Product Cycle Hypothesis
Vernon (1966) talks about the product cycle hypothesis for providing technology based explanation for temporal changes in the pattern of trade. Under innovation phases the world has witnessed industrial revolutions in the 18thand 19th centuries, and computer revolution in the late 20th century. The produce cycle hypothesis suggests that certain countries undertake commercial application (innovation) of scientific invention and produce new products, while the rest tend to produce only well established products in the world economy. This is primarily due to technological differentials as they cannot compete effectively when same/similarly technological knowledge/advancement is lacking. Future each product passes through its life cycle. The relationship among domestic output its consumption and exports tend to vary over the stage of life cycle of the product as shown in
According to Vernon, development and marketing of newly innovated product in the world economy may be divided into three stages:
(1) New product,
(2) Maturing product and
(3) Standardized product
In the initial stage I, the innovating country, say united stated for instance develops a new product and it is sold only in domestic market. In the second stage the product becomes matured and standardized with mass production. It is now exported by the innovating country to other countries. In the second stage the innovating country donates the export market. With the increase in foreign demand for the product the technology is slowly transferred with additional locations for the production in other countries and production is domestically slowed down gradually. In the final stage production is slowed down faster by the innovating country and in other countries it tends to accelerate.
This happens because with the standardization to the product in due course of time, the technology is being sold or transferred to other firms and countries by the innovator. The product location is now shifted to other countries where the standardize production is cheaper. Now, the innovating country tends to import this product to meet the demand in the domestic market with a decline in its domestic level of production of the product in question in this stage technology tends to diffuse completely. In this stage, domestic consumption in the innovating country is satisfied through increasing imports rather than domestic output.
This means initially innovated very product which was exported by the country is now being imported at the end of the product cycle. Products like cycle in innovation countries. Similarly, UK was once renowned for textile industry, today, however, Hong Kong, China, Singapore, Malaysia, and Philippines have become the known centres for textiles.
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