Definition
Import Substitution Industrialization (ISI) is an economic policy approach adopted by many developing countries to reduce their dependence on foreign imports. This is accomplished through encouraging domestic production of industrial goods that were previously imported. The primary goal of ISI is to strengthen the national economy and promote economic self-sufficiency.
Key Takeaways
- Import Substitution Industrialization (ISI) is an economic policy approach aimed at replacing foreign imports with domestic production. It is based on the premise that a country should attempt to reduce its foreign dependency through the local production of industrialized products.
- This strategy promotes the idea of economic self-sufficiency by emphasising the need for a strong manufacturing sector within a country. This can lead to the growth of indigenous industries and potentially lower unemployment rates as more jobs are available in locally based manufacturing firms.
- Though ISI can stimulate domestic economic growth, it may also lead to economic imbalances. These can include increased government deficits, inefficiencies from the lack of competition, and an overreliance on the domestic market, hindering the potential for economic expansion into global markets.
Importance
Import Substitution Industrialization (ISI) is a crucial financial term as it refers to an economic policy adopted by many developing nations to promote their domestic industries. Under this theory, countries aim to decrease their dependence on foreign imports by encouraging the growth of local industries.
This is done by implementing protective trade barriers, such as tariffs and quotas, on imported goods. The objective is to substitute imports with domestically produced goods and services, leading to economic independence and growth.
ISI can stimulate domestic job growth, economic diversification, and development of local skill sets. However, it also poses challenges such as reduced competition and potential inefficiencies in protected industries.
Therefore, understanding ISI is key to comprehend the diverse strategies nations use to advance their economies.
Explanation
Import Substitution Industrialization (ISI) is an economic strategy often implemented by developing nations in an attempt to bolster their domestic economies and decrease dependence on foreign imports. Its prime purpose is to protect local businesses and industries, especially in sectors where these countries have a potential comparative advantage. This theory suggests that a country should attempt to reduce its foreign dependency through the local production of industrialized products.
The economic model suggests a switch from an economy concentrated on raw material exports to an economy with diverse manufacturing and service sectors. The overall goal of Import Substitution Industrialization is to stimulate the growth of domestic industries by shielding them from foreign competition. By focusing on manufacturing products locally, it aims to increase the self-sufficiency of a country’s economy and decrease its reliance on international trade.
It uses various mechanisms such as tariffs, import quotas, and exchange rate manipulation to discourage imports and protect local industries. The idea is that through the protection and development of internal markets, countries can eventually compete in the international market with the goods they originally protected. By nurturing and strengthening the domestic economy in this way, countries aim to improve their economic stability and increase overall economic growth.
Examples of Import Substitution Industrialization
Brazil (1950-1980): During this period, Brazil heavily focused on Import Substitution Industrialization (ISI) to decrease dependency on imported goods and promote domestic production. The government placed heavy restrictions on imports and gave subsidies to domestic industries. As a result, industries such as automobile manufacturing, textiles, and steel saw significant growth in domestic production.
India (1947-1991): Post-independence, India adopted an ISI strategy to decrease its dependency on foreign goods. The government raised import tariffs and restricted the import of certain goods to promote local industries. This policy resulted in the growth of industries such as automobile manufacturing, steel, and consumer goods.
Argentina (1930-1970): Argentina also adopted ISI during this period. The government placed high tariffs on imports, offered incentives for local production, and encouraged the development of domestic industries. This strategy led to the growth of Argentina’s textile, food processing, and automotive industries.
FAQs about Import Substitution Industrialization
What is Import Substitution Industrialization (ISI)?
Import Substitution Industrialization (ISI) is an economic policy adopted by some developing nations to encourage domestic production and self-sufficiency by reducing foreign dependencies and imports through the production of goods domestically.
When and where was Import Substitution Industrialization first implemented?
ISI was first implemented in Latin American countries in the mid-20th century around the 1930s and 1940s. This was an attempt to protect local industries from foreign competitors.
What are the advantages of Import Substitution Industrialization?
ISI allows nations to develop their industrial sector, boost local economy, reduce dependency on foreign goods and services, protect local firms from international competition and maintain a balance of payments by reducing the need for foreign currency.
What are the disadvantages of Import Substitution Industrialization?
Disadvantages of ISI may include inefficiency due to lack of competition, technological backwardness compared to other industries worldwide, the creation of monopolies and the risk of retaliatory trade barriers from countries affected by the policy.
Is Import Substitution Industrialization still practiced today?
While many countries have moved towards economic liberalization and globalization, some countries still implement policies designed to foster domestic industries, which can be considered a form of ISI. However, it is not as widespread or prominent as it was in the mid-20th century.
Related Entrepreneurship Terms
- Protectionism
- Domestic Industries Growth
- Tariff Barriers
- Economic Self-Sufficiency
- Trade Deficit Reduction
Sources for More Information
- JSTOR: A digital library with access to thousands of scholarly journals, books, and primary sources covering a wide range of disciplines.
- International Monetary Fund (IMF): The IMF works to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.
- Encyclopedia Britannica: An informative source with articles written by notable experts, offering a wide range of topics.
- The Economist: A leading source in the country that offers insights and analysis on international news, politics, business, finance, science, technology and the connections between them.
