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244 International Business- Dr. R. Chandran The floating exchange rate regime of 1970s and 1980s clearly showed that exchange rates over short periods depend significantly on asset market considerations rather than price movements. The other issues associated with PPP theory are those of index numbers, inconsistency in the basket of products considered for inflation calculations and the weight age procedures adopted. However the theory holds well in long run. Empirically when prices gets affected by a large number of variables the exchange rate may overshoot the value postulated by the PPP theory. Thus, there is more to exchange rates than what is stated in PPP theory. The deviations of exchange rates from those postulated by the theory are fairly persistent in countries with unstable monetary policies. The PPP theory plays a significant role in describing exchange rates in the long run or when inflationary forces are significant. Whether or not the PPP theory provides a tool to determine real exchange rate or prices in international markets is a moot point that continues to be debated. This is the reason why the PPP theory failed to explain volatility of exchange rates, which was a prominent feature of the floating rate experience during late 1990s. Current account performance and the monetary aspect of exchange rates are a simplified approach to study exchange rate variations. The view put forward by Keynesian Balance of Payment (BOP); dominate analysis during the 1950s because capital movements were minimal. The influence of asset markets and portfolio preferences of investors plays an important role in the present context of exchange rate determination and the PPP theory only supports the exchange rate variations in long run. THEORY OF PRODUCT LIFE CYCLE Theory of international product life cycle propounded by Raymond Vernon emphasizes that every product has to pass through different stages. Conceptually, the life cycle consists of four stages- introduction, growth, maturity and decline. Only for Private Circulation

245 International Business- Dr. R. Chandran To understand the concept very clearly the international product life cycle starts from the location where the products originates. The introduction stage is marked by innovation. Innovation is an outcome of research and development. According to product life cycle theory, the production location for a specific product moves from one country to another at different stages. Generally, the life cycle movement starts from advanced countries where considerable amount is spent for research and development. Many occasions failures may occur. Still they pursue innovation. Out of ten innovations, two may be commercially viable for which they do not hesitate to spend money other eight innovations. 1. Introductory Stage New products are generally developed after observation of demand, utility and benefits a group of a group of customers enjoy in a given market. It is a normal practice that Japanese company develops a new product for Japanese market first and US Company develops a product for US market first. The Research and Development group creates a new product and predominantly the company concentrates on the domestic market and gradually starts export to other countries. By way of getting constant market feed back the company modifies or alters or adds new features to match international markets. Importance of innovation and decision of locations Over the past 50 years all the new products have been developed either in US or in Europe or in Japan. The industrialized countries are having advantage of research, technological infrastructure, and manpower. Companies like Merck, Siemens, Sony, Honda motors, General motors, Matsushita allotted huge funds for such development. Those companies are capable of taking the risk on new product development in anticipation of long term gainful results. Innovations are taking place in such companies on continuous basis. Few companies concentrate more on technological innovative products. Few companies are making improvements in the existing products. Few companies modify methods of manufacturing and process. Even though the debate is going on that developing countries and less developed countries have lacunae in research capabilities currently innumerable innovations are taking place in developing and less developed countries also. In future, the industrialized countries will locate innovation centers or R&D intensive operations in developing countries. Movement of labour and products Only for Private Circulation

244<br />

<strong>International</strong> <strong>Business</strong>- <strong>Dr</strong>. R. <strong>Chandran</strong><br />

The floating exchange rate regime of 1970s and 1980s clearly showed that<br />

exchange rates over short periods depend significantly on asset market<br />

considerations rather than price movements.<br />

The other issues associated with PPP theory are those of index numbers,<br />

inconsistency in the basket of products considered for inflation calculations<br />

and the weight age procedures adopted. However the theory holds well in<br />

long run. Empirically when prices gets affected by a large number of<br />

variables the exchange rate may overshoot the value postulated by the PPP<br />

theory.<br />

Thus, there is more to exchange rates than what is stated in PPP theory.<br />

The deviations of exchange rates from those postulated by the theory are<br />

fairly persistent in countries with unstable monetary policies. The PPP<br />

theory plays a significant role in describing exchange rates in the long run or<br />

when inflationary forces are significant. Whether or not the PPP theory<br />

provides a tool to determine real exchange rate or prices in international<br />

markets is a moot point that continues to be debated. This is the reason why<br />

the PPP theory failed to explain volatility of exchange rates, which was a<br />

prominent feature of the floating rate experience during late 1990s.<br />

Current account performance and the monetary aspect of exchange rates<br />

are a simplified approach to study exchange rate variations. The view put<br />

forward by Keynesian Balance of Payment (BOP); dominate analysis during<br />

the 1950s because capital movements were minimal. The influence of asset<br />

markets and portfolio preferences of investors plays an important role in the<br />

present context of exchange rate determination and the PPP theory only<br />

supports the exchange rate variations in long run.<br />

THEORY OF PRODUCT LIFE CYCLE<br />

Theory of international product life cycle propounded by Raymond Vernon<br />

emphasizes that every product has to pass through different stages.<br />

Conceptually, the life cycle consists of four stages- introduction, growth,<br />

maturity and decline.<br />

Only for Private Circulation

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