1) New product. According to Vernon (1966), U.S. producers are likely to be the first to develop new products which satisfy the need of high-income people or which substitute capital for labor. On the one side this is due to the fact that U.S. market consists of consumers with an average income which is higher than that in any national market. On the other side the production of capital intensive goods is a consequence of the U.S. high unit labor cost. Moreover Vernon claims that production facilities for such products will be located in the U.S., even if most of the involved companies control other facilities in other countries where production costs will be lower. As a matter of fact in the phase other factors than costs are considered in making this choice: communication (with customers, supplier and competitors) and external economies. During the introduction stage the need for flexibility is more relevant that small cost advantages given the not standardized nature of the product and the need for flexibility, satisfied by geographical proximity. Even price elasticity of the demand is low.
2) Maturing product. The expansion of the demand determines a certain degree of standardization in the product, partially reducing the need for flexibility. At this stage companies aim to achieve economies of scale through mass production. At the same time some demand for the product begins to appear in relative advanced countries and entrepreneurs set up production facilities in these new markets to satisfy local demand. If the difference in labor costs is so significant, it will be even possible some export back to the United States.
3) Standardized product. At an advanced stage of product standardization, less-developed countries become attractive as production locations, in that they allow cost savings. This is only possible if the product does not pose problems of market information and self-sufficient processes can be established. The new production facilities can then satisfy increasing local demand as well as a part of the demand expressed by other foreign markets