In this stage, the innovating firm produces and markets solely in the home market. The products depend on the application of advances in science and engineering to product development. The products generally command a high price relatively to direct costs.
In stage two the product is exported to foreign countries. Initially, a firm exports from the home country; gradually, production shifts to those countries with the largest domestic markets, with firms erecting foreign plants and assembly lines to supply local demand.
The firm's activity no longer centers on developing the product, but on refining the means of production. With other firms continuing to enter the markets as producers, competition increases and drives down both price and proportion of price to cost.