Import Substitution

A Brief Summary

Page Contents:	What is import substitution?
	How is it practiced?
	How well does it work?
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What is Import Substitution?

The short answer is that import substitution is the replacement of goods and services purchased outside a region with goods and services produced within the region. In this sense, import substitution creates "growth from within," as local businesses receive supply contracts and local residents earn wages and income. For a longer answer, as well as a discussion of the theoretical underpinnings of import substitution strategies, take a look at the Theory page.

How is Import Substitution Typically Practiced?

There are three main types of import substitution programs being used in the United States.

Information Sharing and Networking - matching local producers with local suppliers
Buy Local Programs - encouraging firms and consumers to purchase local products rather than imports
Industry Targeting - attracting firms and businesses that will engage in or enable import substitution

All three types of strategies are relatively common. They often form a portion of a broader program or support goals not directly related to import substitution. Even when programs are predominantly import-substitution based, they may not explicitly acknowledge this justification.

For a more complete discussion, as well as examples, browse the Practice page.

How Well Does Import Substitution Work?

It is difficult to assess the success of import substitution strategies, for a number of reasons:

Until relatively recently, regional import substitution strategies were not studied explicitly.
Import substitution strategies are rarely practiced or considered on their own, rather they normally form a portion or segment of a broader strategy or set of programs. Thus it is hard to attribute successes to import substitution.
Changes or successes might have happened without the program - it is nearly impossible to separate what would have happened anyway from the effects of the program.

Nevertheless, there are some indications of success:

Most programs involving import substitution facets have been considered successful enough to be continued or renewed.
Import substitution, in the long run, is a relatively cost-effective strategy for economic development, creating jobs and economic growth for far less monetary cost than most other economic development strategies.
Areas with a ready supply of capital and willing entrepreneurs tend to have more success with import substitution.
Some theorists argue that the long-term vitality of certain cities and regions, and the stagnation and depression of others, can be attributed to the success or failure of import substitution efforts.

Some regional and industry factors that improve the chances of a successful outcome are:

An adequate regional supply of capital
Existing businesses or entrepreneurs willing to engage in import substitution
Sufficient local or regional market demand
Relatively high industry transportation or import costs
Relatively small gains from economies of scale in the industry
Purchasing decisions made locally

Consequently, there are increasing numbers of import substitution programs in the United States and around the world. To browse the web sites of some of these programs, connect to the Links page. See the Practice page for a detailed look at a few import substitution programs.