Product cycle theory

Product cycle theory

Theory suggesting that a firm initially establish itself locally and expand into foreign markets in response to foreign demand for its product; over time, the MNC will grow in foreign markets; after some point, its foreign business may decline unless it can differentiate its product from competitors.

Product Cycle

The period of time from the introduction of a product to its decline and stagnation. Different analyses posit different numbers of stages in a product cycle (usually four to five), but all emphasize that a product has a beginning, with technological innovation; a period of rapid growth; maturity and consolidation; and, finally, decline and possibly death. For example, in the video cassette recording (VCR) industry, the mid-1970s were a period of decentralized technological innovation, with VHS and Betamax formats vying for dominance. Later, video cassettes very quickly became a common household item. In the maturity phase, different companies selling VCRs attempted to corner a greater market share for their own (identical) versions of the product. Finally, the industry declined and was eventually supplanted by DVD players. Factors that may prolong a product cycle include the opening of new markets for the product, finding new uses for the same product, or even attaining government subsidies. The concept of product cycles applies most readily to the sale of goods and it is difficult to gauge how it works in a service economy.
References in periodicals archive ?
"The Globalization of Technology: What Remains of the Product Cycle Theory?" Cambridge Journal of Economics, 19, 1995, 155-74.
Product cycle theory has developed countries inventing goods and developing countries copying them.
While we agree with Cumings that a regional perspective is essential for understanding the pattern of industrialization in contemporary East Asia, we find that the "flying geese" variant of the product cycle theory fails to capture the complexity of the regional political economy, which is increasingly dominated by the regionalization of industrial production.
We begin with a brief outline of product cycle theory and a discussion of why we believe it does not adequately capture key features of the contemporary regional political economy in East Asia.
Whereas Akamatsu was concerned with leading sectors, which he saw as determining the development of national economies, Raymond Vernon in his product cycle theory focused on the behavior of individual firms.(5) He examined how the life cycle of individual products affects the competitiveness of firms and thus the locus of manufacturing production.
Kojima Kiyoshi has dubbed this amalgam of Akamatsu's and Vernon's ideas, the "catching-up product cycle theory."(8) Common reference to the "flying geese" analogy in the contemporary literature, as for instance in the Cumings article, is to this amalgam rather than to Akamatsu's original formulation.
Product cycle theory suggests that manufacturing will migrate to less industrialized countries once the products and the technology for producing them within the sector have matured.
Instead of a process of replication and homogenization of industrial structures, as the product cycle theory predicts, technological diffusion in East Asia has been partial, varies from country to country, and has remained linked throughout to a "supply architecture" built around ongoing Japanese innovation of components, machinery, and materials.(17) As a result, the evolution of a wide range of industries in other parts of the region has been different from the experience in Japan, where substantial indigenous capacity for technological innovation had already been built in the interwar period.
To date regionalization has not generated significant reverse exports to Japan, as the product cycle theory predicts; rather, it has led to trade triangles in which technology and components are sourced from Japan while the finished products are exported to third-country markets, principally to the United States and Western Europe.
Buckley then takes his reader down various newer theoretical avenues: route 1: Stephen Hymer--Charles Kindleberger's industrial organization path, and the variants thereof; route 2: product cycle theory; route 3: internalization (carrying on business within rather than outside the firm); route 4: diversification versus internationalization; route 5: locaton theory; and finally, route 6: candidates for a general theory of multinational enterprise (MNE).
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