Evaluating the Product Life-Cycle Theory

Historically, the product life-cycle theory is an accurate explanation of international trade patterns. Consider photocopiers; the product was first developed in the early 1960s by Xerox in the United States and sold initially to US users. Originally Xerox exported photocopiers from the United States, primarily to Japan and the advanced countries of Western Europe. As demand began to grow in those countries, Xerox entered into joint ventures to set up production in Japan (Fuji-Xerox) and Great Britain (Rank-Xerox). In addition, once Xerox's patents on the photocopier process expired, other foreign competitors began to enter the market (e.g., Canon in Japan, Olivetti in Italy). As a consequence, exports from the United States declined, and US users began to buy some of their photocopiers from lower-cost foreign sources, particularly from Japan. More recently, Japanese companies have found that manufacturing costs are too high in their own country, so they have begun to switch production to developing countries such as Singapore and Thailand. As a result, the United States and several other advanced countries (e.g., Japan and Great Britain) have switched from being exporters of photocopiers to being importers. This evolution in the pattern of international trade in photocopiers is consistent with the predictions of the product life-cycle theory. The product life-cycle theory clearly explains the migration of mature industries out of the United States and into low-cost assembly locations.

However, the product life-cycle theory is not without weaknesses. Viewed from an Asian or European perspective, Vernon's argument that most new products are developed and introduced in the United States seems ethnocentric. Although it may be true that most new products were introduced in the United States from 1945 to 1975, there have always been important exceptions. In recent years, these exceptions have become more common. Many new products are now introduced in Japan (e.g., high-definition television or digital audiotapes). With the increased globalization and integration of the world economy that we discussed in Chapter 1, a growing number of new products are now introduced simultaneously in the United States, Japan, and the advanced European nations (e.g., laptop computers, compact disks, and electronic cameras). This may be accompanied by globally dispersed production, with particular components of a new product being produced in those locations around the globe where the mix of factor costs and skills is most favorable (as predicted by the theory of comparative advantage).

Consider laptop computers, which were introduced simultaneously into a number of major national markets by Toshiba. Although various components for Toshiba laptop computers are manufactured in Japan (e.g., display screens, memory chips), other components are manufactured in Singapore and Taiwan, and still others (e.g., hard drives and microprocessors) are manufactured in the United States. All the components are shipped to Singapore for final assembly, and the completed product is then shipped to the major world markets (the United States, Western Europe, and Japan). The pattern of trade associated with this new product is both different from and more complex than the pattern predicted by Vernon's model. Trying to explain this pattern using the product life-cycle theory would be very difficult. The theory of comparative advantage might better explain why certain components are produced in certain locations and why the final product is assembled in Singapore. In short, although Vernon's theory may be useful for explaining the pattern of international trade during the brief period of American global dominance, its relevance in the modern world is limited.