the computer hardware and software products became standardized either through strength of market leaders such as IBM and Microsoft or by the joint efforts of industry, users, and/or government to establish standards.
Currently this market has standards but is not mature as yet. It is rapidly expanding domestically as well as globally. Using Vernon’s yardstick of maturity, the computer industry is in a mature stage of product cycle whereas it is still in the growth stage according to the product life cycle approach.
Vernon’s product cycle model is fundamentally production-oriented and does not focus on consumer-oriented sociocultural and behavioral variables.
Vernon’s framework is based on industrial goods in manufacturing sectors and virtually ignores trade in intangibles such as services or brand names.
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While it provides a broad, long-term macro frame or reference, it is not particularly valuable in making micro-level and short-term managerial deci- sions in firms. His approach is more likely to provide insights for national policy formulation at macro levels.
Traditional definition of demand in economics has two important com- ponents: willingness to buy and the ability to pay. Vernon’s hypothesis deals with the ability to pay as indicated by one’s level of income. The product cycle hypothesis does not refer to the willingness to buy, which is a function of culture. Culture influences greatly the willingness to buy through changes in values, norms, attitudes, business customs, and practices. The product life cycle model factors in on these variables in marketing mix decisions, which are aimed at stimulating the consumer’s willingness to buy. Marketers believe in the role, freedom, and ability of the marketing mix to alter consumer behavior patterns and the expectations of consumers’ demand shifts.
Interest in a product and its acceptance or rejection will depend upon its cultural relevance. For instance, nonkosher meat products many not have market prospects in Israel. If products are not culturally acceptable, the international product cycle concept has little relevance.
Another striking difference between Vernon’s perception of the interna- tional product cycle and marketers’ view of the product life cycle is that the former focuses mainly on inventions and new products. It overlooks the tried and well-established products in the domestic market, which do not enter international markets to take advantage of the economies of scale.
Firms that manufacture these products have had ample opportunities for growth in the domestic market and they do not think of the international market until the market for their products reaches maturity. McDonald’s, Pizza Hut, and Kentucky Fried Chicken did not go international until the domestic markets were nearly saturated. The product life cycle concept is generally a tool for making decisions relating to domestic markets.
The International Product Life Cycle: The usage of the phrase “international product life cycle” (IPLC) has been anything but standard and the term can be precisely defined to remove it from the shadow of the product cycle or the trade cycle concepts in the international context. The IPLC can be defined as market life span stages the product goes through in international markets sequentially, simultaneously, or asynchronously. The sequential stages are introduction, growth, maturity, decline, and extinction in the international markets. When a product is positioned in different international markets at the same time and is going through similar life cycle stages, the cycle process is simultaneous. The life cycle stages are asynchronous when the product is in different stages in different international markets at the same time. The life cycle stage in which a product can be positioned is influenced by macro variables indigenous to country markets. Stanton and others cite examples of this phenomenon. Steel-belted auto radial tires had reached the saturation
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level in Western Europe when they were being discovered by the US market.
Thus it was in the maturity stage in Western Europe and introductory stage in the United States.17
There are two major differences between the product life cycle and the IPLC. The first relates to rejuvenation or rebirth in international markets of a product that is in decline domestically for market-related reasons or is close to extinction. The consumption of cigarettes in the US market has been rapidly declining due to health consciousness of consumers and changes in public policy toward smoking. But the markets for American cigarettes are expanding in China, Eastern Europe, and Russia. The handloom-produced
“Bleeding Madras” fabrics were almost extinct in the Indian domestic market when they gained a new lease of life after being introduced as a fashion product for summer wear in the United States. Finding new international markets can rejuvenate products that have reached the declining stage in the domestic market.
The second difference is that if a culture-specific product is designed for the international market, it can attain a new dimension of the product life cycle that is not possible in the domestic market. For example, fast food outlets like Burger King and McDonald’s can design a product for cultures permeated by Buddhist or Hindu vegetarian values. This product can succeed and go through product life stages in international markets and still not be acceptable in domestic markets. The IPLC is clearly different from the product cycle concept that is essentially circular and from the product life cycle concept with its numerous variations.
Overall, Vernon’s theory suggests that MNCs typically develop new prod- ucts in their home countries, utilizing local resources and technologies to respond to local market needs, and then diffuse the innovations around the world step by step, first to countries that are close to the stage of development achieved by the home country (such as Europe for US-based multinationals), and then to lesser developed countries.