260 BULLETIN 1970's than in the latter half of the 1960's;but the spread persists at rates that are rapid by historical standards.Besides,the changes in the rate of spread,according to various econometric tests,seem quite impervious to changes in exchange rates or in price-adjusted exchange rates;12 so it seems reasonable to assume that we confront a basic change in the institutional structure of the MNCs concerned.13 The environmental changes.In the period after World War II,the descriptive power of the product cycle hypothesis,at least as it applied to US-based enterprises, had been enhanced by some special factors.In the early part of the post-war period,the US economy was the repository of a storehouse of innovations not yet exploited abroad,innovations that responded to the labour-scarce high-income conditions of the US market.As the years went on,other countries eventually achieved the income levels and acquired the relative labour costs that had prevailed earlier in the United States.As these countries tracked the terrain already traversed by the US economy,they developed an increasing demand for the products that had previously been generated in response to US needs.That circumstance provided the consequences characteristically associated with the product cycle sequence:exports from the United States in mounting volume, followed eventually by the establishment of foreign producing subsidiaries on the part of the erstwhile US exporters. But many of the advanced industrialized countries that were tracking over the US terrain were doing something more:They were closing in on the United States, narrowing or obliterating the income gap that had existed in the immediate postwar period.In 1949,for instance,the per capita income of Germany and of France was less than one-third that of the United States;but by the latter 1970's,the per capita income of all three countries was practically equal.In the same interval,Japan increased its per capita income from 6 percent of the US level to nearly 70 percent of that level.That shrinkage,of course,weakened a critical assumption of the product cycle hypothesis,namely,that the entrepreneurs of large enterprises confronted markedly different conditions in their respective home markets.As European and Japanese incomes approached those of the United States,these differences were reduced.And as the United States came to rely increasingly on imported raw materials,the differences in the factor costs of the various markets declined further still. Not only have the differences in income levels among these major markets been shrinking;the differences in their overall dimensions also have declined.This has been due partly to the convergence of such income levels,but partly also to the development of the European Economic Community.As a result,entrepreneurs with their home base in these different markets confront conditions that are much more similar than they had been in the past. Some of the starting assumptions of the product cycle hypothesis therefore are clearly in question.It is no longer easy to assume that innovating firms are 12 Vernon and Davidson,pp.19-20. 13 Although the data for testing the assumption are not at hand,I have assumed that parallel changes are occurring in European and Japanese firms.260 BULLETIN 1970's than in the latter half of the 1960's; but the spread persists at rates that are rapid by historical standards. Besides, the changes in the rate of spread, according to various econometric tests, seem quite impervious to changes in exchange rates or in price-adjusted exchange es'2 so it seems reasonable to assume that we confront a basic change in the institutional structure of the MNCs concerned.'3 The environmental changes. In the period after World War II, the descriptive power of the product cycle hypothesis, at least as it applied to US-based enterprises, had been enhanced by some special factors. In the early part of the post-war period, the US economy was the repository of a storehouse of innovations not yet exploited abroad, innovations that responded to the labour-scarce high-income conditions of the US market. As the years went on, other countries eventually achieved the income levels and acquired the relative labour costs that had prevailed earlier in the United States. As these countries tracked the terrain already traversed by the US economy, they developed an increasing demand for the products that had previously been generated in response to US needs. That circumstance provided the consequences characteristically associated with the product cycle sequence: exports from the United States in mounting volume, followed eventually by the establishment of foreign producing subsidiaries on the part of the erstwhile US exporters. But many of the advanced industrialized countries that were tracking over the US terrain were doing something more: They were closing in on the United States, narrowing or obliterating the income gap that had existed in the immediate postwar period. In 1949, for instance, the per capita income of Germany and of France was less than one-third that of the United States; but by the latter 1970's, the per capita income of all three countries was practically equal. In the same interval, Japan increased its per capita income from 6 percent of the US level to nearly 70 percent of that level. That shrinkage, of course, weakened a critical assumption of the product cycle hypothesis, namely, that the entrepreneurs of large enterprises confronted markedly different conditions in their respective home markets. As European and Japanese incomes approached those of the United States, these differences were reduced. And as the United States came to rely increasingly on imported raw materials, the differences in the factor costs of the various markets declined further still. Not only have the differences in income levels among these major markets been shrinking; the differences in their overall dimensions also have declined. This has been due partly to the convergence of such income levels, but partly also to the development of the European Economic Community. As a result, entrepreneurs with their home base in these different markets confront conditions that are much more similar than they had been in the past. Some of the starting assumptions of the product cycle hypothesis therefore are clearly in question. It is no longer easy to assume that innovating firms are 12 and Davidson, pp. 19-20. 13 Although the data for testing the assumption are not at hand, I have assumed that parallel changes are occurring in European and Japanese firms