Question 5 - Infant Industry Protection & Import Substitution

Infant Industry

An infant industry is one that is a new and in its early stages of development, and not yet capable of competing against established industry competitors

Import Substitution - definition

Government strategy that emphasizes replacement of some agricultural or industrial imports to encourage local production for local consumption, rather than producing for export markets. Import substitutes are meant to: - Generate employment - reduce foreign exchange demand - stimulate innovation - make the country self reliant in critical areas such as food, defense, and advanced technology

Infant industry argument for protection

Holds that new industries in developing countries should be promoted through trade or industrial policy measures to allow them to mature and compete successfully against established foreign rivals.

Is infant industry protection considered to be a successful development strategy?

Sometimes the protective measures that were introduced to protect the infant industry are difficult to remove leaving the industry hampered by the barriers. In free trade, provides benefit to stonger competitor and it may not always be beneficial to infant domestic industries. Using protective tariffs and taxes adds cost for the foreign competitor sales process, and while it may give the infant industry a chance to get started, it also tends to disrupt the economics of production and pricing as the industry grows.

Infant-industry theory

The supposition that emerging domestic industries need protection against international competition until they become mature and stable. The theory holds that once the emerging industry is stable enough to compete internationally, any protective measures introduced, such as tariffs, are intended to be removed.