There will be a discussion about the Vernon’s life cycle and also the strength and weakness of the theory. There will also be a discussion on how to incorporate political risk and currency exchange risk in the capital budgeting.
The Vernon product life cycle theory is used to explain FDI. Vernon had suggested that the product goes through three stages. The first stage is it starts of as a new product. The second stage is that it becomes a maturing product and the third stage is that it finally a standardized product. In the new product stage, the product is created by the country which is the country that is advanced and will have a high-tech advantage in response to the demand for domestic and there will be more labor that will be needed for testing and also for adjusting the product. In the stage of maturing, the product will become standardized and then mass production will begin, there will be less skill labor that will be needed and capital will become vital. The product will be market internationally and search of export markets and producers will look for markets that are similar in similar countries that are advanced. Standardization stage is the final stage and this is when the factors such as location cost and production are important in figuring out the decisions of the location and the product is usually made in other countries and then imported to the original producing company. The theory of Vernon’s was based on observation for the twentieth century and this is when the world’s new products were developed by the firms of U.S. and was also first sold in the U.S. market. Vernon had argued that most of the new products were created in the U.S.
There are several strengths of this theory. The first strength is that there will be new products that will be introduced simultaneously in several countries. There are several weaknesses of this theory. The theory of Vernon had implied that overtime the main importer could change...