Paul XXXXXX
XXXXXXXXX University
International Financial Markets:
Foreign Direct Investment
FIN630 – Global Financial Management
March 17, 2011

Foreign Direct Investment:
Vernon’s product life-cycle theory Raymond Vernon’s theory was different than the modern day theories of the 1960’s. Before Vernon, economists thought the reason a country traded with another was because of some advantage it had over the other for producing a product. The advantage was thought to be mostly related to cost; a country could produce it cheaper. Vernon did not agree with this way of thinking. Raymond Vernon believed that products have a life cycle. His theory put emphasis on invention and new products. He believed that most trade came from manufactured products especially products saved consumers time and effort from work. Vernon believed that more advanced or stronger economic countries would focus on developing new products and inventions because those economies would have the economic structure to support research and development (Katsioloudes & Hadjidakis, 2007). Vernon believed that countries varied in economic development and they traded with each other not because they were superior but because it was a good opportunity for both. For example, during the 1950’s and 60’s the United States was a much more developed economic leader than Japan; however, trade between the two countries would not come from the U.S. having an advantage over Japan. It came about because it was to the advantage of both; for the U.S. it meant a chance to grow their market size and for Japan it meant the opportunity to buy new and different products. Vernon described his international product cycle theory as stages in the history of a product. First stage involved a new product, perhaps an invention first developed. The second stage was described as a maturing product. The