INTERNATIONAL PRODUCT LIFE CYCLE THEORY

INTRODUCTION
It explains for the fundamental motivations for trade between and among the nations. It relies primarily on the traditional marketing theory regarding

(i) development (ii) progress (iii) life span

This theory looks at the potential export possibilities of product in discreet stages in the life cycle (i) Innovation (ii) Growth (iii) Maturity (iv) Decline

INNOVATION

In the first stage of innovation new product is manufactured in the domestic arena of the innovating country. A lot of effort and hard work of many years is
being involved in innovating a product. Low demand, people wont know much about the product.

Sales are generally achieved through exports to other markets, often those of the industrial countries In this stage generally it has little competition in its market abroad.

GROWTH
The growth of the product sales tend to increase so the competition as other forms enter the arena and the product become increasing in the standardize They begin the production abroad to maximize the service of foreign market and meet the activity of the competition

MATURITY
The new product enters the maturity of the lifecycle,after enjoying the excellent marketing all over the world. Percentage of sales through exporting The product becomes much familiar for the consumer of the world. However the years go by they try to evolve substitute product to this new product through their own R&D

Substitute product enter into the market competing with popular market of the product. Original firm made to compete effectively by exploiting They have to make all efforts to protect its all original brand in the maturity stage

Product enters the third stage maturity export from the home country decreases because of increased production in overseas location Foreign manufacturing facilitates increase the competition and to maximize the profit from higher sales in foreign market. At these point the price become crucial determinant of the competitiveness

Minimizing the cost become the important objective of the manufacturing firm At this point the innovator country even decide to discontinue all the domestic production and re-export the product back to the home country and other market.

Maturity is characterized by:

A decline in exporting from the innovating country.. More production standardization. Increased competitiveness in pricing. Production start up in standardization.

DECLINE

In the decline stage the product become more standardize and the price becomes the main competitive tool. Hence the advanced country starts shifting the production to the developed countries. i.e., the product imported back from the developing country to the whole country. Shifting of location of production is instrumental in changing the patterns of trade but not necessarily in the loss of market share profitability, or competitiveness of the firm.

Contributions
The most important contribution of this theory is that it explain international investment This theory is recognize the mobility of capital across country, it shift the focus from the country to a product. Technology is simplified and modified as the product moves to the different life cycle stages, where it requires less skilled labor.

Limitations
The main limitation of theory is that it is appropriate the technology based product that are most likely to experience the changes in the production process as they grow and mature. Other products either resource or service based or not easily characterized by stages of the life cycle. Finally this theory most relevant to the products of mass production and therefore use cheap labor

Example

History of photocopier: (i) Photocopier first developed in 1950 by xerox in US. (ii) Xerox used to sold it to the users initially in that country itself. (iii) Originally xerox exported photocopier from US to Japan and then advanced to European countries. (iv) And the demand grows in those countries. (v) Xerox entered to the joint venture to set up production in Japan and European countries.

(vi) Xeroxs patents on the photocopier process expired at the foreign competitors enter the market (vii) As a consequence exports from the US decline and the users in the US began to buy some of the photocopier for lower cost particularly Japan (viii) Most recently Japanese companies have found that manufacturing cost is too high in the own country so began to switch production to develop. (ix) As a result US and several other countries switched from being exporter to importer of photo copy.

Conclusion
The international product life cycle theory has been found to hold primarily for such products as consumer durables synthetic fabrics and electronically equipment. The product that have long lives in terms of times span from innovation. This theory doesnt hold for the products with a rapid time span of innovation, development .

The international product life cycle theory holds less often these days because of growth of multinational global enterprise that often introduce products simultaneously in several markets in the world.

FACTOR ENDOWMENT THEORY

Web definition of the theory

A trade theory which holds that nations will produce and export products that use large amounts of production factors that they have in abundance and will import products requiring a large amount of production factors that they lack.

Introduction

The factor endowments theory (a.k.a. Heckscher-Ohlin theory, and the Modern Theory of International Trade) is a modern extension of the classical approach and attempts to explain the pattern of comparative advantage(i.e how one country differs from the other).

How does a country differentiate from another?

There

should be some kind of natural distinction between regions. The principal criterion used to differentiate one region from another is its endowment with factors of production. Hence, regions have different factor endowments, while the factors within a region are essentially similar.

