CRP 415- ECONOMICS OF REGIONAL PLANNING

1) THE PRODUCT LIFE CYCLE THEORY

The theory I choose is The Product Life Cycle Theory (PLC). It was the theory of Raymond
Vernon. The product life cycle theory is an economic theory was developed in 1966 in order
to explain the pattern of international trade and foreign direct investment. The words “life
cycle” give us a hint about the understanding of the theory. Everything in life has a life cycle
so do products.
The theory states that developed countries must rely on high-tech products within research,
development and innovation. At the early stages of product life cycle, everything used to
produce is located in the home country which we can classify them as developed countries;
when product enters the world market it can be beneficial for developing countries.
Theory begins with development of a new product in the United States. The United States is
seen as an high-income and labor-scarce country therefore technological change will
positively effect production process. Therefore Vernon emphasized that new product will
have two features: it will meet to high-income demands and the product itself will be labor-
saving and capital-using. (Appleyard & Field, 2016)
Vernon states that, at the beginning getting information about market is more available in
home country so firms established at home country, as time goes firm may retain its
advantage in foreign market. Then as the country exports the goods to the rest of the world,
and product is adopted and becomes more standardized, developing countries where
production costs are lower also benefited. For example television receivers were a distinctive
export of the US but Japan emerged as a competitor, more recently South Korea and other
Asian producers have become competitors to Japan. Another example can be textile
industry, developing countries such as China, Taiwan, South Korea have become major
suppliers on the market. Furthermore automobile industry shifted from US and Europe to
Japan and South Korea. (Appleyard & Field, 2016)

In product life cycle theory, Vernon defined three categories of product based on their stage
in the theory and their behaviour in world market: new product, maturing product and
standardised product. Their meanings can be understood within their names. There are four
stages that Vernon determined in his theory: Intoduction, Growth, Maturity and Decline
stage.

Figure1: Stages of Product Life Cycle

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First stage is Introduction. In this stage new product is developed in the most advantageous
country that has research and development capability. Innovation can only be easily
accepted in developed countries due to existence of high-income consumers to buy and
eager to try new products. The product enters to the local market where demand is located in
order to reduce risks and uncertainity. There is minimal competition, sales are domestic and
prices are initially high because there is no mass production. In this stage limited
international trade exists because there is no large scale production. Xerox and Apple can be
example.
Second stage is Growth. Some general standards and product features are identified in this
stage of life cycle. Foreign demand for the product grows but it is limited with other
developed countries that can afford relatively high prices. Domestic and foreign competition
appears. Foreign direct investments decrease cost of production because labor cost and
tranportation cost is minimised. For example if a United States firm invests in French which is
another developed country, not only French but also other European countries can reach the
product This relocation of production advantage reveals capital and management are mobile
internationally. Mass production techniques started to be used in this stage therefore volume
of the production increases and also production cost is decreased.
Third stage is Maturity. In this stage developed country loses its comparative advantage
based on technology and innovation. Companies try to find a way to decrease production
cost. As a result production process and product itself become highly standardized. Domestic
production in the developed country starts to collapse and finally stop. Therefore mass
production of the standardized product relocates in developing countries which has lower
labor costs such as Indonesia, Korea, Taiwan. Developing countries start to export the
products to developed countries, and developed countries are busy with introducing new
innovative products to the market.
The last step is Decline where market is satisfied by the existing product and there is less or
no demand for the product. This stage can happen as a result of product life cycle or can be
started with the enterance of new innovative products.
If we summarize these four phases to the life cycle of a person, Introduction Stage is infancy,
Growth Stage is childhood or puberty, Maturity Stage is adulthood and Decline Stage is
elderliness.
2. THE PRODUCT LIFE CYCLE THEORY AND PLANNING
As a suitable starting point we must underline the importance of today’s economic system.
First we need to admit, the global economy allows to be innovative and technology based
and second important point is that every actor of the market wheter is a producer or a
consumer (wheter companies or countries etc) is interrelated to each other in the global
system. We can assume that desicions of each actor has effect others’ desicions. Alltogether
these desicions become actions that has a spatial reflection. Governments make desicions in
order to compete with others and remain in the global economy, for example it can give
incentives to encourage a sector in a specific region that has tecnological capability and
efficient infrastrucure (such as human capital social capital and physical infrastructures) to
achieve effective production. Then those regions can compete with similar regions in other
countries. This pursue the competitiveness in order to get greater market share and helps
global economy to continue over these competition. All in all we can say that regional
development is an important stage of integrating to the global market. Macroeconomic
approaches, has national scale and also subnational scale reflections that we need to be
aware in order to integration of global system. Subnational desicions shape the regional
development patterns and achieve a persistent local economy. In subnational scale which
reveals itself as regional development, the importance of spatial organizations such as
learning regions, technology regions, innovative industrial clusters etc is undeniable. Also we
need to remember that institutional thickness is crucial in regional development. The
accumulation of knowledge, innovation capacity, inter-agent trust and reciprocity are
important dimensions of regional development in today’s world. In one hand we have global
economic system that includes these features that I mentioned above, on the other hand we
have PLC. The Product Life Cycle Model began as a framework to explain patterns of
international trade (Vernon, 1966) rather than as a model of regional growth but it can be
seen as an explanatory framework for regional growth. The Product Life Cycle Theory is
based on the assumption that regions may be accessible for production of a manufactured
good based on its stage of life cycle, production will be transferred to regions with best
conditions for production (The Product Life Cycle Theory, Mendel University). The main
focus of the theory is technological change in the context of large companies and
multinational capital, as a company or country, growing in global market includes increased
need for more capital-intensive production, more specialization, effective production
techniques and cheap labor force. Spatial consequences of these circumstances was
explained in the theory but the determinants for location choice is limited. The theory can be
used in today’s economic system only with improvement in terms of learning capabilities,
distribution of cumulative knowledge, reciprocity. In the early formulations of the product
cycle model locational element was metropolitan areas. Firms were located in metropolitan
areas or in conurbations. [Florence (1948), and Beesley (1957)]. Then the relocation and
`deconcentration' of firms to more distant locations helped maturing of production
(Lichtenberg, 1960; Vernon, 1957; 1960). We can say that large companies has a tendency
to shift production to outside of urban center, this is an important issue of regional planning
and development in terms of determining where the production facilities can be located and
what would be the best beneficial way to encourage this production process in that specific
area. This theory can be useful in order to accept local dynamics as an important instrument
for getting a share in the global market. Theory encourages the importance of technological
development and also R&D movements in order to be succesful in global economy. Vernon’s
later contributions extended the theory. He states that technological capability was important
to relocate production and exports from developed countries to developing countries (which
could be operated either by a new firms or by branch of transnational corporations). We can
combine the model with economic geograhy as an explanation of the location of R&D, high-
tech industries and new firms through analyzing capital markets, and locational shifts all at
the subnational scale (Taylor, 1986). With the light of this statement we can understand the
importance of the theory in determining the best location for production facilities due to
technological capability, lower production cost and this results as achieving regional
development. The theory is still used as an explanation of regional growth (Sternberg,
1996). All in all the theory assumes an international integration through subnational actors. It
can be used affectively as a guide for encouraging development with little improvements.
The theory is lack of the existence of Internet in global economy and also learning capacity,
reciprocity, human capital, social capital, and cumulative knowledge.

