The International Product Life Cycle (IPLC) develop and verified by economists to explain trade in a context of comparative advantage describes the diffusion process of an innovation across national boundaries.
The product life cycle theory is an economic theory that was developed by Raymond Vernon in response to the failure of the Heckscher-Ohlin model to explain the observed pattern of international trade.The theory suggests that early in a product’s life-cycle all the parts and labour associated with that product come from the area in which it was invented. After the product becomes adopted and used in the world markets, production gradually moves away from the point of origin.
All products have certain length of life during which they pass through certain identifiable stages. As soon as a product is introduced in the market, its life begins, then it goes through a period during which its market grows rapidly, eventually it reaches at maturity and then stands saturated. Afterwards its market declines and finally its life come to an end.
Stages of International Product Life Cycle
International Product Life Cycle theory has the potential to be a valuable framework for marketing planning on a multinational basis. The theory explains the variations and reasons for changes in production and consumption patterns in various markets over a time period. The product life cycle for international markets has the following four distinct identifiable stages:
- Local Innovation: Innovations are most likely to occur in highly developed countries because consumers in such countries are affluent and have relatively unlimited wants. Forms the supply side, the firms in advanced nations have both the technological know-how and abundant capital to develop new products.
- Overseas Innovation: As soon as the new product is well developed, its original market well cultivated, and local demand adequately supplied, the innovating firm will look to overseas market in order to expand its sales and profits. Thus this stage is known as ” Pioneering or international Introduction” Stage. The technological gap is first noticed in other advanced nations because of their similar needs and high-income levels.
- Maturity: Growing demand in advanced nations provides an impetus for firms there to commit themselves to starting local production, often which the help of their governments’ protective measures to preserve infant industries. Thus, these firms can survive and thrive in spite of the relative inefficiency.
- Worldwide Imitation: This stage means tough times for the innovating nations because of its continuous decline in exports. There is no more new demand anywhere to cultivate. The decline will inevitably affect the innovating firms’ economic of scale and its production costs thus begin to rise again. Consequently, firms in other advanced nations use their lower prices to gain more consumer acceptance abroad at the expense of the innovating firm. As the product becomes more and more widely disseminated, imitation picks up at a faster pace.
- Reversal: Not only must all good things end, but misfortune frequently accompanies the end of a favorable situation. The major functional characteristics of this stage are product standardization and comparative disadvantage. The innovating country’s comparative advantage has disappeared, and what is left is comparative disadvantage.