world of economics
- Apart from differences in the relative availability of labor, capital, and natural resources (stressed by the Heckscher–Ohlin theory) and the existence of economies of scale and product differentiation, dynamic changes in technology among nations can be a separate determinant of international trade.
- These are examined by the technological gap and product cycle models. Since time is involved in a fundamental way in both of these models, they can be regarded as dynamic extensions of the static H–O model.
- According to the technological gap model sketched by Posner in 1961, a great deal of the trade among industrialized countries is based on the introduction of new products and new production processes.
- These give the innovating firm and nation a temporary monopoly in the world market. Such a temporary monopoly is often based on patents and copyrights, which are granted to stimulate the flow of inventions.
- As the most technologically advanced nation, the United States exports a large number of new high-technology products. However, as foreign producers acquire the new technology, they eventually are able to conquer markets abroad, and even the U.S. market for the product, because of their lower labor costs.
- In the meantime, U.S. producers may have introduced still newer products and production processes and may be able to export these products based on the new technological gap established. A shortcoming of this model, however, is that it does not explain the size of technological gaps and does not explore the reason that technological gaps arise or exactly how they are eliminated over time.
Technological Gap between Countries
- Technological changes are cumulative, path-dependent, and non-specific for each country. Thus, it is hardly sharable between nations. Nowadays, it can determine the competence of a nation to a great extent, and influence demand conditions and technological policies. As a result, the technology gap theory strongly emphasizes on the role of government in prompting innovations.
- United States, as one of most technologically advanced nations in the world, exports a variety of new technology to conquer the global market. Most of the time, other countries acquire the same technology sooner or later.
- With lower labor costs, U.S. no longer holds the comparative advantage in making the same products. However, U.S. producers can keep on introducing new technology to the markets abroad and new technology gap will be formed during the process.
- As long as the new technology is diffused to developing countries, the globalization will have a positive impact on them; otherwise, the domestic market will only be harmed.
- African countries, for example, Kenya, are currently suffering from the technology gap not only globally but also domestically. Organizations, such as the United Nations, are now working hard to bind such gaps within nations.
Technological Gap between Companies
- Unlike between countries, technological changes between firms are specific. It is can be measured by the ability of the firm to produce and innovate.
- Companies, such as PwC (PricewaterhouseCoopers), offer surveys and solutions to help alleviate the gap between business and technology, which will also lead to enhanced communication and creativity of the whole business, and making the enterprise more competitive in the market.
- The 5G is an example demonstrating impact of technology gap on and between businesses. In accordance with the theory, the vice president and global innovation officer at Cisco said that “There is not any one country, one company or one continent that’s going to own 5G…I just don’t want the focus to be all about 5G and who gets to the finish line, the sprint first, because there’s a much longer race after that.’’
Product Cycle Models
- A generalization and extension of the technological gap model is the product cycle model, which was fully developed by Vernon in 1966.
- According to this model, when a new product is introduced, it usually requires highly skilled labor to produce.
- As the product matures and acquires mass acceptance, it becomes standardized; it can then be produced by mass production techniques and less skilled labor.
- Therefore, comparative advantage in the product shifts from the advanced nation that originally introduced it to less advanced nations, where labor is relatively cheaper. This may be accompanied by foreign direct investments from the innovating nation to nations with cheaper labor.
- There is cycle of product development and production.
- According to product cycle model a product goes through five stages:
- In stage I, or new-product phase (referring to time OA on the horizontal axis), the product (at this time a specialty) is produced and consumed only in the innovating country.
- In stage II, or product-growth phase (time AB), production is perfected in the innovating country and increases rapidly to accommodate rising demand at home and abroad. At this stage, there is not yet any foreign production of the product, so that the innovating country has a monopoly in both the home and export markets.
- In stage III, or product-maturity phase (time BC), the product becomes standardized, and the innovating firm may find it profitable to license other domestic and foreign firms to also manufacture the product. Thus, the imitating country starts producing the product for domestic consumption.
- In stage IV (time CD), the imitating country, facing lower labor and other costs now that the product has become standardized and no longer requires development and engineering skills, begins to undersell the innovating country in third markets, and production of the product in the innovating country declines. Brand competition now gives way to price competition.
- Finally, in stage V (i.e., past point D), the imitating country starts underselling the innovating country in the latter’s market as well, and production of the product in the innovating country declines rapidly or collapses. Stages IV and V are often referred to as the product-decline stage.