product life-cycle theory
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product life-cycle theorya theory that seeks to explain changes in the pattern of INTERNATIONAL TRADE over time and is based on a dynamic sequence of product INNOVATION and diffusion. Four ‘phases’ of the cycle can be postulated:
- to begin with, as new products are introduced, the consuming country is likely to be the producing country because of the close association between innovation and demand. This original producing country -typically an advanced industrial country -becomes an exporter to other high-income countries;
- production begins in other leading industrial countries, and the innovating country's exports to these markets are displaced;
- as these countries’ own demand for the product reaches sufficient size to enable producers to take advantage of ECONOMIES OF SCALE, they too become net exporters, thereby displacing the innovating country's exports in nonproducing countries;
- finally, as the technology and product become increasingly standardized to the point where relatively unskilled labour can be used in the production process, DEVELOPING COUNTRIES with lower costs become exporters of the product, further displacing the innovating country's exports. Meanwhile, however, the innovating country has moved on to the production of new products. See also TECHNOLOGICAL GAP THEORY, THEORY OF INTERNATIONAL TRADE.
Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005