3.4 Modern theories
In the previous section we noted that there are other theories that attempt to explain the deficiencies of earlier theories. One of the newer theories is the technological gap theory (not mentioned in your textbook) which suggests that technology is the most significant element in explaining the pattern of international trade. The technological gap theory is similar to the product life-cycle theory which also accommodates technology as being a significant factor in explaining patterns of international trade.
The product life-cycle theory looks at the potential export possibilities of a product in five discrete stages in its life-cycle (see Figure 3.1).
Figure 3.1 The life-cycle of a product
Source: Ashegian and Ebrahimi 1990, p. 40.
- Stage 1: Introduction
A new product is manufactured in the innovating country and sold primarily in that domestic market (although not shown in Figure 2.1, this relates to the US ). Any overseas sales are generated through exports to other markets. At this stage the innovating company has little competition in markets abroad.
- Stage 2: Expansion
Sales increase, as shown in Figure 3.1(a) but so does competition as other firms enter the arena. At this point, the firm begins some production abroad, as shown by Canada , Europe and Japan , to serve foreign markets and to counter the competition.
- Stage 3: Maturity
Exports from the home country decrease, as shown in Figure 3.1(b) for the US , because of increased production in overseas locations. This is shown in Figure 3.1(b) on the intersection with the vertical line between maturity and sales decline. Price has become a critical determinant of competitiveness, so minimising costs becomes an important objective. Production may shift to less developed countries to take advantage of lower labour costs. At this point, domestic production may cease and the product is imported by the home market.
- Stage 4: Sales decline
This occurs because competitors have achieved economies of scale equal to those of the innovator.
- Stage 5: Demise
The innovator may cease production (thus the US curve moves under the horizonatal axis in Figure 3.1(b)) and leave the declining market to imitators. Typically, the product's popularity has also ceased and consumers seek other products.
The product life-cycle theory has been found to hold primarily for products such as consumer durables, synthetic fabrics and electronic equipment; that is, those products which have a long time-span from innovation to eventual peak consumer demand. The theory does not hold for products with a short time-span between innovation and obsolescence, for example, kitchen gadgets such as electric can openers and ice-cream makers.
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