The Product Profit Cycle or the Filtering Down Hypothesis Explains Industrial Decentralization Based...

The Product Profit Cycle or the Filtering Down Hypothesis

• Explains Industrial Decentralization

• Based upon corporate organizational theory

• A product passes through three stages:– Early

– Growth

– Mature

Early Stage

• Low Capital Intensity• Limited production• Rapidly changing

production technology• Scientific and Human

inputs are high

Growth Stage

• Mass Production• Technologies

developed• Capital-intense• Great need for

management skills

Mature Stage

• Long Run Production few changes

• Human input minimal• Capital-intense and

increasing keeps products in the hands of a few firms

Filtering Down

• Corporations respond to different input requirements by changing locations to minimize costs and increase competitiveness

Early Stage• Need highly skilled human

inputs• Likely to be in an urban area• Specialized labor and

support services• Close to company HQ• Intense management and

decision making during product development

Growth Stage

• Often moved out into the suburbs but still close to hq

• Less skilled and semi-skilled labor

• Capital intensity increases

• Factory space cheaper outside of city

Mature Stage

• High capital intensity• Looking for cheapest

land and inputs• Unskilled labor• Usually rural places• Later foreign

countries.

Implications• Rural places often recruit footloose

businesses• Give expensive incentives• Then they leave when they get a better deal• The cycle has been greatly compacted• Products that do not rapidly become

obsolete continue to filter down to cheaper labor nations

• Now many manufacturing jobs go directly overseas

• outsourcing