lnternational Economics, 1 5th Edition 139 fhapter 7 ( irrnl.'tl'' rrirri Tr''tiLl Develcping a new exportable natural resource can {a'Jst prokllems. One. discussed iater in this chaptel is the prcblem of "immiserieing growth"; lf you are already exporting and- ycur J*pott expansion lowers the wcrld price of your exports, ycu could end up worse off' A second is the apparent problem called the l":r:ii' ':iii'rj''i:';'r' in which new production of a natural resour{e results in a decline in production of manuf*c- tured products (deindustria lization)' For the Netheriands. ihe origin of the disease was the development of new natural gas fields under the North Sea. li leemed that the mole the Netlrerlands developed its natural gas production' the mcre depreii'ed its manufaeturers of traded gcods became' Even the windfaii price increases inut tf,. two oil shocks offered the Netherlands (all fuei prices skyrocketed, including that for naturai gas) seented to adci to indusiry's slump' The Dutth disease has been thought to have spread to Britain. Norway. Australia, Mexico' ancl cther countries that have newiy devek:ped natural resourceg' The main premise o{ this fear is corre'ct: Under many'realistic conditions, the windfall of a ner"'r natural resource does indeed erode pro{its and production in the manufactured goods se'tor' Deinclustrialization cccurs for the same reason that underiies the Rybczynski theorem intro- duced in this chapter: The new s€ctor draws resources away from the manufacturing secto!-' Specifically" to develop proriuction of the naturai resource, the sector must hire labor away from the manufacturing sector, and it must obtain capital that otherwise would have been invested in the manufacturing sector' Thus, the rnanuiat- turing sector contracts. lournalistic coverage of the link beturee* natural resource development and deindustii- "f i=rtion tends to discover the ba:ic Rybczynsl*i effect in a different way' The press tends i* ""tli* that the develcpment of the expcrta*ie natural regource causes the nation's {$tl*l}{}{ to rise in value on foreign exchangc r**rk*t't because of the increased demand far li:e tc$?t" iryt .uttunry as fareign buyers pay f*r ii: r*:' pu,:rf,rt*u. A higher vaiue of the natio*'s cur' ienry makes it harder for its indurlriai firn:si* .o*p*t" against foreign products whose pr*'{e is now relativeiy lowe*r. lo the manufactxr*'tag' sector this feels like a drop irr demand' a** '€*e. ,*.io, .ontracts. The foreign exchang* r**rk#" in gravitating back toward the origin*l bsi'Bt3{* cf irade. is pioducing the same result w* s'r#i*s get from a barter trade model: lf you eryryp i'rore o* a good, You'll end uP either *;x$sq.€1 ing l*r, af -another good er impo*ir'g ry' Sorietfring has to give so that tiade wril'rctilrff to the same balance as before' Even though the Dutch disease does lead to some cleindustrialization. it is not clear that this is really a national problem' Merely shifti ...

1. lnternational Economics, 1 5th Edition 139
fhapter 7 ( irrnl.'tl'' rrirri Tr''tiLl
Develcping a new exportable natural resource
can {a'Jst prokllems. One. discussed iater in
this chaptel is the prcblem of "immiserieing
growth"; lf you are already exporting and- ycur
J*pott expansion lowers the wcrld price of your
exports, ycu could end up worse off' A second is
the apparent problem called the l":r:ii' ':iii'rj''i:';'r'
in which new production of a natural resour{e
results in a decline in production of manuf*c-
tured products (deindustria lization)'
For the Netheriands. ihe origin of the disease
was the development of new natural gas fields
under the North Sea. li leemed that the mole the
Netlrerlands developed its natural gas production'
the mcre depreii'ed its manufaeturers of traded
gcods became' Even the windfaii price increases
inut tf,. two oil shocks offered the Netherlands
(all fuei prices skyrocketed, including that for
naturai gas) seented to adci to indusiry's slump'
The Dutth disease has been thought to have

