Download The Infant Industry Argument

Infant Industry Protection:
Economic Anchor or Springboard?
MGMT 6390 International Operations
Summer 2007
Francis X Moran
Abstract
Countries with Infant Industries protectionist policies tend to suffer lower growth and less
integration into the world economy than countries that compete without a lot of protectionism. The use of
protectionist policies to fix a market problem is at best highly inefficient at worst economically disastrous.
This economic isolationism is very difficult to overcome and industries developed under it can never
compete freely in the international market.
Infant Industry
Without overstating the obvious, not all countries are endowed with equivalent natural resources
and other key factors of production, including labor and even cultural attributes. For many reasons,
countries may want to foster the development of advanced industrial goods, even though such a country
does not possess the necessary technology or skill sets to produce such goods. Advanced industrial
countries that have invested heavily in technology and education have taken the lead in the production of
many of the worlds technologically advanced products such as automobiles, computers and aircraft, in
some cases because they were first movers in these industries.
For instance, when a country such as Brazil wishes to foster the development of an automobile
industry, it must recognize that these domestically produced automobiles will be competing with foreign
automobiles. The foreign competitors will have the advantage of scale, driving down costs and in most
cases the reputation for producing quality goods in a very competitive world market. In order for the
fledgling domestic producer of automobiles, in the case of Brazil, to sell any vehicles at all, prices for the
first models will be far below the actual cost of production and will not likely contribute to any return on
the initial investment. If Brazil as a sovereign nation feels that the development of this industry is critical
to the economic fortunes and welfare of Brazil, it may choose to protect it from international competition in
order for the industry to develop a level of scale that allows it to make a profit relative to its cost. A further
benefit of the infant industry is the “learning by doing” effect. (Melitz 2004)i
The government is essentially going to protect the industry from foreign competition by creating a
barrier to entry by foreign competitors either through import quotas or tariffs on incoming vehicles.
The Impact of Infant Industry Protectionism
Much has been written around the subject of infant industry protection and the detrimental impact
on the society which employs them. The near term reduction in social benefit to countries that adopt infant
industry practices can be visualized in the graph below.
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“Protected” Industry
Supply curve
P
World Supply
curve
Economic loss to
the protected
country
Demand curve
Q
The red area shows the “tax” paid by the country that is protecting it infant industry and shows
how consumers would demand more that good if it could be acquired more cheaply. The average cost
curve (not pictured) of the domestic protected industry would have to move down and to the right more
rapidly than the pace of the foreign or world market in order the domestic industry to compete on par with
the world supplier of this good.
The other aspect of this argument against the protection of infant industries is that these countries
are ineffectively and inefficiently using their resources. In short, these countries are not drawing on their
natural competitive advantage. This concept has been forwarded by many classical economists, especially
John Stuart Mill, in the following: “"... the importation of foreign goods, in the common course of traffic,
never takes place, except when it is, economically speaking, a national good, by causing the same amount
of commodities to be obtained at smaller cost of labour and capital to the country. To prohibit, therefore,
this importation, or impose duties which prevent it, is to render the labour and capital of the country less
efficient in production than they would otherwise be; and compel a waste of the difference between the
labour and capital for producing the things with which it can be purchased from abroad" ii
A key real world example of the impact of infant industry protection can be illustrated by the
automobile industry of India. India is home to nearly one-sixth of the world’s population yet has a
passenger car industry of only 1 million vehicles per year. (Most vehicles sold are of the two and three
wheeled type)iii. India’s automobile market was so protected that, as the joke went, you could buy any car
you wanted- so long as it was an Ambassador. Ambassador had a hammer lock on the Indian market,
commanding over 70% of the market, with the remaining 30% controlled by another small Indian firm,
Premier Padmini. People in India did not buy these cars because the quality was better or even for national
pride. They bought them due t to the huge import tariffs on imported vehicles, that virtually barred the
purchase of these vehicle by other than the extremely wealthy. Often, demand for the vehicles outstripped
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the capacity of the very inefficient plant to produce them. Waiting list to get one of these sub optimal cars
ranged from months to even years. Of course if you were willing to pay a “facility” payment, one could be
obtained more expeditiously.iv
Since 1990, India has removed most tariffs and opened up its economy to much more liberalized
trade practices. The India automotive industry now supplies nearly 7% of the automotive output to the
world versus virtually nothing two decades ago. Many of the companies operating in India are partnerships
with multinational automotive manufacturers, including Ford, Hyundai, Renault and Honda, to name a few.
(Srivastava 2006) By allowing these foreign competitors to come in a build and sell cars in India, greater
than 25 million jobs are expected to be created over the next decade. Beyond likely getting better cars at a
better price, consumers in India now have choices as never before. As noted when Ambassador and
Padmini dominated the market, there were few choices. Now foreign and domestic automakers are
planning on rolling out over 50 new car models in 2007 according to the Society of Indian Automobile
Manufacturers. (Srivastava 2006) Other industries that support the automotive industry will no doubt
flourish.
