The infant-industry theory posits that nascent industries in developing countries need protection against competitive pressures until they mature and develop economies of scale that can rival their established competitors. Originating from the ideas of Alexander Hamilton and Friedrich List, the theory often serves as a rationale for protectionist policies.
Key Insights
- Market Shielding for Growth: The infant-industry theory contends that emerging industries require shielding from international competition until they become mature.
- Historical Roots: Developed in the early 19th century by economic pioneers Alexander Hamilton and Friedrich List, this theory often justifies protectionist trade measures.
- Tools of Protection: Developing nations may use measures like import duties, tariffs, quotas, and exchange rate controls to provide fledgling industries time to grow and stabilize.
Understanding the Infant-Industry Theory
The infant-industry theory advocates for the safeguarding of new, domestic industries in their early developmental stages from international competitors. Such nascent industries are not yet capable of contending with established counterparts.
Originally put forward by Alexander Hamilton and Friedrich List in the early 19th century, the idea is that young, burgeoning industries in underdeveloped regions need protection from well-established foreign industries. This allows them time to stabilize and attain economies of scale.
To combat competitive international pricing and give them room to grow, governments might implement protective measures such as import duties, tariffs, quotas, and exchange rate controls.
Special Considerations
According to a study in the Journal of International Economics titled “When and how should infant industries be protected?”, economist and philosopher John Stuart Mill later refined the theory. Mill stipulated that protection should be granted only if the infant industry could eventually thrive without support. Economist Charles Francis Bastable added that the cumulative net benefits of protection must surpass the associated costs.
Proponents of the theory argue that without protection, developing industries could be severely damaged or destroyed by international competitors. These startups lack the economies of scale that more mature industries in other countries enjoy and need protection just until they grow strong enough.
The theory suggests that once an emerging industry is sufficiently stable to compete on a global scale, protective measures like tariffs should be phased out. However, in practice, lifting these protective measures can prove challenging.
By envisioning a path from fragile beginnings to robust competitiveness, the infant-industry theory highlights a strategic approach for fostering economic growth in developing nations.
Related Terms: economies of scale, import duties, tariffs, quotas, exchange rate controls
References
- Melitz, Marc J. “When and How Should Infant Industries Be Protected?” Journal of International Economics, vol. 66, 2005, pp. 178.
