Explain Vernon’s product life-cycle theory of FDI. What are the strength and weakness of the theory?
Answer: As to the product life-cycle theory, companies undertake FDI at a certain stage in the life-cycle of the products which they primarily introduced. While a new product is introduced, the firm selects to keep production at home, close to customers. But while the product become mature and foreign demands develop, the company may be persuaded to start production in foreign countries, particularly in low-cost countries, to serve the local markets also to export the product back to the home country.
Since can be inferred from the boxed reading on Singer in the text, the product life-cycle theory can describe historical development of FDI very well. Though, in current years, the international system of production has become so much complicated to be explained neatly by the life-cycle theory. For instance, new products are frequently introduced simultaneously in several countries and production facilities may be located in many countries at identical time.