1. Raymond Vernon’s Three-Stage Theory
The product life cycle theory was first proposed by American economist Professor Raymond Vernon in his article “International Investment and International Trade in the Product Cycle” published in the Quarterly Journal of Economics in 1966. Professor Raymond Vernon divided the product life cycle into three stages, namely the new product stage, the product maturity stage and the product standardization stage. He believed that products are similar to life and have a process of birth, maturity and aging. (1) New product stage. In the new product stage, countries with large domestic market capacity and high investment in research and development funds have advantages in developing new products and adopting new technologies. In this stage, enterprises have the secrets of new technologies, so for enterprises to meet the needs of the international market in the form of export trade, one of the safest and most favorable options is to produce domestically and mainly supply products to the domestic market, followed by (2) product maturity stage. In the product maturity stage, new technologies are becoming more mature and products are basically finalized. With the increasing demand in the international market, the price elasticity of products (the degree of change in market demand caused by price changes) increases, and enterprises are particularly eager to reduce product costs. Since foreign labor costs are lower than domestic labor costs, the marginal cost of domestic production (the increase in total cost brought by each unit of newly produced products) is greater than the cost of foreign production, so it is more advantageous to transfer the production base from domestic to foreign countries. (3) Product standardization stage. In the product standardization stage, both products and technologies have been standardized, the technological monopoly advantage of enterprises has disappeared, and competition is mainly concentrated on price. The production advantage has shifted to regions with low technology levels, low wages and labor-intensive economic models. When the domestic market has become saturated and the export of products from other developed countries has increased sharply, enterprises have made direct investments in developing countries and transferred their standardized technologies. According to the principle of comparative cost, enterprises have reduced or stopped producing the product in their own country on a large scale and instead imported the product from abroad.
2. Wales’ Four-Stage Theory In 1986, Wales, another American sales scholar, conducted further research on the new product life cycle theory proposed by Professor Raymond Vernon and used the new products developed in the United States as an example to illustrate his views. Wales believes that the new product life cycle should be divided into four stages.
(1) The first stage. American companies do not have a monopoly on science, technology and knowledge, but they are very familiar with the American consumer market and can quickly obtain consumers’ feedback on new products and improve them. In addition, the United States has an advantage in the supply of raw materials for new products and can control production costs in a timely manner, so new products must be promoted by American companies. In this stage, the United States has a relative monopoly on new products and has certain advantages in exports, which can attract the consumption of wealthy people in other countries, so the export volume continues to increase.
(2) The second stage. The number of consumers in other countries attracted by American new products continues to expand, which creates convenient conditions for companies in these regions to organize the production of new products themselves. After these regions start production, they do not need to pay transportation fees and tariffs, nor do they need to pay R&D costs. The production cost is lower than that of the United States, so their competitiveness in the domestic market must be stronger than that of the United States. However, in the third country market, since both parties have to pay transportation fees and tariffs, their competitiveness is still not as good as that of the United States. Therefore, in this stage, the production and export volume of new products in the United States will continue to increase, but the growth rate will slow down.
(3) The third stage. As the production of new products in other countries continues to expand, economies of scale continue to increase, and wage levels are lower than in the United States, the prices of their products continue to fall. Although the United States and other countries must bear the cost of long-distance transportation and tariffs for new products exported to third countries, the United States is squeezed out of third-country markets because other countries have lower costs and prices. However, under the protection of tariffs, the United States still occupies a monopoly position in its own market.
(4) The fourth stage. As other developed countries’ economies of scale continue to increase, coupled with lower wages, more advanced improved equipment, and higher technological levels, their production costs are much lower than those of the United States. They can not only beat the United States in third-country markets, but will also break through the tariff protection of the US market and enter the United States. At this time, the production and export volume of new products in the United States has dropped to almost zero, and the life cycle of such new products has ended in the United States.