The most prominent trade theory which is quite a fit for the global scenario we have been having is the Raymond Vernon’s International Product Life Cycle Theory . This theory is infact used globally . It explains how a company start by manufacturing the product and exporting the product and then subsequently moves to the import of product and wind up of inhouse production facilities . The theory moves through three phases :
A. New Product Stage : Here a company introduces a new product on the basis of a felt need in the market . Initially it is introduced in local market as its fate is uncertain .
B.Maturing Product Stage : As the product picks up in acceptance and popularity production facilities are also introduced in foreign markets . Competition hots up as others in the fray tries to do a catch up . Towards the end of this stage product is introduced in developing countries .
C. Standardised Product Stage : As the market stabilises , product becomes a commodity and margins get thinner the company looks at avenues of producing it else where production cost is lowest . It results in product being imported into the innovative company’s country and local production facilities are shut out .
Now let us take the prime example of photocopiers . Xerox started manufacturing these in US and exported to Japan and countries in Europe . As the business grew they set up manufacturing in joint ventures in Japan and Great Britain . Once Xerox patent expired and product gained in popularity and acceptance local manufacturers came in Canon in Japan and Olivetti in Italy . As these were low cost manufacturers US exports declined and they infact started importing these . Then Japan found that production cost in their country was more so they started manufacturing these in Singapore and Thailand . This is a classic case which is quite consistent with Vernon’s International Product Life Cycle Theory .
1 . Now by subscribing to this theory the country or region is affected both positively as well as negatively. Positively because consumers gets products at most competitive rates and negatively because jobs moves out as production facilities moves out .
2. Health of export business is good for countries which are better in terms of cost of production of good . The example is China where almost everybody amongst the global brands has a production facility .
3. The trade theory in use encourages foreign businesses to set up operations in countries like China because they get a chance to keep on producing the product even after the product has become a commodity and it helps them compete on account of lesser cost of production.