To further the argument against infant industry protection, again in India, one can look to Tata
Motors. For years Tata Motors made light trucks, heavy trucks, buses, cement mixers and heavy vehicles
of all kinds. It dominated the Indian market through 1991, when India began lowering its trade tariffs and
allowing the import of foreign trucks. Tata experienced much more competition for its core product and
made the decision to diversify its portfolio and begin producing passenger cars, to offset the cyclical swings
it experienced in the heavy truck market. Up until this time, Tata had counted on a virtual monopoly and
exactly like Ambassador would simply work down its waiting list as new orders softened in the cycle. v
Competition forced Tata to make a bold move- it aimed to produce the world’s least expensive
passenger car. Prior to the opening of India’s markets, this move would have been wholly unnecessary.
Now, Tata stands at the forefront of becoming a world leader in small vehicle production. This car would
be aimed at the “bottom of the pyramid” and allow people who could only dream of owning a car, the
reality of being able to afford it.(Meredith 2007) The impact of removing infant industry protections has
allowed and some would say forced Tata to become more efficient. This efficiency will benefit the Indian
economy and the world economy as well. The social surplus will now return to the consumer and all will
benefit.
Beyond the automotive industry, lowering trade barriers and opening up industries to competition
also attracts further foreign direct investment in other industries. In the case of India, reforms to its trade
protection policy have opened many opportunities to both foreign companies and domestic companies that
thrive in the Indian economy. India’s Tata Tea’s purchased Tetley Tea in 2000 in much the same way
Western companies acquire complementary businesses- by leveraging its balance sheet and taking on debt.
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Other manufacturing industries are also benefiting from this trade liberalization as foreign companies invest
in India for its low wage, highly skilled workforce.vi
Others have argued that industries need to be fostered and protected to overcome the first mover
advantage of more developed economies. The fallacy with this argument stems from the fact that all
companies and therefore industries are “infant” at some point. Whenever a business is started, costs almost
always exceed price on the initial units produced. As stated previously, as size and scale are obtained the
average cost of a good comes down with each successive unit produced. The protectionist argument allows
for the “infant” industry to gain profits from these inefficiently produced units from its earliest stage.
There are two problems with this- one it removes the incentive to move as quickly as possible to lower
costs and compete and- two industries will continually petition to be protected claiming dumping and anti
free trade practices by other countries. The US steel industry is one such “infant” industry that has never
grown up.vii
Developing countries are not alone in using protectionist policies to shore up infant industries.
Recently the US Government enacted steel tariffs to protect US steel companies from foreign competition,
ostensibly to protect it from dumping. While steel producers are protected, other down stream industries
also suffer. The US auto industry is twice burdened by these tariffs- first it raises their costs and as recently
as 2006 has caused shortages of critical types of steel forcing them to lower production runs or pay higher
prices for available supplies of critical materials. viii It has been noted that other domestic industries that
must compete with foreign imports are hurt by these tariffs as well, since they cannot pass along these
higher costs. This is especially relevant to the domestic manufacturers of products that used rolled steel in
appliances and as mentioned automobiles. The profits in these industries are retarded in order to support
the domestic steel industry. GM chief economist Mustafa Mohatarem states that keeping these tariffs also
hurts the domestic steel industry. The steel industry will react by trying to get more competitive in the face
of imported steel benefiting all upstream and downstream industries. (Nicklaus 2006)
While the foregoing examples of the impact of infant industry practices are largely anecdotal,
there have been some studies that have empirically analyzed the impact of such policies. Anne O. Krueger
and Baran Tuncer examined the infant industry protection practices of Turkey. The authors establish these
4 basic reasons to promote the development industry through infant industry protection:
1.
Newly established enterprises will have much higher costs than foreign companies and
time will be needed to become competitive.
2.
An individual entrepreneur would not undertake this project at the free trade prices
3.
If developed the industry would have a reasonable rate of return on the initial investment
4.
Development of such industry requires only temporary protection, given enough time
costs will fall and allow it to compete against international firms without protection. ix
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The authors argue that in order for an industry to qualify for infant industry protection, cost per
unit of output in the protected industry must fall at a greater pace than the industry as a whole. Without a
high positive spread between the protected industry and the international industry, the “investment” or
social losses generated by protectionism will never have a chance to be recovered. Krueger and Tuncer’s
study of Turkey proposed that protecting an industry greater than 10 years, with a real rate of return of 10%
would only net 40% of the initial investment. Any industry that is projected to fail this test would not
warrant any type of protection and should not be supported. It is also recognized that the industry is
impacted by both dynamic factors and externalities. (Kreuger and Tuncer 1982) It is argued that the
dynamic factors are captured within the calculation of the rate of decrease of unit costs, though it is not
completely clear as to which unit of production this applies. They are argue that industries requiring higher
levels of protection, therefore higher “cost”, need to have a higher return. Externalities to the industry
might not impact the infant industry and the established foreign industry equally, but for purposes of their
study they assumed that these impacts would be felt by all.