2. spread to Britain. Norway. Australia, Mexico'
ancl cther countries that have newiy devek:ped
natural resourceg'
The main premise o{ this fear is corre'ct: Under
many'realistic conditions, the windfall of a ner"'r
natural resource does indeed erode pro{its and
production in the manufactured goods se'tor'
Deinclustrialization cccurs for the same reason
that underiies the Rybczynski theorem intro-
duced in this chapter: The new s€ctor draws
resources away from the manufacturing secto!-'
Specifically" to develop proriuction of the naturai
resource, the sector must hire labor away from
the manufacturing sector, and it must obtain
capital that otherwise would have been invested
in the manufacturing sector' Thus, the rnanuiat-
turing sector contracts.
lournalistic coverage of the link beturee*
natural resource development and deindustii-
"f
i=rtion tends to discover the ba:ic Rybczynsl*i
effect in a different way' The press tends i*
""tli*
that the develcpment of the expcrta*ie
natural regource causes the nation's {$tl*l}{}{
to rise in value on foreign exchangc r**rk*t't

3. because of the increased demand far li:e tc$?t"
iryt .uttunry as fareign buyers pay f*r ii: r*:'
pu,:rf,rt*u. A higher vaiue of the natio*'s cur'
ienry makes it harder for its indurlriai firn:si*
.o*p*t" against foreign products whose pr*'{e
is now relativeiy lowe*r. lo the manufactxr*'tag'
sector this feels like a drop irr demand' a** '€*e.
,*.io, .ontracts. The foreign exchang* r**rk#"
in gravitating back toward the origin*l bsi'Bt3{*
cf irade. is pioducing the same result w* s'r#i*s
get from a barter trade model: lf you eryryp
i'rore o* a good, You'll end uP either *;x$sq.€1
ing l*r, af
-another
good er impo*ir'g ry'
Sorietfring has to give so that tiade wril'rctilrff
to the same balance as before'
Even though the Dutch disease does lead
to some cleindustrialization. it is not clear that
this is really a national problem' Merely shifting
resources away from the manufacturing sector
into the producticn of natural resources is not
necessarily bad, despite a rich foiklcre assufi-
ing that industria! expansion is sornehow key r*
prlsperity. The country usually gains fr**r C*vel-
oping production o{ itr natuta! test:urtee, *s lang
.i tnlt'gto*th does not tip into the realn'r af the

4. immiserizing'
Changes ip a country's p,iiiingness to tfade catt aitel lhe
countryi tc't'llrs
r:l iraiie it
the country i,r large enough for its tlade to have att inipact on
tli* itrt"'t'na1ii:r:tie1
rqili-
libriuni. ln tunr^ any charile in tire cou.ir)."s ternls of irade
all'ects the
srtet:l;''t r.ii-ri;it
thr country 'oenefits fiom its growth.d',
s.
*;i*
S,i
S:,''
g':'.
XL
F.l
{t::
1 4A ; lnternational Economics - Vol' 1
Part One The Therry of Intertrttriorut[Trat{t
i':'
t'

5. f".
iii:
5r
l*j
fi
In this section we first exatnine the case of a Sn:ali {*#r}?fy"
one whose trade
does not affect the international price ratio. We then examine
the case of a i'r*'l-t*r
e**r;try. one whose trade can have an impact on the telative
international price
ratio {that is, an effect on ihe price the country receives for its
expofis, the price it
pays for its imports. or both). Note that the definitions of smull
colt,lttn and letrge'(:o;tnfi1v
are based ol the ability of the countly to have a noticeable
efTect on one
of more international prices. Even a country that rve think of as
having a small
economy can be a larye counffy. For instance. Ghana (r,vhich is
a relatively srnali
country, overall) is a major exporter of cocoa. A reasonable
change in its export
supply{say, an increase in its export suppbr by l0 percent due to
an improvernent
ln^faiming practices) would affect worid cocoa prices. On the
other hancl, even a
colrntfy thai rve think of as having a large economy (for
instance. Japan) can be a

