According to Vernon, which of the following influences the movement of the locus of global production from advanced countries to developing countries? A) domestic competition B) factor endowments C) supporting industries D) cost considerations E) firm structure
The correct answer and explanation is:
Correct Answer: D) Cost considerations
According to Raymond Vernon’s Product Life Cycle Theory, the movement of the locus of global production from advanced countries to developing countries is primarily influenced by cost considerations.
Vernon developed the Product Life Cycle Theory in the 1960s to explain how a product’s production location can shift internationally over time. He suggested that a product typically goes through three stages: introduction, maturity, and standardization (or decline). In the introduction stage, new products are often developed and produced in advanced countries where there is access to research and development, skilled labor, and high-income consumers. These countries provide a fertile environment for innovation and allow firms to recover initial investment costs through high pricing.
As the product enters the maturity stage, demand spreads internationally, and production may still be maintained in advanced economies to meet high standards and customer expectations. However, the product becomes more standardized, and the emphasis gradually shifts from innovation to efficiency and cost savings.
Finally, during the standardization stage, the product is no longer considered novel, and competition increases. At this point, firms focus heavily on minimizing production costs to stay competitive. This leads to relocating production to developing countries, where labor and operating costs are significantly lower. These cost considerations become the driving force behind the shift. Developing countries offer advantages such as lower wages, cheaper land, and fewer regulatory constraints. As a result, production becomes more cost-effective in these regions.
This global shift allows firms to maintain profitability in a competitive market while making the product affordable for a broader customer base. In summary, cost considerations are central to Vernon’s explanation for the shift of global production from developed to developing countries.