Question

1. Discuss with relevant examples the extent to which the product life cycle hypothesis explains the recent trend in foreign direct investment flows to developing countries.

Answer 1

Product life cycle hypothesis is related to change in the the investments due to life cycle of the product like there would be introduction life cycle at which the product will be introduced into the market and then there would be growth stage of the life cycle in which there would be a high level of investment and profits will also be reinvested back into the business in order to acquire large market share.

after the growth stage of the life cycle there would be a maturity stage of the life cycle when the company has already acquired a large amount of the market size and it is trying to retain that market share by maintenance of appropriate strategies through price fixation which will be help the company in order to to retain the market share and it will also be trying to maintain the competitiveness of the business through the declining stage by mergers and acquisitions of modern and sophisticated business so these life cycles of a product will be helpful in determination of investment flows in developing countries because these developing countries are having a underpenetrated market for different products and when these products are introduced in this developing markets there is a large potential of growth for these products and when there is adequate market which have been built by proper consumption and demand, it would lead to an appreciation into shares of those investors who has invested into those Markets and products.

So it can be said that there has been a recent increase in innvestment into foreign markets in terms of product life cycle hypothesis in order to to help in gaining capital appreciation by improvement of market share of the product because the market is highly underpenetrated in the developing economies