6. small country for some products (examples wouid be rnilk and
cheese), in the sense
that reasonable changes in its orvn production or demand have
no discernible efYect
on the world Price of the Product.
Small CountrY
If a country is small {that is, a price-taker in world markets),
then its ffade has ncr
impact on the inr.rnutionui price ratio (the country's
terms ol trade)' The graphs
shown in Figure ?.1 ;;;;;.;t rhe tull anaiysis of growth.by the
sma1l
countr;'. In
each of these cases tfre'lountr' gains fromits growth in
the sense that it reaches a
higher comrnunitv inditTerence curve
(at point c, c,, or cu. depending on the type
of growth).
Large CountrY
If a counffy is large. a change in its willingless to irade affects
the equilibrium inter-
national price ratio. bonrii", first the case in which growth
reduces the country's

7. rviilingness to tracie at any given price. as shown
in Figure 7'3 lwhich reproduces the
ppc shift of Figure l.iei. dr. reiuction in the country's dema'd
ftir
imports red*ces
the relative price of the iruport good (or the reduciio[
in the country's supply of
exports increases ti,. ,.iu,io*'pricJof the export goocl)'
This change in the equilibriun't
international price is an improvement in the co'[6y's ternts
of tratle' 11 this case' the
country gets two benefits from growtil:
" The procluction benefit from growth as the ppc shifts out'
- The benefit from improved terms of trade as it receives a
better price for its
exports
relative to the price ihat it has to pay for its imports"
ln Figure 7.3 theimproved terms of trade are shown
in a t'latter price line (a lower
relative price of
"rotrr.
it
"
i*por, ggodl. In response, the country shifts its

8. production
point to So o' the ,,; dr uni^6".-id.. to constlme ai a point C6'
lMith this
ppc grorvth
and no change in the tlims of trade, the country wauld 1ea1h ie
level of well-being
associated with the conrmunitv indifference
cu**e through c, (48 wheat and 72 cloth)
in Figure 7.1B. The improvetnent in the terms
of trade permiti tne country to reach the
higher level of **1-f.1ng ussociated *ltt, iire .o**unity
indifference curve tlrrough
CrtS+ wheat and 82 clothlin Flgure 7'3'
trr.rrec*ati{F*d S€s*6&tr5"
i :th Edition
ihapter l ,,,t, l,: ,rtl,i ltt,t.ltl
141
iii:: ii;t.: ., :j
{ir.:ri't1.t
3;*sr-j ton'ard
,E:*piecing
!:i:Jiilrh i11 a

9. i.*:g* i luntrv
Wheat
91
80+ .
I Ji r
CT-,{-
4Ai----:
1r
I
Price=213 V{lC
ppjqs = 1 WICll
Cloth
,t l,.tSt .","*y cao gain in tr'vo rva-vs from an expanding
orr i n,-":,,, p*uu.* ttr. imp'r t-compeli:s sood ;.
h:'
:-. :].1'n
ir., -aOirl;i., ro rhe gains fr.orn be ing able
t. p'oduce
'llors
iutr"oOo shorvu in Figure 7'iB)'
it can itlprove its terms of
ir^,f .. L]:' rlemanding f'er'r'er itnpot'ls ( a decr*ased *'i
llit rgness

10. io ffadei. it ruakes cloth cheapel' ot't 'nvorld
nrarkets Aiier
gt"tt;Jt. if.r- r'elative price olcloth declines to
2r'-1 ltr'r{- in the
lrnna,t- sllowtl.'fhe country! reiriaining.inrports
cost less
Ihus. rhe couiltrY gains more firx'rr
grnwth' a! collsunlpttoll
.r',in.. ,iorr, c', t,i{. because thc price line becomes tlatter'
{lonsider next the case in whicli grorvth itrcreases
lhe ctlttntrY's willingtress to
ffade. Tlre increase itl the cot-ttttl-v.S del]land
tb, in.,po1.,, itrcreases rire reiative
piicc ol
rhc impor:t good (or rhe increase in the cor:nt.y"t
tupplu olexpot'ts i'e'luces the relative
price of rhe export g*ii.:ifrit change in tne equitibriut.'''
intet:naLitnal price ra1lo:s
a dcterioration in the countr)i's terils of "oOt'
it-r this case the overail efl'ect ou the
countr),''s 'ell-being is not ciear' Cirorvth brings
u p:"d.Y:1t-t"lbenefit' L:ut the coulltry
is hr-rrt 6y the subsequent 4ecline iil irs tenils

