Innovation Within Overseas Subsidiaries

According to Vernon's (1966) international product-cycle model, product innovations are generally directed to domestic markets because innovators are more aware of the preferences and needs of consumers in domestic markets and because they are more capable of communicating to them the attributes of new products. As products emerge into the 2nd cycle of maturity, manufacturing at the lowest costs and selling at the highest volumes become primary strategies. Manufacturers seek foreign markets for their products and extend production operations to foreign locations to take advantage of low labor costs. During the 3rd cycle, parent firms become net importers of products produced by foreign subsidiaries. Based on an analysis of data on the innovation and international diffusion of new products, it is shown that Vernon's model is not fully applicable to world trade in the 1980s. Multinational corporations with global organizational structures are able to rapidly adapt innovations to local markets, producing and marketing them in multiple locations within an average of 2 years.