Vernon ‘s international merchandise life rhythm theory ( 1996 ) is based on the experience of the U.S. market. At that clip, Vernon observed and found that a big proportion of the universe ‘s new merchandises came from the U.S. for most of the twentieth century. It was concluded that U.S. was the first to present technological driver merchandises.
Vernon theory was used to explicate certain types of foreign direct investing made by the U.S. companies after the Second World War in the fabrication industry.
The U.S. has become a major importer of many of the goods that had one time developed, produced and exported. Vernon ‘s international merchandise life rhythm is used to try to explicate why this happened.
Harmonizing to Vernon, in the first phase the U.S. multinational companies create new advanced merchandises for local ingestion and export the excess in order to function besides the foreign markets.
Harmonizing to the theory of production rhythm, after the Second World War in Europe has increased demand for manufactured merchandises like those proposed in USA. Thus, America houses began to export, holding the advantage of engineering on international rivals.
In the first phase of production rhythm, makers have an advantage by possessing new engineerings. However at these early phases of production, the merchandises were non standardized as the nature of the goods has deductions such as monetary value snap, the communicating throughout the industry and besides the location of the merchandise itself.
As the merchandise starts to maturate, the conditions besides start to alter. A certain grade of standardisation takes topographic point and the demand of the merchandises appeared elsewhere. As demand has increased, abroad markets were copying those merchandises at a cheaper labor and overall cost. The U.S. houses were forced to execute production installations on the local markets to keep their market portions in those countries. Consequently the U.S. exports were limited.
As the markets in the U.S. and these other developed states mature, the merchandise became standardised. The developments of the life rhythm were one time once more changed. There were more demand and cheaper labor costs from abroad states, the pricing became the chief competitory tool and cost became more of an issue than antecedently. The manufacturers internationally based in advanced states so had the chance to export back to U.S. This has led to the undeveloped states offering competitory advantage for the location of production and eventually they became exporters.
This grounds suggests that the more a merchandise is standardized ; the location of production is more likely to alter. At the same clip there is besides grounds that unstandardized merchandises will keep their location in more phosphorus location.
This besides explains ; between 1950 to 1970 there were certain types of investings in Europe Western made by U.S. companies. There were countries where Americans have non possessed the technological advantage and foreign direct investings were made during that period.
To restart, Raymond Vernon believes that there are four phases of production rhythm:
And the location of production depends on the phase of the rhythm.
Phase 1: Introduction
New merchandises are introduced to run into local demands, and new merchandises are foremost exported to similar states i.e. states with similar demands, penchants and incomes.
Phase 2: Growth
A transcript merchandise is produced elsewhere and introduced in the place state to capture growing in the place market. This moves production to other states, normally on the footing of cost of production.
Phase 3: Adulthood
The industry contracts and dressed ores and the lowest cost manufacturer will win.
Poor states constitute the lone markets for the merchandise. Therefore about all worsening merchandises are produced in LDCs.
Vernon ‘s merchandise life rhythm theoretical account can explicate both trade and FDI. By adding a clip dimension to the theory of monopolistic advantage, the merchandise life rhythm theoretical account can explicate a house ‘s displacement from exporting to FDI. Initially a house when introduce a merchandise, it produces at place basking its monopolistic advantage in the export market, therefore specializes and exports. Once the merchandise becomes standardized in its growing merchandise stage, the house may be given to put abroad and export from at that place to retain its monopoly power. The challengers from the place state may besides follow to put in the same foreign state ‘s oligopolistic market.
Vernon ‘s theory implies that overtime the chief exporter may alter from exporter to importer. This leads to the low cost manufacturers going exporters.
One failing of this theory can be that Vernon ‘s position is ethnocentric. It can besides be said that many new merchandises are now produced in advanced economic systems such as Japan.
Globalization means that there is more spread and coincident production of comparative advantage.
The concluding failing of this theory is that this survey was carried out in the sixties. The universe ‘s trading importation and exportation has changed vastly over the old ages.