No one will deny that products come into existence, change in character, and eventually disappear or become altered out of all recognition. Archaeologists, historians, businessmen and ordinary people have no difficulty in recognizing that fact. Economists, at least since David Hume, have occasionally acknowledged the phenomenon. But until a decade or two ago, the disposition of economists to use that process as a basis for formal inductive or deductive analysis has been extraordinarily limited. The ideas have surfaced from time to time in the works of John Williams (1947), Donald MacDougall (1957) and Michael Posner (1961) among many others, only to slip back into limbo. When economists have found it difficult to disregard innovation and product change in any formal analysis, they have usually assumed that the economic effects of innovation could be captured through its consequences for increased productivity, hence through a change in production costs. The appearance of the railroad, the automobile and the commercial aircraft, therefore, was usually thought to have been captured by referring to a decline in the cost of transportation; the appearance of nylon was treated as the equivalent of a decline in the cost of thread.

Meanwhile, businessmen and business schools came to speak of products as going through a life cycle. During the course of that cycle, predictable changes were thought to occur in product characteristics, hence in production technique and production location. Equally predictable changes were seen in the nature of the market during the life cycle of a product, including changes in the prevalence of competition and in the character of demand.

In their early stages, new products tended to be unstandardized in character, as suppliers experimented with different inputs, different production processes, and different designs of the final product. This was a stage, therefore, in which suppliers could not readily determine an optimum location, production scale or sale price, and in which product differentiation among suppliers was relatively high. In a later stage, the number of suppliers would increase, the product would become more standardized, production and location decisions would be made with less uncertainty, and the price elasticity of demand – both in the aggregate and for the output of the individual supplier – would increase. Thereafter, some producers might elect to attempt some degree of product differentiation, using trade names, advertising and minor variations in product; but price elasticities at the firm level would still be quite high, demanding close attention to production costs.

These ideas, which have formed the basis of a large literature about product life cycles or product cycles over the past few decades, would ordinarily be assigned by any economist who took note of them to the microeconomics of imperfect markets. In the two or three decades immediately following World War II, however, some economists professed to see such considerable strength in the product cycle factor as to help explain the macroeconomic performance of some countries, notably, the foreign trade patterns and foreign direct investment patterns of the US economy.

In brief, the product cycle was thought to be greatly influencing the performance of the US economy as a whole because of some highly distinctive features of that country. For many decades, the United States had recorded the highest per capita incomes in the world, along with high hourly labour costs, low capital costs and low costs of raw materials. That configuration, according to the argument, had placed a distinctive cast on US innovation. US innovators specialized in generating new products that responded to the emerging demands of a mass market of high-income consumers, as well as to the desires of producers for devices that could produce goods and services with less labour.

Fortuitously, according to the argument, the US pattern of innovations created a stream of products during much of the twentieth century that subsequently would be appropriate for other countries as well. That outcome was a result of the fact that during this period, the per capita incomes and labour costs of other countries were also rising, albeit from a lower level, while the capital costs and raw material costs of these countries were declining in relative terms; hence the products that had been generated for the US economy in 1950 became increasingly appropriate for other economies in the succeeding years.

These asserted relationships, supported by numerous empirical studies, were thought to provide an important part of the explanation for the strong showing of the US economy in the exportation of manufactured products, especially in high-technology goods, along with the heavy investments of US firms in subsidiaries in foreign markets devoted to the manufacture of such products.

By the 1970s, however, it was evident that the performance of US firms in both exports and direct investment was changing. At the same time, the product cycle factors that were thought to have produced the strong international performance of the US economy up to that time also were seen as considerably altered. For one thing, the per capita incomes of Western Europe and Japan were rapidly rising to the US level. Moreover, the distinctiveness in the profile of US factor costs was being obliterated, as the global costs of capital and raw materials came to be reflected increasingly within US markets. As a result, Europe-based and Japan-based innovators, responding mainly to the conditions of their own home markets, were found to be challenging US innovators with similar products.

Moreover, the 1970s interrupted the long-time global trends that had created markets for US innovations. Income growth was interrupted; capital costs and material costs rose more rapidly than labour costs. Now it was the turn of the European and Japanese innovators, with their long-time emphasis on the conservation of materials, the improvement of product performance, and the paring of costs. As a consequence, the United States found itself importing on a large scale products in which such characteristics had come to matter, such as steel, electronics and automobiles.

The power of the product cycle concept as an explicator of the export and investment behaviour of the US economy accordingly declined in the 1970s. As US products matured in world markets, US producers were pressed increasingly to concern themselves with the costs and prices of those products. Moreover, once the US firms had established their multinational networks, the existence of those networks gradually altered the perceptions and calculations of some US-based firms. Some began to respond to conditions in foreign markets, as well as the home market, to provide the stimuli for their innovations. Some began to think in terms of world models for their products, with production facilities for component parts established in any country in the world where factor cost considerations might indicate. Trends of this sort reduced the relevance of the nationality of the parent in determining the direction of the firm’s innovations and in determining the patterns of its imports and exports.

Still, the product cycle concept continues to have some considerable utility. Most producing firms continue to produce within a single national economy, even though the relative output of such firms is considerably smaller than their relative numbers. Moreover, national economies continue to retain some distinctive national characteristics, a fact that may lead their entrepreneurs to generate distinctive new products. Thus, US and Israeli producers operate in economies that are heavy producers of military goods; Argentine and Indian producers in economies in which they are challenged to overcome the handicaps imposed by unreliable supplies of power or transportation; Singapore producers in a national economy so small that it cannot provide the basis for scale economies. These different conditions will tend to push innovations in somewhat different directions, creating fertile grounds for theorizing about the trade and investment patterns that these differences will eventually produce.

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