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Vernon's product life cycle theory

Raymond Vernon's product-cycle model predicts two distinctive kinds of foreign direct investment in developing countries: fist, subsidiaries whose operations are tightly integrated into the parent's strategy to advance its competitive position in international markets; second, subsidiaries toward the host market whose profits help fund the needs of the parent but whose output is not an integral part of the parent's global sourcing network. In practice, the latter are frequently subject to domestic content, joint venture, and technology-sharing requirements; the former almost never are. (Sridhar, V., and Vijay Prashad, 2007, 65-78)

How do the two kinds of foreign direct investment differ in their impact on host country development? Somewhat surprisingly, to those who may be wary of what Vernon himself reffered to as “captive” plants, foreign investor operations intimately linked into the parent's global sourcing network make a systematically larger and more dynamic contribution to the host economy via the activities of the affiliates themselves, via backward linkages to local suppliers, and via spillovers and externalities. Foreign investor operations impeded from close integration via domestic content, joint venture, and technology-sharing requirement provide a much less positive and sometimes genuinely negative impact, especially if they are protected by trade barriers or other forms of market exclusivity. (Sridhar, V., and Vijay Prashad, 2007, 65-78)

The U.S. trade date of mid 20th century indicated that the U.S. was always an exporter of new products with a monopoly position initially, later overseas production began to displace American exports in some markets, and then foreign manufactured products became competitive in overseas markets, further reducing American exports, finally foreign goods were competitive in the U.S. The trade flow was influenced by innovations and technical update along with the time running on. Based on the trade flow, Vernon developed the theory of international product life cycle theory in 1966. Today, the theory has been diffusely implemented by MNEs throughout the world. The theory claims that a company should locate its production in the original country of invention (i.e. U.S.) during the growth of manufacturing process, and then the company moves its production to other low developing countries gradually when the product has been adopted and used in the world markets. The company will start from offering the domestic market, and then exporting its new product to other markets of advanced countries, finally importing its product back to those markets from own foreign based assembly or manufacturing facilities. However, the world's economy is a very important factor for making the theory (Vernon, 1966). Today, international business came into a new century, and the whole world economy has been changed. Hence, our international businessmen have the obligation to evaluate the continuing utility of Vernon's product life-cycle theory of the MNE. This essay will explore and understand the utility of the theory at first. And then, it will apply relevant case-studies and other data to evaluate the continuing utility of the theory for MNEs. (Sridhar, V., and Vijay Prashad, 2007, 65-78)

Knickerbocker's theory

It is possible ...