One of the hypotheses that were existed in the world about the trading of goods and service is called the H-O; the theory said that the international trading would only happen inside countries that have different resources; Labor rich country will trade with capital rich country. However, the theory is not really working on the international trade, 60% of the trading volume in the world only happens with the developed country which rich of the same input which is capital.
Therefore, because the H-O theory is not effective then it appears a new theory called the product life cycle. This product life cycle does not only explain about why the international trading dominated by the trading between the developed countries, but also explains about the background of emergence the multinational corporation. Transformation from H-O theory to PLC theory
Improvement of a theory is on the improvement of the assumption. H-O theory is still a comparative statistical international trade which almost all variable is considered as exogenous or fixed (the changing is specified outside the model). It made there is a tendency that discussing international trade is just talked around assumption.
In reality a lot of variable in H-O theory had changed in endogenous model, so it cannot be generally applied. It can only represent trading between labor-rich country and capital-rich country which only 40% of international trading volume. Further this theory weakness gives the opportunity of emergence of new international trade that can also represent another 60% of international trade in developed country, which is PLC theory.
The new theory uses dynamic variable as driving motives of international trade and also can explains about the background of emergence the multinational corporation. Dynamic Characteristic of PLC Theory
PLC theory is constructed from testable hypothesis about what will happen if all of relevant curve (in previous theory is considered as a constant or fixed) changes from time to time.
This changing affects trade, and hereafter trade affects welfare. The changing conditions are supply and demand of trading commodity because the dependent variable of them (knowledge variable) does also change, received from R&D (Research and Development). Moreover technology does not fix any longer because of innovation and invention in R&D. Factor endowment does also change. One labor can produce more than one unit of a product.
In PLC theory, comparative advantage of a country is not permanent. The occurred changing of using input for production process of a new product after that product is mature in the market and standardized at the production process will shift the cost advantage from one country to another country. For example is United State lost their comparative advantage in car manufacture because another country can produce it easier and low cost production with none R&D cost. Assumptions Comparison between H-O theory and PLC Theory
Supply and Demand Condition
Fixed, Ceteris Paribus
Investment Variable Determinants
Quantity and Quality of Production Factor and Technology
Changing in Time
Monopoly, RSG, Oligopoly
Tariff may be charged
PLC Theory Derivation
PLC Theory Definition
PLC explains that product experiences three stages: introduction, maturity, and decline. In PLC theory, decline stage of a product can be delayed with international trade and developing national industry into multinational industry. PLC theory as a dynamic trading theory can explain these three areas: a) Reality of pattern and direction of international trade which is domination of developed country with rich of capital. b) Emergence of Multinational Corporation.
How they (Oligopolies Corporation) get the market domination, face the competition, maintain and raise their market domination, increase their economic scale into a big business and further how they can reach the market power as global company. c) Expansion oligopolies global company to LDCs.
PLC theory emphasizes at:
a) Driving motives of innovation and invention which is emerged of market threat and promise. b) Punctual time to do innovation and invention.
c) Communication to solve passiveness to the product and technology uncertainty problems. d) Utilizing economic of scale.
e) Market domination strategy.
Characteristic of commodity variety within developed country are: a) High price because of high R&D cost, so it has a tendency to be a luxury product in the introduction. b) Consumed by high income consumer
c) Used economical labor, which can be changed with capital. Assumption
Other assumptions used by PLC theory are:
a) Corporations within developed country have not significant difference accessing to get and saturate knowledge, but the probability to use it is not same. b) The market has these characteristic: high income consumer, high labor cost, and relatively abundant capital. c) There are threat and promise
at the market to enforce doing innovation and invention to maintain the profit.
d) There is a promise to get a lot of profit in the introduction of monopoly product. e) There is an effective communication need between producer and consumer in the development of new product stage. To get that choosing production location is considered of closeness with market location. f) There are economies of scale with learning by doing behavior, and external economies because of closeness between market and production location. The Logic
The logic here is straight forward — there are four stages in a product’s life cycle:
Phase 1: New product stage
The product is produced and consumed only in the producer country. Firms produce in the producer country because that is where demand is located, and these firms wish to stay close to the market to detect consumer response to the product. The characteristics of the product and the production process are in a state of change during this stage as firms seek to familiarize themselves with the product and the market. No international trade takes place. Phase 2: Maturing product stage
In this stage, some general standards for the product and its characteristics begin to emerge, and mass production techniques start to be adopted. With more standardization in the production process, economies of scale start to be realized. In addition, foreign demand for the product grows, but it is associated particularly with other developed countries, since the product is catering to high-income demands. This rise in foreign demand (assisted by economies of scale) leads to a trade pattern whereby the producer exports the product to other high-income countries. Phase 3: Standardized product stage
By this time in the product’s life cycle, the characteristics of the product itself and of the production process are well known; the product is familiar to consumers and the production process to producers. Vernon hypothesized that production may shift to the developing countries. Labor costs again
play an important role, and the developed countries are busy introducing other products. Thus, the trade pattern is that the producer country (a developed country) and other developed countries may import the product from the developing countries. Phase 4: Dynamic comparative advantage
The country source of exports shifts throughout the life cycle of the product. Early on, the innovating country exports the good but then it is displaced by other developed countries – which in turn are ultimately displaced by the developing countries. A casual glance at product history yields this kind of pattern in a general way.
For example, electronic products such as television receivers were for many years a prominent export of the United States, but Europe and especially Japan emerged as competitors, causing the U.S. share of the market to diminish dramatically. It because R&D cost of Europe and Japan is less than R&D cost did by United States
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