THE PRODUCT CYCLE HYPOTHESIS IN A NEW INTERNATIONAL ENVIRONMENT By RAYMOND VERNON* The last decade has produced a flowering of hypotheses that purport to explain the international trade and direct investment activities of firms in terms of the so- called product cycle.My purpose in this paper is to suggest that the power of such hypotheses has been changing.Two reasons account for that change:one,an increase in the geographical reach of many of the enterprises that are involved in the introduction of new products,a consequence of their having established many overseas subsidiaries;the other,a change in the national markets of the advanced industrialized countries,which has reduced some of the differences that had previously existed between such markets. A Word on Theory The fact that new products constantly appear,then mature,and eventually die has always fitted awkwardly into the mainstream theories of international trade and international investment.Hume,Ricardo,Marshall,Ohlin,Williams,and others have observed the phenomenon in passing,without attempting any rigorous formulation of its implications for international trade and investment theory.In the past decade or two,however,numerous efforts have been made to fill the gap. Some have dealt mainly with the trade aspects of the phenomenon.'But some have pushed beyond the immediate trade effects,tracing out a pattern that eventually culminated in foreign direct investments on the part of the innovating firm.2 According to the product cycle hypothesis,firms that set up foreign producing facilities characteristically do so in reliance on some real or imagined monopolistic advantage.In the absence of such a perceived advantage,firms are loath to take David Felix,Seev Hirsch,Sanjaya Lall.L T.Wells,Jr.and L.H.Wortzel reacted critically to various points in an earlier draft,a fact that led to some significant revisions. I For instance,M.V.Posner,'International Trade and Technical Change,Ozford Economic Papers, October 1961,pp.323-341:Gary Hufbauer,Synthetic Materials and the Theory of International Trade (Cambridge:Harvard University Press,1966);Seev Hirsch,'The Product Cycle Model of International Trade-A Multi-Country Cross Section Analysis,Oxford Bulletin of Economics and Statistics,November 1975,vol.37,no.4,pp.305-317:W.B.Walker,'Industrial Innovation and International Trading Performance',mimeo.Science Policy Research Unit,Sussex University,October 30,1975;and M.P. Claudon,International Trade and Technology:Models of Dynamic Comparalive Advantages (Washington, D.C.:University Press of America,1977). 2S.H.Hymer,The International Operations of National Firms (Cambridge:MIT Press,1976)based on the author's 1960 Ph.D.thesis;Raymond Vernon,'International Investment and International Trade in the Product Cycle',Quarterly Journal of Economics,May 1966,pp.190-207:W.H.Gruber and others. 'The R&D Factor in International Investment of US Industries'.Journal of Political Ecomomy,February 1967,pp.20-37:Thomas Horst,'The Firm and Industry Determinants of the Decision to Invest Abroad:An Empirical Study'.Revie of Ecomomics and Statistics,vol.54.August 1972,pp.258-66:S.P. Magee,'Multinational Corporations,The Industry Technology Cycle and Development.fournal of World Trade Law,vol.11,no.4.July-August 1977,pp.297-321;P.I.Buckley and Mark Casson,The Fulure of the Multinational Enterprise (New York:Holmes and Meier,1976):Paul Krugman,'A Model of Innovation,Technology Transfer,and The World Distribution of Income'.Journal of Political Economy. April1979,pp.253-266. 255THE PRODUCT CYCLE HYPOTHESIS IN A NEW INTERNATIONAL ENVIRONMENT By RAYMOND VERNON* The last decade has produced a flowering of hypotheses that purport to explain the international trade and direct investment activities of firms in terms of the so￾called product cycle. My purpose in this paper is to suggest that the power of such hypotheses has been changing. Two reasons account for that change: one, an increase in the geographical reach of many of the enterprises that are involved in the introduction of new products, a consequence of their having established many overseas subsidiaries; the other, a change in the national markets of the advanced industrialized countries, which has reduced some of the differences that had previously existed between such markets. A Word on Theory The fact that new products constantly appear, then mature, and eventually die has always fitted awkwardly into the mainstream theories of international trade and international investment. Hume, Ricardo, Marshall, Ohlin, Williams, and others have observed the phenomenon in passing, without attempting any rigorous formulation of its implications for international trade and investment theory. In the past decade or two, however, numerous efforts have been made to fill the gap. Some have dealt mainly with the trade aspects of the phenomenon.' But some have pushed beyond the immediate trade effects, tracing out a pattern that eventually culminated in foreign direct investments on the part of the innovating firm.2 According to the product cycle hypothesis, firms that set up foreign producing facilities characteristically do so in reliance on some real or imagined monopolistic advantage. In the absence of such a perceived advantage, firms are loath to take * David Felix, Seev Hirsch,Sanjaya Lau, L. T. Wells, Jr. and L. H. Wortzel reacted critically to various points in an earlier draft, a fact that led to some significant revisions. I For instance, M. V. Posner, 'International Trade and Technical Change', Oxford Economic Papers, October 1961, pp. 323-341; Gary Hufbauer, Synthetic Materials and the Theory of International Trade (Cambridge: Harvard University Press, 1966); Seev Hirsch, 'The Product Cycle Model of International TradeA Multi-Country Cross Section Analysis', Oxford Bulletin of Economics and Statistics, November 1975, vol. 37, no. 4, pp. 305-317; W. B. Walker, 'Industrial Innovation and International Trading Performance', mimeo. Science Policy Research Unit, Sussex University, October 30, 1975; and M. P. Claudon, International Trade and Technology: Models of Dynamic Comparative Advantages (Washington, D.C.: University Press of America, 1977). 2S.H. Hymer, The International Operations of National Firms (Cambridge: MIT Press, 1976) based on the author's 1960 Ph.D. thesis; Raymond Vernon, 'International Investment and International Trade in the Product Cycle', Quarterly Journal of Economics, May 1966, pp. 190-207; W. H. Gruber and others, 'The R & D Factor in International Investment of US Industries',Journal of Political Economy, February 1967, pp. 20-37; Thomas Horst, 'The Firm and Industry Determinants of the Decision to Invest Abroad: An Empirical Study', Review of Economics and Statistics, vol. 54, August 1972, pp. 258-66; S. P. Magee, 'Multinational Corporations, The Industry Technology Cycle and Development',Journal of World Trade Law, vol. 11, no. 4, July-August 1977, pp.297-321; P.J. Buckley and Mark Casson. The Future of the Multinational Enterprise (New York: Holmes and Meier, 1976); Paul Krugman, 'A Model of Innovation, Technology Transfer, and The World Distribution of Income',Journal of Political Economy, April 1979, pp. 253-266. 255