11. ,irtro,i.. (lt receives a lor'r'er pr"ice tbr:
its
export prodr:cts ..torol.i to the irrice that
it pays for its irnport prodtlcts')
if the terms of tracle,Jo ttot clecline by tooinrtclr'
then the countr'v gains o'e.tal1fiottt
gr.wtli. but n't u:,' ,.lJ".rrls it *oura'ii tire ternrs of
trade did not ch'l'ge' l{orvever'
if trre adverse inovement is rarge. a surpdsing
outcome is possitrlc'
lmmiserizing Growth
Wlrat lrapperrs if the tet.rns of trarie declinf a gleai
de al irr lesp0ltse to gror,vth in tlre
country"s abiliry to pro,i** its export goori'.' Jiii'u
tu"'tt t''f trarltt rieclinc substantially'
the country's well-Lreing could fall. {or.
jn tl'ie !i}-be$'eel} casc' lhe conntrv's u'ei.l-
being could be Lrnchanged') The possibiliii'
i-rl a rieclill"l in u'*11-beittg is shorvn tn
Figure 7.4. in rvhich a lirge improver;r'r:r
i:i *l:e*t-pri:ili.i*iioii technology resilits
in I
shitl in the ppc that is ,tringry'rr,*,l.d t*$*rll 'llpandi:tg

12. t'heat pr'dtlclion'
142 lnternational Economics - Vol, I
: l:r Part One Thc Thtrirr of ittnr.:;:lririi Trr'ai:
:'-ii-"jijfit;j.$
Imuriserizing
Gror,vth in a
Large CountrY
Wheat
A large counfry actually couid be made worse offby an
improvement in its ability to produce the products it exports'
Such a perverse case of immisetizing growth is show'n here'
By expanding its ability to produce wheat. its export good'
the laige cotntry increases its supply ofexports (expands its
willingness to trade).This drives down the relatlve price of
rvlreat in worlcl narkets. Looked at the other way' this causes
an increase {here a tripliirg) of the relative price that it must
pay for its imports of cloth. The decline in the couutry's
teims of ti"ade is so bad in this case, that it outweighs the
benefits of the extra ability to produce. Consumer enjolment

13. is lolver at C, than at the initial consumption point C,'
For a relatively steep price line (.showing a 1alge decline in the
country's
ten]ls 01'
trade), the countiyl procluction is at point '9, on the-ne' ppc and
its consumption
at
pomt,r-ffre 1evel oiwe11-being for C' is-1ess than that for point
tl-0"t"91t g:"^T.'::.,'- Thir'porribiliry is a remarkable result,
first analyzed carefully_by Jagdtsh lJhag$'atr'
It is calfed the possibility of irxirn*s*'rleinqg {}r{:k:/{:i'ni
lrowltr that expands
the c*un-
try,s rvillingness to trade can result in such ; large decline in
the country's terms of
trade that the coulltry is worse of-f'
Three condiiions seem crttcial fbr immiserizing grou'th to
occur:
1. The countl,],"5 gronth must be strongly biaseci toward
expanding
the countty's srtp-
p11, of exporrs {increasing its willingness to trade), and the
increase
in export supply
mlst be iurg* *n*,,gh to have a noticeable impact on world
prices.

