Product Cycle by Kilkenny for APEC 460

This theory argues that where a product is produced is a function of what stage the product is in its life cycle.

It is based on the theory of comparative advantage (Heckscher & Ohlin, 1930s). The concept was coined by spatial economist Hoover (1948); elaborated by Vernon (1966), and applied to gain insights about industrial policy by Norton (1986). It has recently been reformalized in spatial general equilibrium by Puga & Duranton (American Economic Review, 2001).

The Product Cycle Model explains, among many things:

1. why USA is the place where the ‘new-new’ things are created

2. why businesses move around

3. why factories move from cities to non-metropolitan USA as their product matures

4. why nonmetro factories close and move to Mexico or Asia or…

5. why “economic development” activities aren’t one-shot

6. why low-wage places get stuck that way, despite growing fast

Define a product as a thing with unique or distinguishing characteristics (e.g. a Tommy Hilfinger Sweater; a Napa Valley Cabernet Sauvingnon), as opposed to commodities that share common characteristics (e.g., rubber boots, Number 1 Yellow Corn).

Define the cycle of a product like a “life cycle” or the stages a product goes through over time: conception, birth, maturation, senescence and death.

The location of production will, as predicted by comparative advantage, occur where the factor used intensively is relatively abundant. So we can map out the locations as follows:

stage	what factor is used intensively	where the factor is abundant	where demand is effective	where is this stage located
conception invention innovation	creative or educated people	US cities	US metro areas, coasts	cities in USA
birth start-up	$ capital	US cities (where the highest rents are earned)	USA	cities in USA
maturation production	engineers, skilled labor	US, Europe	US, Europe	suburbs US
mass production	factory space	nonmetro and rural USA	US, Europe	nonmetro USA
senescence	unskilled labor	LDCs	LDCs	LDCs
after-life	people with traditional skills	rural places	museums county fairs	rural USA, rural Europe, rural Asia, rural Africa

The Product Cycle Model explains:

1. Why are most of the world’s new new things created in USA? Because it is where the market is, where consumers can afford to spend money on things just because they are different; AND the U.S. is where the factors needed intensively are relatively abundant: where the wealth is, where the loanable funds are, (we are a net IMPORTING country with by far the largest INFLOW of financial capital in the world), and where creative and highly educated people concentrate.

2. Why do businesses move around? To maximize profit, businesses move when their mix of inputs, needs, and customers change. Because the mix changes over the life-cycle of the product, business move as they mature (or they will go out of business SOONER). Businesses move toward places where their inputs can be obtained less expensively (comparative advantage), toward places where the majority of their customers are (firm location theory), and away from places where the main inputs are expensive (dispersive location factors).

3. Why do factories move from cities to non-metropolitan USA as their product matures? Because they need the different mix of inputs. The first factory needs skilled employees and engineers most, and these are relatively abundant in metro areas, suburbs. Once the factory gets into mass production, they need lots of space for the machinery and equipment, but few workers. So, manufacturing plants move out of cities to rural areas as they mature.

4. Why do non-metro factories move to Mexico or Asia or…

The next phase in the product’s life cycle is when Americans are no longer the majority customers of the ‘old’ thing. The mature products are provided competitively: there are many brands. Prices are driven down by this competition to marginal cost. Floor space and unskilled labor are all that are needed in production. The cheaper it can be produced, the more third-world consumers can buy it. Such businesses survive by relocating to where both their inputs and customers are relatively abundant: Mexico or Asia or another centrally-located or highly accessible LDC. The move will reduce both production and transport costs, and this will allow the company to expand sales while selling at lower prices.

5. Why do small towns have to keep replacing “basic” businesses? Because all “basic” businesses have to move or die. But small towns can’t take it personally when a factory closes or moves overseas. No place retains factories for long. Business churning occurs at the fastest rate in cities. Businesses that stay are the “nonbasic” types that cater only to local residents.

6. Why can’t low-wage places (rural USA, LDCs) grow out of being the low-wage places? The places where new product development occurs—US/cities—are the where the supranormal profits are made. In general, profits are made only by the business to take the first risks, who made the original investments and own the patent or copyright. When the product matures, the patent expires and competitors enter, driving prices and profits down. Then production processes become standardized, and the industry has to relocate spatially. The businesses that best locate in rural and other lower-wage areas are just able to pay the going wage for labor. People with high human capital migrate out of these low-wage places. And the cycle repeats for each new-new thing. Thus, low-wage places don’t have a shot at getting rich. Its ‘way-hard to break out of being in last place in the Product Cycle because the Product Cycle is self-perpetuating.