Varying ability and advantages of

specialization
What are the causes of division of labor in general? Why do individuals trade with each other, instead of each one producing his own requirements? Why does division of labor increase the total efficiency of production? The reasons may be grouped under two headings: varying ability and advantages of specialization.

VARYING ABILITY

First of all, some individuals have greater ability for certain tasks than others. Varying natural aptitudes make one more fit to be an engineer, another better suited for the work of physician or a lawyer. Some people take greater interest in gardening than in other occupations, and hence probably make better gardeners than others.

ADVANTAGE OF SPECIALIZATION

Second, even if all individuals had exactly the same natural abilities, it would be still be advantageous to have specialization in one or a small number of occupations. In this way much greater skill can be acquired than if everyone produced everything for himself. Furthermore, the workman who constantly attends to one task wastes no time changing over from one occupation to another.

In short, there results an increase in skill and a saving of time when each individual is occupied in the production of a large number of one particular article instead of cooperating in the production of a small quantity of many different articles.

Sources of comparative advantage

Turning from individuals to regions, one finds that the two regions might be quite differently endowed with facilities for the production of various articles. One reason is that they are differently supplied with productive factors. One region may have plenty of iron and coal but little land for wheat-growing, while another has plenty of wheat-growing land but a scanty supply of mineral resources; clearly the former is better adapt to iron production and less well adapt to wheat-growing than the latter.

It is the proportion of the factors in a region that determines its fitness for specific industry.

Australia has more agricultural land but less labor, and capital, and mines than Great Britain; consequently, Australia is better adapted to the production of goods that require great quantities of agricultural land, whereas Great Britain has an advantage in the production of goods requiring considerable quantities of other factors.

Australia vs Great Britain

29

Nature of a companys factory endowment and its comparative advantages

The nature of a countrys factor endowment determines the method of production and then the relative price of production factors and consequently the relative costs of products and at last the comparative advantages of a particular country.

What will happen?

Relatively abundant factor extensive method of employment relatively low price of this factor price of the goods requiring relatively large proportions of the abundant factor would be relatively low. Relatively scarce factor intensive method of employment relatively high price of this factor price of the goods requiring relatively large proportions of the scarce factor would be relatively high.

In brief, each region is best equipped to produce the goods that require large proportions of the factors relatively abundant there; it is least fit to produce goods that require large proportions of factors existing within its borders in small quantities or not at all. Clearly, this is the cause of interregional trade, just as varying individual abilities is cause of individual exchanges.

32

Case of Australia
Australia has an abundant supply of agricultural land but a scanty population. Land is cheap and wages are high in comparison with most other countries; therefore, production of goods that require vast areas of land but little labor is cheap. This is the case with wool, for example. Sheep-raising requires great areas of land but little labor, and the shearing is a relatively simple process; hence, wool can be produced at a lower cost than in countries where land is expensive, even if wages in the other countries are somewhat lower than in Australia. Similarly, regions with an abundant supply of labor, technically trained as well as unskilled, and of capital will find it profitable to specialize in manufactures, for labor is cheaper in such regions than in Australia.

kangaroo

rangeland
33

Brief Summary

Countries differ in their relative stocks of the different factors of production, these differential factor supplies influence the costs of producing particular goods. Differences in production costs lead to the comparative advantages of a country in international trade. A country with an abundant supply of capital and little labor, and therefore has a comparative advantage in and exports such capitalintensive goods.

The conclusion follows that each region has an advantage in production of commodities into which enter considerable amounts of factors abundant and cheap in that region

34

Prominent characteristics of the theory

Factor Endowment Theory of Heckscher and Ohlin has a prominent characteristic which obviously separate itself from trade theory so far of the older generations of economists.

Comments on factor endowment theory

Factor endowment theory breaks away from the classical labor value theory and tries to explain the reason of international trade in an entirely new way. Heckscher-Ohlin theory holds that comparative advantages enjoyed by different countries are the pre-requisite of trade. These comparative advantages, however, do not come from the relative differences in labor inputs of production as the classical economists described.

It is the differences in a countrys production factor endowment that determines the production costs of different countries and thus their respective comparative advantages in international trade. That is to say it is factor endowment theory not labor value theory that functions as the foundation for international trade.

 This

implies that comparative advantages and thus international trade do not related with labor at all. The very important comparative advantages are only the gifts of the nature.