Vernon (1966)

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Vernon (1966) - PCM

The US firms spend more on product development, but it is not “to some obscure sociological drive for innovation but to more effective communication between the potential market and potential supplier of the market” Pg193.
(Innovation is market, rather than technology-driven)

In the mature product stage, locational implications become important. The need for flexibility declines and the production becomes more standardised, making it easier to set up plants in foreign countries and exploit possible economies of scale. At this stage, production costs begin to take precedence over product characteristics (as the design is now more standardised). Price elasticity is increasing. Pg196

It will be appealing to similar capital-intensive countries if it is a good substitute for high cost labour or if it has a “high income elasticity of demand”. Pg197
(inadvertently predicting US’s future state of importing capital-intensive goods)

FDI will only occur when the marginal production cost and exporting costs is higher than the cost of prospective production in the foreign market.

US firms only respond to threats, rather than opportunities, including increased tariffs etc. Pg198

Vernon realises that people are not rational and can only make decisions with the limited information they have, arguing that the assumption that an entrepreneur will “react rationally when offered the possibility of a lower-cost location abroad is, of course, somewhat suspect”. Pg200
“Threat in general is a more reliable stimulus to action than opportunity is likely to be”.

He mentions that large firms seeing fellow US firm shifting abroad as a threat to the status quo, as it brings with it the threat of price competition and that their competitor will have a bigger share of what they now see as a global market. They will follow the “pathfinding investor” into the same areas, as their knowledge of the foreign markets will be impaired. (Oligopolies and MNE strategy!)

He mentions the Leontif paradox, which predicts that the US imports capital-intensive goods more than it exports them (in opposition to HO, which states that because the US is a capital-intensive economy, it exports them and imports labour-intensive goods). The PCM argues that the US exports high-income and labour-saving products in the early stages and imports them during the later stages.

(Because this is when they become standardised and it is thus cheaper to make them abroad and import them? Thus the PCM shows how the HO model leads to the L paradox, validating both of them, but at different times). Pg201

In order to produce and export large amounts of goods, the US relies on labour inputs. When the US is importing goods the process relies on capital.

We need to remember that information is not free. It comes at a cost. This means that entrepreneurs are less likely to pay the price of investigating unknown overseas markets. Pg202

The search for low-cost processes, that is plants in an unknown, low-wage economy, is sparked by the threat of increasing price elasticity (Firms move on threat, rather than opportunity, showing the bounded rationality of firms from market failure).

The easier it is to mass produce (the simpler the product), the more likely a firm is to set up a manufacturing plant in a low-wage country, as it can then benefit from economies of scale. Pg204

Mentions negative location advantages (though not by name), that “extensive export constraints and overvalued exchange rates are combining to prevent and exports that would otherwise occur” Pg205

Seems to be wondering why firms from developed countries invest in less developed countries which have less money. Investors invest because of resources which are non-capital (surely this is LAa and the FDI theory)
International lenders lend money at uniform rate, no matter the identity of the country. If an underdeveloped country wants some money, they have to show that they have resources enough, in the form of a project, which can “pay its own way”.