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Assignment - Theories of International Business

The international product life cycle theory proposes that a product develops in a developed nation where demand is initially high. Over time, as costs increase, exports to other developed countries occur. Demand then grows in these other countries, allowing local production and standardization. Eventually, developing countries gain production advantages. The theory differs from other international theories such as mercantilism which advocated trade surpluses, absolute advantage which focuses on single product efficiency, comparative advantage which emphasizes specialization, and Heckscher-Ohlin which considers a country's resource endowments.

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38 views

Assignment - Theories of International Business

The international product life cycle theory proposes that a product develops in a developed nation where demand is initially high. Over time, as costs increase, exports to other developed countries occur. Demand then grows in these other countries, allowing local production and standardization. Eventually, developing countries gain production advantages. The theory differs from other international theories such as mercantilism which advocated trade surpluses, absolute advantage which focuses on single product efficiency, comparative advantage which emphasizes specialization, and Heckscher-Ohlin which considers a country's resource endowments.

Uploaded by

Puneet sharma
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Assignment – Theories of International Business

Topic: Intl' Product Life Cycle Theories and how is this theory different from
other theories.

About: Intl' Product Life Cycle Theories


It is propounded by Raymond Vernon’s Theory. A product develops in a
developed nation and the demand of product is high in the nation but over
time the pressure for cost reduction grows.
The limited initial demand in other advanced countries does not make it
worthwhile for firms in those countries to start producing the new product,
but it does necessitate some exports from the country of development. Over
time, demand for the new product grows in other advanced countries. It
becomes worthwhile for foreign producers to begin producing for their home
markets.
As the market in these foreign markets start to mature, the product becomes
more standardized and price remains the only competitive weapon. This
results in the developing countries to acquire a production advantage over
advanced countries.
Product life cycle is the course that a product’s sales and profits take over its
lifetime. It has following distinct stages: -
Introduction
This is a period of slow sales growth as the product is introduced in the market.
Profits are non-existent in this stage because of the heavy expenses of product.
The strategy is to create wide spread awareness. Costs are incurred in building
distribution and increasing awareness through heavy promotion.
Growth
Reaping off the benefit of promotion during the introduction stage. This is a
period of rapid market acceptance and increasing profit. Strategy might be cost
based, differentiation or niche market focus. Unit manufacturing costs begin to
fall as fixed costs are spread over more production units and workers move
down the learning curve.
Maturity
A period of slowdown in sales growth because the product has achieved
acceptance by most potential buyers. Profits level off or decline because of
increased marketing outlays to defend the product against competition.
Decline
A period when sales fall off and profits drop. The firm may continue to market
the product hoping that competitors will discontinue their products. Strategies
are to maximize profit by eliminating as many product costs as possible as sales
slow, or else to eliminate the product altogether.
Other theories
Mercantilism
The mercantilist doctrine advocated government intervention to achieve a
surplus in the balance of trade.
Absolute Advantage
Based on Adam Smith’s “The Wealth of Nation”. A country has an absolute
advantage in the production of a product when it is more efficient than any
other country in producing it.
Comparative Advantage
According to David Ricardo’s theory of comparative advantage it makes sense
for a country to specialize in the production of those goods that it produces
most efficiently and to buy the gods that it produces less efficiently from other
countries.
Heckscher-Ohlin Theory
The theory of factor endowment. Factor endowment means the extent to
which a country is endowed with such resources as land, labour and capital.

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