3. CRITIQUES OF THE PRODUCT LIFE CYCLE THEORY

The Product Life Cycle Theory is not a perfect model for explaning the patterns of
international market because there are some concerns about using the theory and limitations
that it can cause as I am going to explain below.
First of all the theory focuses on sales data only, if there are irregular rises and falls in the
sales due to production issues, seasonal sales or due to any other reason, the graph is
unable to be used for prediction. Another critique is that the theory is generally appropriate
for only products and not for brands or services. For example Microsoft has so many
products which have come and gone but this does not mean that the brand is in maturity
stage or decline stage. Some products of the brand are in growth stage whereas others are
maturity or decline stage. (Bhasin,2017). Moreover theory suggests that one stage of the life
cycle naturally will follow another stage but stages do not smoothly connected. Every product
is not have to experience each of the stages respectively, For instance some products can
not be successful, they can be stay in the introduction stage and never step up to growth or
maturity stages, whereas other products remain in the maturity stage for a long time. Also not
all product follow the shape of the curve. For instance, a fashion item may go up and down
through life cycle with changing fashion styles. Trend products may be popular for a while but
then may decline when there is a new trend occurs. The relative simplicity of the theory
makes it difficult to determine the stage of a product. In some cases assumptions fit perfectly
but theory is unable to generalize its assumptions about changes in time. For instance
colored television invented in the US and exported then the production shifted other
countries such as Japan, Taiwan etc. Computers and aircrafts invented also in the US and
exported but the US still has the comparative advantage despite the fact these products are
relatively standardized products. (The Product Cycle Theory, 2017) Furthermore the theory
does not help to determine how long each stage will continue. For instance, the Philips light
bulb stayed in the maturity stage for many years. The duration of each stage depends on
demand and production costs. Also the theory denotes that life comes to an end with decline,
but there are examples after decline the product may have found new popularity and
rejuvenation (International Product Life Cycle, 2017). Nokia 3310 mobile phone can be an
example.
Another critique is competitors can respond differently than what the theory states in pricing,
relocation, spendings etc. Because competitors do not always fit into theories. For example
Pegasus Airlines decrease prices drastically within the mission that everybody has right to
fly, this act reduces the prices of tickets in general. Another criticism is about the impact of
external forces. The theory suggests that desicions of customers are effected by the acts of
companies, but there are other factors that can effect market that are not controlled by
companies such as cultural changes, social dimension, technological changes, innovation
etc. Moreover the absence of external forces makes it hard to use the theory as a predicting
tool. Vernon said that the spread process of a new technology happens slowly enough to
create differences between countries in terms of access and use of new technologies. But in
1970’s this statement became unimportant because income differences between developed
countries had decreased remarkably, competitors were able to copy product faster. Basicly
the model estimates firms begin producing in one country, exporting and then building
facilities in other countries but the business landscape become much more complicated
since early 1960’s and created more complex organisational structures. We can say that
model is too simplistic because there is more entry modes and does not address
organizational issues and determinants of foreign direct investment. Blazek states that the
validity of this theory is very limited despite there are products experience this life cycle. The
critics of this theory disagree with the strong technological determinism and the incorrect
approach to the emergence of a new product as a one-time phenomenon while in reality
continuous improvement and innovation is the norm. (2008) The relation between the
company and the country is not well structured. Vernon focuses the country level.
Furthermore, he uses the product side of the product life cycle, not the consumer side,
thereby stressing the supply side. In addition to all the criques above I must add that, it is
really sceptical to accept applicability of the theory in today’s modern economy. Because
there is an undeniable effect of Internet as an important determinant in the global economy.
Internet is an accelerator when it comes to international trade and it can change the patterns
of international trade. Internet can also change the dynamics of stages and even can change
number of stages.
 Elif Gülfem URHAN
201325020

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