4.4.5 Vernon 's product life-cycle theory
You may recall from Chapter 3 that the product life-cycle theory (PLC) argues that when demand for a new product in other countries become significant, it becomes worthwhile for the innovating firm to set up production facilities in those countries. Alternatively, the firm may establish production facilities in other areas where labour costs are lower than in the home country and export to other regions. Now, while PLC theory gives a rationale for FDI, it does not explain why it is profitable to undertake FDI rather than continue to export from the home base, or license a foreign firm to produce the product. What PLC theory does is simply to say that when a foreign market is large enough to support local production, FDI will occur.
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