In a short essay, discuss the four stages of the international product life cycle.
Answer: The international product life cycle theory of trade states that certain kinds of products go through a continuum, or cycle, that consists of four stages—introduction, growth, maturity, and decline. The location of production will shift internationally depending on the stage of the cycle.
a. Introduction: Most new products are produced in and exported from developed countries because of their combined demand conditions and labor skills. Many reasons account for the dominant position of developed countries, including competition, demanding consumers, the availability of scientists and engineers, and high incomes. Early production also generally occurs in a domestic location so the company can obtain rapid market feedback, as well as save transport costs.
b. Growth: As sales of the new product grow, competitors enter the market. At the same time, demand is likely to grow substantially in foreign markets, particularly in other developed countries. In fact, demand may be sufficient to justify producing in some foreign markets to reduce or eliminate transport charges, but the output at this stage is likely to stay almost entirely in the foreign country with the additional manufacturing unit. The original producing country will also increase its exports in this stage but lose certain key export markets in which competitors commence local production.
c. Maturity: In this stage, worldwide demand begins to level off, although it may be growing in some countries and declining in others. There is often a "shake-out" of producers such that product models become highly standardized, making cost an important competitive weapon. Longer production runs become possible for foreign plants, which in turn reduce per-unit cost for their output. The lower per-unit costs create demand in developing countries.
d. Decline: As a product moves to the decline stage, those factors occurring during the mature stage continue to evolve. The markets in developed countries decline more rapidly than those in developing countries as affluent customers demand newer products. By this time, market and cost factors have dictated that almost all production is in developing countries, which export to the declining or small-niche markets in developed countries. In other words, the country in which the innovation first emerged and exported from then becomes the importer.