THE PRODUCT LIFE CYCLE (Raymond Vernon, 1966)

The logic here is straight forward --there are four stages in a

product's life cycle:
* introduction,
* growth,
* maturity, and
* decline,
and the location of production depends on the stage of the cycle.

Stage 1: Introduction
New products are introduced to meet local (i.e., national)
needs, and new products are first exported to similar countries, i.e.,
countries with similar needs, preferences, and incomes.. If we also
presume similar evolutionary patterns for all countries, then products are
introduced in the most advanced nations. (E.g., the IBM PCs were produced
in the US and spread quickly throughout the industrialized countries.)

Stage 2: Growth
A copy product is produced elsewhere and introduced in the
home country (and elsewhere) to capture growth in the home market. This
moves production to other countries, usually on the basis of cost of
production. (E.g., the clones of the early IBM PCs were not produced in the
US.)

Stage 3: Maturity
The industry contracts and concentrates -- the lowest cost
producer wins here. (E.g., the many clones of the PC are made almost
entirely in lowest cost locations.)

Stage 4: Decline
Poor countries constitute the only markets for the product.
Therefore almost all declining products are produced in LDCs. (E.g., PCs
are a very poor example here, mainly because there is weak demand for
computers in LDCs. A better example is textiles.)
Note that a particular firm or industry (in a country) stay in a market by
adapting what they make and sell, i.e., by riding the waves. For example,
approximately 80% of the revenues of H-P are from products they did not
sell five years ago.

Graphically, we have the following:

time

The down arrows represent the introduction of a new model based on new
technology. Note that this strategy keeps the firm in the high growth and
high profit zone.
DETERMINATION OF TRADING PARTNERS
Country Differences Theory = "The greater the differences the
greater the amount of trade." Differences are due to various factors,
including climate, factor endowments, and innovative capabilities.

This theory is too simple. For example, the similarity of

demand in two countries might induce trade. Therefore, we have the

Country Similarity Theory = "The greater the similarities the

greater the amount of trade."
This is a small leaps theory. If a product is developed in one
country, the next best place to sell it is the most similar country. For
example, the largest trading partner for the US is Canada, and vice versa.
These two countries are strikingly similar.

INDEPENDENCE, INTERDEPENDENCE, AND DEPENDENCE

Independence - a country alone and apart with respect to trade. (E.g.,
recently we had Albania, in the past China and Japan.)

Interdependence - network of mutual trade exchanges. The generally

agreed upon view is that interdependence diminishes the likelihood of both
economic and conventional war. (This is the heart of the argument,
advanced by Jean Monnet of France, that led to founding of what has
become the European Union.)

Dependence - there are two kinds of one-way dependence

* Monopolist = single supplier.
(Others will find a substitute.)
* Monopsonist = single buyer.
(Others may lose interest in producing the good.)

Dependence is dangerous because the dependent player is vulnerable,

i.e., has no diversification for safety.
WHY COMPANIES TRADE

Companies trade so as to increase revenues, reduce costs, and/or

mitigate risk.

To use excess capacity, companies seek to increase (world) market

share.

To reduce costs, companies seek to increase production and sales, and

thereby reduce the per unit cost. If you price at the marginal cost of the last
item produced, then you get remarkable growth in revenue and market share
if marginal cost is dropping. You also gamble that these revenues will cover
costs. The best example is DRAM chips--a great strategy for a while; then
the market was flooded.

Companies increase profitability through international sales because

the same item often fetches a higher profit elsewhere, due to differences in
life cycle (e.g., cosmetics) or demographics (e.g., baby food).

Companies reduce risk through international sales by diversification.

Future growth - firms must adapt to changing markets and maturing

products. Long term growth is often a reason to enter a foreign market. For
example, many large firms are attempting to enter Eastern Europe
(particularly Poland and Hungry), or have entered Russia and China in
anticipation of the coming changes. Similarly, many have entered Spain and
Ireland in an effort to gain relatively low cost entry to the European Union.
Finally, many US and European reclamation companies have entered the
Eastern European market because it provides a vast number of opportunities.

In sum, companies trade so as to increase revenues, reduce costs, and/or

mitigate risk, i.e., to increase the expected utility of profit.