In contrast to the learning stages models, Vernon’s (1966, 1974, 1977, 1979) product life cycle (PLC) models were based on the production process and the adaptation to changes in the environment. Vernon (1966) proposed his original version of PLC model known as PLC model Mark I. Following some criticisms, Vernon (1974) revised the model by encompass the oligopolistic behavior of MNCs, and PLC model Mark II was formed up. The PLC models were essentially the extension of the theory of economic development as in Schumpeter (1912) into internationalization studies.
Vernon’s PLC model Mark I
The basic assumptions of the theory are that location of new products usually is started in some of the developed economies. The new product innovation and production goes through different stages of the product life cycle. In Vernon’s international PLC model Mark I, a company's internationalization can be divided into three stages:
• New product stage: in the PLC, internationalization starts in advanced market economies, and the key factors driving the process is high income and the savings on labor costs. New products are developed and marketed primarily in the domestic market, but soon export on a small scale takes place to other advanced market economies;
• Maturing product stage: the internationalization goes further due to the growing markets, the increase in competition and the standardization of the products.
This accompanies with the relocation of the production from the home country to the larger foreign markets. Depending on the production and transactions costs, the foreign market may now be served from the home base or from the new production base abroad;
• Standardized product stage: in this stage, production may be relocated to developing countries where the locational advantages can be utilized. The products may also be shipped back to the home country as well as to other country markets.
Ve rnon's PLC mode l Mark II
Stage 3
Figure 2.4 Vernon’s PLC models: Mark I and II Source: adapted from Vernon (1966, 1974, 1977, 1979)
Paliwoda (1993) points out the rationality of PLC’s process as the influence of costs including production cost, factor cost, transaction cost and capital cost. For example, if the marginal cost of production, together with the freight costs of exporting from the USA, is lower than the average cost of prospective producers in the market of import, US producers will delay the foreign investment. If economies of scale are being fully exploited, the principal differences between any two locations are likely to be factor costs. Thus, the servicing of third markets may take place from the new location, and if labour costs offset the cost of freight, the servicing of the US market as well. Vernon does not find the rationality of PLC model in terms of the decision-making relating to lower cost locations abroad.
Vernon’s PLC model Mark II
In PLC model Mark I, the notions of technological change and deregulation of markets were not taken into account. In addition, the behavioral dimensions does not have any decisive role to play. In view of the changing environment, Vernon revised his model Mark I and proposed PLC model Mark II in Vernon (1974, 1977, 1979). In PCM Mark II, the model was revised as the three stages of:
• Innovation-based oligopoly stage: in this stage, the crucial factor of product innovation is still the domestic market conditions. Due to the differences in economic conditions and social factors in different countries, the firm-specific advantages are different. The technological innovation is the major barrier of market entry for oligopolistic firms.
• Mature oligopoly stage: in this stage, the strategic decision of production is related to the reaction of other oligopolistic firms, the research and development,
the economy of scale in production and marketing. All these factors would become the barrier of market entry for the competitors. With the similar notion in Knickerbocker (1973)’ “Bandwagon Effect”, in this stage, the new strategies adopted by one MNC would influence others, and the existing balance in the market would be broken, and other MNCs would follow up.
• Senescent oligopoly: in the last stage, the economy of scale becomes weaker in terms of market barrier for oligopoly, although the oligopolistic MNCs made much effort to maintain their positions. The locational choices in this stage are mainly determined by cost and market factors, rather others.
Vernon then classifies MNCs into three types to explore their likely behavior in production cycle, namely: (i) the global scanner: the MNC with a powerful capacity for global scanning; (ii) the producers of standardized products for homogenous world demand; and (iii) the myopic innovation and home-oriented production while all decision-making are left to individual foreign producing subsidiaries.
The PLC models were the first dynamic interpretation of the determinants and relationship of international production. However, it does not address the rate of change of innovation or time lags, nor suggest the time frame and requirements of the occurrence of the different stages in the cycle. It also does not explain the exogenous factors of other firms’ production on the standardization of the product.