What is IPLC Theory?
Prof. Raymond Vernon developed the International Product Life Cycle (IPLC) theory in 1966. He explained how a product produced in the home country gets international market and starts exporting and ultimately how the international market force the home country to start importing.
According to Vernon, demand for new innovative products grows both domestically and internationally, and foreign countries will find it cheaper to produce for their home markets as a result. Firms in the home country may eventually establish production facilities in other countries where demand is increasing, limiting the potential for export from the country where the items truly originated.
When importers and consumers in the home country find it profitable and less expensive to trade and consume equivalent foreign-made products, the home country will naturally shift from exporter to importer.
In IPLC theory, Vernon states that countries produce innovative products for consumers through extensive research and development (R&D), obviously, they were the industrialized countries. According to him, new products had been developed by US firms and sold first in the US market (e.g mass-produced Automobiles, TV, Camera Photo Piers, Computers, Semi-Conductor Chips).
He argued that the wealth and size of the US market gave US firms a strong incentive to develop new consumer products. The high cost of US labor gave US firms an incentive to develop cost-saving process innovations. It does not follow that the product must be produced in the US. It could be produced abroad at some low-cost location and then exported back into the US.
However, Vernon argued that most new products were initially produced in the US. As such, the demand for new innovative products takes place nationally and internationally, a result of this, foreign countries find it cheaper to produce the same products in their local market. And due to this, cheaper products with similar benefits get international market more rapidly, and the products take place internationally.
- International product life cycle theory explains that a new or innovative product that begins as a nation’s export ultimately becomes its import.
- The pattern and direction of trade import or export are highly influenced by the innovations based on research and development.
- During the early sixties, Prof. Stefan B. Linder propagated the concept that demand aspects of consumer tastes are highly affected by the per capita income level that determines the type of goods people buy.
- The goods produced initially for the domestic market will find consumers having similar income level at foreign markets and exports of such goods starts.
Stages in IPLC Theory
The IPLC theory states that a product has mainly four stages in its life in the international market namely – the introduction stage, the growth stage, the maturity stage, and the decline stage.
The theory holds that over the products’ life cycle in the context of the international market, production will shift to foreign locations, especially, to emerging economies as the product reaches the stages of maturity and decline.
The innovating nation no longer will have a production advantage at those stages, because markets and technologies are already widespread. So, plants begin to move to emerge nations’ markets where unskilled, inexpensive labor can be made efficient for standardized (or capital intensive, for example) production processes. Exports decrease from the innovating country as foreign production displaces them.
In any given market, products pass through four distinct phases of the life cycle in the international market. The product, as it passes through any of these phases, will have to explore markets, if they were to survive and sustain itself. For example, a product declining in one market can be introduced afresh in other markets where it would go into the introduction or growth stages.
The introduction stage is the first stage of the IPLC theory in which a new innovative product is introduced in the domestic market.
Usually, the introduction stage consists of using more labor-intensive means in production as shown in the above picture. The new product’s price is usually high. The product gets markets slowly and starts getting feedback from consumers.
Firms quickly react to feedback through R&D and by introducing new products. As the product starts to capture the market the product’s demand in the foreign market start to begin and exports also start.
In the second stage, the export volume increases rapidly as compared to the introduction stage. Along with export increment, the foreign countries also begin the production.
The competition takes place, multinational enterprises start to set up their subsidiaries in foreign nations (especially in developing nations or nations where the product’s demand is increasing), and capital intensive means are assumed to increase production.
Sales growth at home and abroad creates incentives for companies to develop the technology processes. The output becomes physically differentiated in the marketplace. The price and costs still remain relatively high. New and specialized equipment is introduced by firms.
In the third stage of IPLC theory, the exports reach the top and worldwide demand begins to level off (constant) and competition becomes intense.
The export is growing in some countries and declining in other. Foreign countries effectively run and maintain their operation in developing economies where they can enjoy a less skilled and less expensive labor force for capital-intensive production.
Foreign producers will gain experience and costs will start falling. Foreign productions displace the home country’s product and the home country’s exports begin to decline.
In the last stage of IPLC theory, foreign firms compete in price and quality and the product’s price will fall. Exports to a home country rapidly start falling. Domestic products may disappear.
Production is concentrated in developing countries. As a product reaches the decline stage the markets in the developed countries decline more rapidly than in developing countries. The country first in the innovative product which emerged as the main exporter becomes the importer. Ultimately, an innovating country becomes a net importer.
As such, in this stage, the export declines in the home country, and the country may leave the product, enter into a completely new market, or begin to produce a new product.
Applications of IPLC Theory to International Trade
When applied to international business or trade, the IPLC theory emphasizes pricing and cost variations, as well as changes in the manufacturing process, as explanations for the creation of a multinational firm (investment or trade in a foreign country).
Both the product price and costs are high when the product is in the introduction stage. The production becomes physically distinguishable in the marketplace as the product progresses from the introduction to the growth stage.
Since new and specialized equipment is brought in to meet the rising demand, the price and costs have remained relatively high.
There are many rivals in the marketplace as the product reaches the maturity stage, and demand and price are highly elastic. To be marketed, the product must be psychologically distinct. The production cost is dramatically reduced because it is done on a massive scale.
International business firms should exploit this relationship existing among the price, cost, and production, for which they can move products from unattractive markets to more attractive ones.
Thus, while personal computers of the second latest generation are in their early maturities in the US market, they are at their early growth stages in Nepal or Bhutan.
Hence, the IPLC trade theory says that it is beneficial to move the product from the US market to Nepalese and Druk (Bhutanese) markets. It is important, however, to note that this approach is feasible as long as the demand can be created or utilized in that market.
Criticisms of IPLC Theory
The criticism of IPLC theory can be mentioned below.
- Innovative products may have very short life cycles as such the products may not compete in the international market. In addition, due to a very short life cycle, it may not complete all stages of IPLC.
- Luxury products – This theory assumes consumers will look for cost when buying. But for luxury products cost is of little concern to the consumer. In fact, production in a developing country may make the product seem less luxurious than it really is.
- Products for which a company can use a differentiation strategy, perhaps through advertising to maintain consumer demand without competing on the basis of price.