Definition
Infant-Industry Theory is an economic principle that suggests new industries need to be protected from competitive pressures until they reach a size and level of development where they can compete on a global scale. It posits that establishing industries in developing countries often need support from government policies, such as tariffs and subsidies, to develop. This theory provides justification for trade barriers for these young, domestic industries against international competition.
Phonetic
The phonetic pronunciation of “Infant-Industry Theory” is: “In-fuhnt In-duhs-tree Thee-uh-ree”
Key Takeaways
- Infant Industry Protection: The Infant-Industry Theory posits that new industries do not have the capacity to compete against established foreign industries. Therefore, they require protection in the early stages of their development. This protection is often delivered by the government through methods like tariffs, subsidies, or import restrictions.
- Economic Growth: Once these ‘infant industries’ have developed enough to compete internationally, they can contribute significantly to a nation’s industrialisation and economic growth. This theory suggests that nurturing domestic industries could lead to a more diversified and robust economy.
- Potential Pitfalls: However, the Infant-Industry Theory does not come without its potential pitfalls. These include a lack of competition which could lead to complacency, poor quality, and higher prices. It could also foster a dependence on government protection, discouraging industries from striving to become internationally competitive.
Importance
The Infant-Industry Theory is a significant concept in business and finance because it provides a rationale for temporary protectionist measures such as tariffs and quotas for new industries in the developmental stage. The central idea is that young industries need a period of protection to develop and strengthen before they can compete on international markets. This theory is especially significant in developing countries, which might have promising sectors that lack the resources, expertise, or scale necessary to compete with well-established foreign industries. Therefore, utilizing the Infant-Industry Theory can help such industries grow and reach a level where they can compete globally, thereby contributing to the country’s economic growth and diversification. The theory has its critics and success depends on the correct implementation, but it’s nonetheless a crucial part of discussions in international trade policy.
Explanation
The primary purpose of the Infant-Industry Theory in economics is to provide a rationale for temporary protectionist measures in developing economies. This theory posits that nascent industries or businesses in these economies may not initially be able to compete with established and more-efficient foreign rivals. Without temporary protective measures like tariffs, import quotas, or subsidies, these “infant” industries might be crowded out before they can reach a competitive scale of production. Therefore, by shielding these emerging industries from intense foreign competition, a country may foster their growth until they become self-sustaining and capable of rivaling international firms.The Infant-Industry Theory’s importance lies in its strategic tool for development used by countries to strengthen their domestic industries. By using the theory, countries can nurture and grow businesses locally, leading to increased local production, job creation, and improved national economies. However, the “infant” industry must strive to reach a competitive level of productivity in a reasonable time frame. If not, there is a risk that sustained protection might lead to inefficiency, resulting in more harm than good for the economy. Thus, while the application of the Infant-Industry Theory can potentially give birth to globally competitive industries, its implementation must be carefully managed.
Examples
1. American Auto Industry: In the early 20th century, the United States’ auto industry was considered an infant industry. To protect it from competition from established European manufacturers, such as those in Germany and France, high import tariffs were imposed. This allowed the local industry to thrive, grow, innovate, and establish the infrastructure necessary to compete internationally. As the industry matured and became competitive, trade barriers were relaxed.2. Korean Electronics Industry: Post the Korean War, South Korea’s electronics industry was almost non-existent. The Korean government then designated electronics as a strategic industry and applied the infant industry theory. They provided subsidies, protection from foreign competition, and encouraged investment in infrastructure and R&D. This protection nurtured companies like Samsung and LG, which are now global leaders in electronics.3. Brazilian Information Technology Industry: In the 1970s and 1980s, the Brazilian government instituted policies similar to the infant industry theory to grow its information technology industry. The policy imposed significant barriers to imports of foreign-made computer products, allowing Brazilian companies to develop and grow. Although the policy had setbacks, it did contribute to the foundation of a robust domestic IT industry.
Frequently Asked Questions(FAQ)
What is the Infant-Industry Theory?
The Infant-Industry Theory states that budding industries, referred to as ‘infant industries’ , need protection against international competition until they mature and can compete effectively. The theory suggests that countries should implement protective policies, like tariffs and quotas, to protect these new industries from more established international competitors.
How do tariffs and quotas help infant industries according to this theory?
Tariffs increase the cost of imported goods, making domestic products competitive in terms of price. Quotas are limits on imported goods and serve to restrict competition. Both can help new industries grow without being overwhelmed by larger, foreign competitors.
What are the benefits of Infant-Industry Theory?
Infant-Industry Theory can help support the growth and development of new industries which can lead to increased domestic production, job creation, technological innovation, and industry diversification.
What are some criticisms of the Infant-Industry Theory?
Critics argue that protectionist policies can lead to inefficiency as these new industries may remain dependent on protection and not work toward becoming globally competitive. There are also concerns that such policies may lead to trade disputes with other countries.
Can the Infant-Industry Theory be applied to any industry?
While in theory, it can be applied to any industry, it is often applied to industries that have high startup costs, significant economies of scale, or require a lot of technological development.
How long does an industry need to be protected under the Infant-Industry Theory?
The theory doesn’t specify a specific time frame. Instead, the idea is to protect the industry until it can compete effectively on an international level. Different industries will mature at different rates, and the protection needed varies based on a number of factors, including the industry’s inherent complexities, the level of international competition, and the rate of technological progress.
Does every country embrace the Infant-Industry Theory?
Not every country adopts this philosophy. Some countries may prefer to embrace open competition from the beginning, while others may choose protectionism as a means of building their domestic industries. Country’s economic philosophies, policies, and their level of industrialization will generally determine their approach to the Infant-Industry Theory.
Related Finance Terms
- Protectionism
- Import Tariffs
- Subsidies
- Economic Development
- Domestic Industry Growth
Sources for More Information
