Industrial heterogeneity and international product cycles

Abstract

This paper proposes a model of quality ladder in the context of North–South trade to examine the emergence of product cycles in industries of different research and development (R&D) intensity levels. To acquire the dominant advantage, firms as a whole can strategically undertake either quality upgrades through R&D or cost saving through the channels of market penetration—foreign direct investment (FDI) or offshoring. In an infinite-horizon game, the uses of mixing moving-up and moving-out strategies in high-tech and medium-tech industries generate product cycles. Furthermore, in low-tech industries, FDI is a strongly dominant strategy for the industry leaders and followers. Under certain conditions, firms leapfrog over each other and product cycles thus emerge.