14. 2. Th* foreign demand for the counry's expotts must_ be price
inelastic.
so that an
expansi*n in tr,e
"o.rntry,s
export supply ieads to a large drop in the international
pric* *f tlle *xP** Product.
lnternaiis, al Economics, 1 5th Edition r43
Chapter 7 (lrorth
'rnLJ
1i'url* i i i
3,t]eforethegrowtlr'thecountrynustbeheal'il-
velgagedintrade'sothatther'velfare
loss fi"om the decline in the terms cl'trade is great
enough to ottset ttre gains from
being able to Produce tnore'
Llor.rntries that export a diversifieil selection of export
ploducts rlo no1 seem to be at
rr-,u.t', *rt* of eiperiencing i;iserlzing gror'vth' A developing
coulltry
that reiies on

15. one or a fbrv primary p,ortu.i, logri"ufiriul or mineral
proclucts) is more at |isk' For
example. consider a corurtry iike fanrbia that relits otl a
mitterai ore (e'g'. copper) lbr
most ol its expolt feveilues. e o,*ou.ty that leacls to the opening
of severai tterv large
mines woulcl increase its ore expofis and greatly reduce
the international price of tiris
ore. As a result of the decline in ttie price. Ihe cotill1'y
coulcl be worse off' For iustance'
ttre rnoriey; vu-r* oizutnbiak expoits of copper orl coLrld
ciecline
(ii the price falls
more than the export cluantlt; i*creases). and'Zambiathen
coulcl rtot afford to inport
as much as before the grorvth'
ft nif, ,*.; foolisiitbr a nation to undergo atr expansion that
makes itself
worse
oij. B,t remember that *re .*junrion rvorrldle uncler.taketr.
botli in the model and in
tt e ,eai ,";;ld. t), indiviciual eompetitive firms.. each of rvhich
mrght prot'ii individu-
;i;tt'*,, its .u,n'expansiorr. tndividual rationality can solnetimes
add up

16. to collective
irrationalitY.
-fire possibiliry of immiserizing growth ofTers large counlries a
policy lesson that
transcencls the cases in rvhich it actuall-v occlrrs. B.tiitseltl the
case
of imrniseriziug
gror,r,th is pr.babiy irrst a coiio,ru ,arity Even lorlarge
countries the rtecessary condi-
tions listed above are not lifreiy io t . *.r very often-. Yct a
larger pt'rint etnerges
tt'om
Figures l'3 andT '4.
lrr.r,eflbct of growth in tiie nationai economy on the
terms of trade aftects the national
gains f1onr encouragitrg ,ftui gt,nt'trt. Supqo.le that the
government is debating rvhich
- indLlstfies to favc.,r rvith tax bieaks 0r subsidies, and has to
choose befil'een
etlcoufag-
ingitnpcrt.replacingindustriesanclencouragingexport-
exparrdingones.Itt'lq.:']:"1.1
rve tbunrl that the colnltq/ reaped greatef benefits if its
expansion of
import-competlng

17. .npurriiitl** causes a c1.op inii* pii.. of imporrs. By confl'ast,
in Figure 7'4"
expanding
export inclustries is less beneficial because it lowers the
relative
price o1'exports' This
is rrue whether or not the bad terrns-ot'-trarle etl-ect is Lrig
enough to outiveigh the gains
tiorn being rnore productive. So a laige country has reason t0
favor import-replaeing
indusffies over export industlies: {l othir things are truly equal,
rvhy not favor iildustries
that tr-rrn rvorlci prices ln your:a.,oi rather thariagainst
you'/j We return to this point r'vhen
c.liscussing rrade policy for developin-q countries in Chapter
14'
, , . i: , ' ":
i t"''',:t,'" * t'-"
';
This chapter's ciiscussion of biased growth can be iinked
to the gener:ri discussion
of the basis lbr comparative aclvantase presentecl in chapter 4'
As we noted there'
:Renrernber, however, that thr: rryircjs ie;:cl j,:l i;o:r,n! rrrpcr-t

