Shortcomings of Vernon's Iplc Model

Shortcomings of Vernon’s Model

Introduction

Raymond Vernon was an American economist and a faculty at Harvard Business School. He developed the International Product lifecycle theory in which he endeavoured to over-come the failures of the Heckscher-Ohlin model (based on comparative advantage theory). The International Product lifecycle is one of the foremost models explaining ‘International trade patterns’. The International Product lifecycle theory model observes & explains the pattern and stages of international trade & consists of 5 stages for most products. The first stage of the model suggests that during the initial years of a product, the production happens in the home country (country of product origin). The following stages go on to implicate that as the demand for the product increases domestically, the demand in other developed nations is created limited to a high-income section of the society. The demand in the other developed nations is then met by a substantial upsurge which in turn facilitates the Company to start producing in those countries to meet local demand. It is assumed that the labour cost in the home country (USA) is one of the highest in the world hence the host country over a period of time is able to produce the product at a cheaper price than the US. This gradual shift of production from the point of the origin later results in the Point of the originating country (ie. USA) to finally become an importer of the product. Stages 2, 3 & 4 discuss the above competitive growth of the product & its maturity followed by a substantial International standardisation of the product and efficiency of production hence implying maturity in the home market. Stage 5 deals with product lifecycle changing its course of production from other developed nation now to the Third world nations.

The model has a lasting appeal given its chronological approach of the:

Introduction --- Growth --- Maturity ---- Saturation --- & Decline

However it does have criticisms following the simplicity of the model which makes it susceptible.

Through our findings, we will raise valid indications to depict the ‘Shortcomings of the International Product Lifecycle’ model.

We will discuss

- Which factors determine a firm’s decision to internationalise & what makes them take the FDI route?

- The role of economics of scale in determining such patterns which have been ignored

- Why are US firms assumed to be innovative (Ethnocentric take)

- Why can’t the inventing company serve its overseas market by exports or alternatively authorise