Infant-Industry Theory

Published Oct 25, 2023

Definition of Infant-Industry Theory

Infant-industry theory is an economic theory that suggests that developing countries should protect and nurture their fledgling industries until they become competitive enough to compete in the international market. This theory assumes that these industries need temporary protection from foreign competition to grow and eventually become globally competitive.

Example

To illustrate this theory, let’s consider a hypothetical developing country called “Econoland” that wants to establish a domestic automobile industry. Initially, Econoland’s automobile industry is not competitive enough to compete with established foreign automobile manufacturers due to factors like lack of economies of scale, limited technology, and insufficient infrastructure.

To protect their domestic automobile industry, the government of Econoland imposes tariffs and quotas on imported cars, making them more expensive for consumers. This raises the cost of imported cars and makes domestically produced cars relatively more attractive to consumers. With the protection and support from the government, Econoland’s automobile industry receives investment, adopts advanced technologies, and improves its efficiency over time.

As the domestic automobile industry in Econoland matures and becomes more competitive, it gradually reduces the level of protection and opens up to international competition. This transition is intended to ensure that the industry can survive on its own without constant government support.

Why Infant-Industry Theory Matters

The infant-industry theory is significant because it is often used to justify protectionist policies for developing countries. By providing temporary protection to nascent industries, developing nations can foster their growth, create jobs, and ultimately promote economic development. However, critics argue that such protectionist measures can lead to inefficiencies, dependency on government support, and even distortions in the allocation of resources. Therefore, the implementation of the infant-industry theory requires careful balancing and long-term planning to ensure the successful transition of protected industries to become self-sufficient and globally competitive.