18. repiacement.here relates
to tr:rttinq
ini'.:rnational prices lll this naliolr,s {a.,.or. i:ll.ite,.!:i.]:.::
a';i:cle, tne[e
c.n be no such gi:itl anrl trcl
iilmiseriziirg gro"{h. clne countrys -lails i!csi=:r itlrr" i"rirtlss
ii llre'ielins ol lrade equal anotlrer
r uu'rlry'5 lussc's (rta;nst.
1M lnternational Economics - Vol. 1
Part One The Theurr rf lntrririrrionti
'lr;g-lr
comparative advantage skeA/s collntries' capabilities'fbr
proclucirlg vadous products.
ln presenting the Heckscher-Ohlin theory we spent much time
discussing dilferelces
in factor endowments as ihe basis for comparative advantage'
Another basis for comparative advantage is differences in
production tech-
nologies available in the r.,arious countdes. Technology di1l-
erences tend to skew
production ip each country toward producing the product(s) in
which the counfi:y has
ihe reiatively better technology {that is, the techlology of
greatest advzuitage or least

19. disadvantage).
Teclnol-ogy-based comparative aclvantage cail arise over time
as technological
change occ.irs at different rates in different sectors atrd
countiies. For instance, in otLr
e*uropl* from Chapters 4 and 5, improvements in the
produclion technology used in
the wheat industry in the United States over time would skerv
U.S. production capabili-
ties toward producing larger amounts of wheat. The U.S. ppc
would shift out in a way
biased towarcl wheat production (as in Figure 7.lC). These
technology improvements
could include improved farming practices or better seed
varieties. lf the technology
for whear prosusiisn is not improving rn a aomparable mannff in
the rcst 0l'lhg w8fld,
then the United States can develop a comparative advantage in
rvheat based on its rela-
tive technology advantage in wheat.
In some r,vays this technology-based explanation is an
alternative that competes
with the H-O theory. Technology differences can become an
important cause (some-
times the dominant cause) of the pattern of trade in specific
products. For instance, the

20. fact that the United States became a net importer of steel
products in the early 1960s
can be explained in part by the adoption of newer production
technologie s ior steel in
Japan and other countries.
In other r,vays technology differences can be consistent witli an
H-O view 0f the
world, at least one using an extended aqd d,vnarnic H.-O
approach. To see this, we nlust
consider the question of rvhere the technological improvements
come from.
Some technotrogical improvement happens by chance or through
the unusual efforts
of individuals. However, most industrially useful new
technology norv conres from
organized efTorts that we call r*s*ar*h *ne* dev*t*p*'l**{
tRe*}. This R&D is
done largely by businesses and focuses on improvements in
production techitologies
for existing products and on new production technologies for
new or improved prod-
ucts. Products or industries in which R&D is relatively
itnportant-such as aircraft,
semicondnctors, and pharmaceuticals-are usually called high
technologl'. Ongoing
(and costly) R&D within these high-tech industries can create
an ongoing stream of
nerv and improved technology over time.
The most obvious link to the H-O theory is the natiottal location
of R&D itself,

21. R&D is a production activity that is intensive in highly skilled
labor--scientists and
engineers in palticular. Most of the world's R&D is done in the
industrialized coun-
tries that hat'e an abundance of this lvpe of labor. Another
factor of importance is
capital willing to take fhe substantial risks involved in
financing R&D investn-ients.
The relative abundance af t,entw'e capitul (ontsiders' purchase
of orvnership in nelv
businessesi in th* United States is the basis for a u.S.
advantage, while other colttttries
like Japaa depend more on internal funding of R&D within their
latge corporations.
The nati**al l*cation of production using the nerv technology,
rvhich is what is
shown e.xpiicitll.' in c*r ppc graph, is not so clear-cul. lt seems
reasonable that the first
" ..i:g$
'. !;
lnte$latitfial tror${?t*p 1 5th Edition . 145
{h+pter 7 (}i'nr''rh lrd TrsJr 1:i}
useinpfoductioncouldbeinthesamec0llntryinrvhrchtheR&Dwasdo
ne,However,
rechnology can spread ini**utiooutly' This iJtrinu'ionol
spread or "tratle" in technol-

