Question

What’s the relationship between product cycle model and the basic H-O model?

Answer 1

The Product Life Cycle Theory was authored by Raymond Vernon in the 1960. It is an economic theory in response to the failure of the Heckscher-Ohlin model. H-O model had failed to explain the observed pattern of international trade. H-O model proposed that countries export what they can produce most efficiently and abundantly and import the goods that cannot be produced efficiently.

The International Product Life Cycle Theory explains the life cycle that the products go through when entered into an international market. The cycle describes how a product is introduced, how it matures and declines as a result of internationalization. The stages of Product Life Cycle are Introduction, Growth, Maturity, Saturation and Decline.

Heckscher-Ohlin model was used as a base to develop Product Life Cycle Theory. H-O model implied free mobility of capital across different sectors. Product Life Cycle Theory explains the foreign activities of the multinational companies. Product Life Cycle Theory explains that the propensity to engage in the foreign trade activities depend on the capability of the companies to upgrade the technology, human resources and all other assets and to introduce new products into the market.