The product life cycle hypothesis

The product life cycle hypothesis postulates that most products follow a life cycle in which they first appear as innovations in the home country (which is more technologically advanced than other countries)but ultimately they become standardized.FDI results from the reaction of firms, by expanding overseas, to the possibility of losing markets as the product matures.

The process goes like this.The product is initially produced at home and any foreign demand (from developed economies initially)is satisfied by exports.Rival producers, who can make the product more cheaply, will eventually emerge in these foreign markets.At this stage,the innovator will examine the possibility of setting up a production unit abroad.When the product is standardized, the innovator may decide to invest in developing economies to obtain some cost advantages, such as cheaper labor.