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different stages of economic development, new markets are available to receive new

products through the demonstration effect of richer countries. At this stage, expansion

into

overseas

markets

is

by

means

of

exports.

Later,

when

the

product

becomes

standardized, other countries may offer comparative cost advantages so that gradually

production shifts to these countries. It is possible to then export back to the country that

originally invented the product. There are many examples of products that have followed

this cycle. Presently, Japan and other Asian countries are major exporters of radio sets

and other electronic appliances originally invented in the United States and Europe.

The

product

cycle

hypothesis

is

useful

on

several

counts.

It

explains

the

concentration of innovations in developed countries, and offers an integrated theory of

international trade and FDI. Furthermore, it provides an explanation for the rapid growth

in exports of manufactured goods by the newly industrialized countries. It therefore

presents a useful point of departure for the study of the causes of international

investment.

However, the hypothesis does not resolve the question of why MNCs opt for the

use of FDI rather than to license their technology to local firms in the host (recipient)

countries. This issue has been examined with reference to the theory of the firm, notably

by Hymer (1976), and Dunning (1977, 1988). Hymer (1976), in a groundbreaking

viewpoint on industrial organization as an incentive for FDI, focuses on the advantages

that

some

firms

enjoy.

Such

advantages

include

access

to

patented

and

generally

unavailable technology, team-specific management skills, plant economies of scale,

special marketing skills, possession of a brand name, and so on. Before a firm invest

abroad, the potential gains from these advantages must outweigh the disadvantages of

5

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