22. ogy is called *lffxsa*n New tech'oiogy is difficult
ro keep secret, and other countries
have an incentive to obtain the technoiogy i*prou.tent;'
Indeed" the creator of the
new rech'oiogy l.ras ;;;;;;"* to uppl"/ it in prodrction in the
national location(s)
in which the nerv technology is rnost slrlt;b; (and
therefore most profitablel' H-O
theory suggests that the suiiable location *aicttes
the factor proportions 6f productiort
using the new technoffiio ti.,* ru.tot eildowments
of the national location.
lndividual Products and the Product Cycle
One efforr to find a pattern in these technologt activities
is the pr*dtl{t {Vel*
?iyp*tlre:i*, flrst advlircrJ uy nuy*ond venrJri.
When a product is first i*vented
(born), it still must be il;f*ft niditional n*n ir needed ancl
production
is olten
in sma1l amounts ry sritteo workers. tn oJ.t;iion, the
major demand is mostly in the
high-income countries. since most nerv
protlucts are luxrries in the economisth seRse'

23. Close communirutioiii, n.edecl between trte-ngn.
production' anel marketing people
in the producing fir*.,{11 this suggeto tttuinotft
R&n and initial procluction are iikely
to be in an advanced developed country'
overtinre,theproductanditsproductiontechnologybeconremolesta
ndardized
a'd tamiliar (mafure). Factor intensitv i" ito4uttlon
tJnds to shift away from skilled
labor and tor,vard t..r-ri.itt.o labor. Tire teitrnology difTuses.
and production locations
shift into other courrtries, evenfually into developing
countries that are abundant in
'tt;:*l-;|ll*1-?ri .n",'*e in a manner consisrenr with shifting
productionlocatir:ns'
The innovating cor.lrtry is initiaily the exporter
of the new product' but if eventua]ly
becomes un irnport.r.'ait1,org1, it is aynamic and empltasiz"t
additional consider-
ations like demand and commJrnication, mu"y orp..ts
of this pr"oduct cycle hypothesis
arr'consistent with H-o theory.
The procluct c,vcle fr:rp"tfr-iit does fit the experience of
products

24. in many indus-
tr.ies in the past centurv. Laptop compulers afe an example.
computer firms in the
Unired States and ;rptuiU-gi'' nAn to design
small,.portable,cornputers
in the 1970s
anrl eariy 1980s. The finns planned t9 *9ii9*.nected
demard^by businesspeople and
researchers in the Unitecl States ancl other high-incr:me
countries' Several eariy models
were produced in the urited srates and Japln, and R&D
continued. In the late 1980s
and early 1990s, iBN{,lbshiba. Texas lnstruments. and
other u's' and Japanese firms
introduced befier rnodcls, wirh proiluction in the united
states and Japan. and some
ol this prod'ctior was exported to buyers in ott't"t counffies'
As the conponents of
the laptops became standaidized, and as cornpetition.u*gng
selJers inte'sifleci through
the 1990s, finns shitted much of the urr.*fly production of
laptop:,.f.irlt.to
Ti:y"11
and later to China, to reduce prod*ction cosis'-ln
the process' tlie initial innovatttrg

25. countries became imPofiers'
Nonetheless, the risefulness of the product cycie hypothesis
is limited tbr several
reasons.,rhese ha'e to
jo witrr tire unpredictable tengilx or progression of the
phases
of tlie cycle. ln *unf inOurtiies*-especially high+eih
jndustnr"s--*prod.ct and pro-
rluctio,fecinologres
'ari
i'orrtinually ivolviilg beZause of.onggirig R&D' I(eluvenatjort
or replenishecl vouthtulness is important' Iir addition,
internatitluai di{hrsion often
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