The results of the study indicated that where Turkey had protected industries from foreign
competition, some level of accelerating cost decreases were observed versus competing foreign industries.
In total, it was estimated that the protected industries did experience some accelerating decrease of costs;
though these small spreads versus their global competition did not warrant the protection afforded these
industries. The return period was also deemed too long and the returns too small to offset the original
investment. Additionally, Krueger and Tuncer examined the potential positive externality of supporting
infant industries on the manufacturing sector as a whole. By examining the output of the entire
manufacturing sector they found that total output, based on their testing, only increased 1.8% in the
observed period. It was calculated that the industries that were protected, assuming a 50% cost
disadvantage, would have had to grow at greater than 5.8% growth in output per unit of input in order to
warrant protection. As can be seen from the table below, only two industries even approached this level of
rate of growth.
While Krueger and Tuncer present a viable approach to examining infant industry protection
policies and use this technique to examine the results of Turkeys protected industries, others have
reexamined these results and found the opposite or at least a more favorable conclusion. Ann E. Harrison
argues that taken as a whole, the protection of infant industries in the case of Turkey may be bad, but infant
industry protection by its nature is selective and not meant to be economy wide. She argues that based on
excluding some outliers from the original table and performing correlation test based Spearman Correlation
Coefficients, protection of infant industries can be shown to have a high correlation between protection and
increase productivity growth in the protected industry. She further states that if the industries are split into
traditional and protected industries the positive correlation for protection is even higher. x
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Traditional
Protected
Another key empirical study that tests the performance of protected infant industries is that of
Eduardo Luzio and Shane Greenstein on the Brazilian Microcomputer industry. Brazil had enacted policies
in 1977 to protect its “informatics” firms and develop a domestic micro computer industry. These policies
pursued “technological autonomy and absolute exclusion of foreign goods”.xi One initial impact of these
policies was the creation of a black market for small purchasers that negatively impacted large firms who
were subject to review and enforcement raids. It was estimated that up to 65% of the total PC market for
individuals was supplied by this black market in 1991. An interview with a colleague Monica Simsek
confirmed this situation. She asserted that the everyday Brazilians paid more for the foreign computers on
the “black market” due to their higher quality and more updated programming. There was also little or no
enforcement on the individual versus the larger corporation she confirmed.xii In this instance a government
policy actually created a black market for which the Brazilian society as a whole paid a very high price,
both in monetary and opportunity terms. Forgone buyer surplus was estimated at $143.3 million from 1984
to 1988. (Luzio and Greenstein, 1995) Beyond just the forgone buyer surplus, it was also estimated that
over the 13 year period of this policy, Brazil lost approximately $716.4 million in surplus, which totaled
roughly one-third of the expenditures on domestically produced computers. A high cost indeed. One
aspect not addressed in the study was the potential additional downstream costs borne by the Brazilian
consumers. (Luzio and Greenstein, 1995) The effectiveness of trying to nurture a high technology industry
such as microcomputers may require a different approach other than tariffs and or import bans.
Eventually, these “informatics” laws were repealed. The results to the “infant” computer industry
in Brazil were devastating. Almost at the time of the announcement of this policy change, large Brazilian
firms cancelled their orders to the domestic computer makers and massive layoffs of engineers and factory
workers ensued. The authors concluded that while the pace of technological improvement in the Brazilian
PC industry somewhat matched that of worldwide technological improvement, it was never enough to
overcome the lead the rest of the world had. Further, since the price started high and remained relatively so
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throughout the period of protection there was never a chance that the protected industry could overcome the
“initial” investment and return any meaningful surplus to the Brazilian economy. (Luzio and Greenstein,
1995) The conclusion reached here support indirectly the Kruger and Tuncer conclusion that in order for
an infant industry to be protected it needs to have the ability to pay back its initial investment.
The case of Malaysia also bears a brief review. Malaysia protected many of its domestic
industries, especially autos, and at the same time promoted exports through the use of Foreign Trade Zones.
While Malaysia experienced enormous growth in manufactured exports during the 1990’s, little was done
to push the protected industries to become more competitive. There was never a concerted effort to move
these industries beyond domestic production and have them compete in the international market. Perhaps
there was not enough political will in the Malaysian government to expose their home grown industries to
the rigors of international competition, and this ended burdening the Malaysian populace with higher price
and most likely inferior products.xiii
While most arguments against protectionist policies for infant industries relate to manufacturing,
there is a growing tide of sentiment of protection for service jobs as well. While these do not represent
pure infant industry examples, the same issue of negative overall social benefit remains true. Lower priced
resources can be used to complete the same low level and mid level service functions such as call centers
and basic graphic design in foreign countries as in the developed countries.(Lochead 2004) This shift may
also lead countries towards “protecting” their service industries, though claiming development under the
infant industry argument will be seen as far fetched. Further examples of this sentiment have been echoed
by former Federal Reserve Chairman Alan Greenspan, as he stated that protectionist cures would only
make matters worse in terms of stemming the tide of service outsourcing.xiv
Countries will be able to trade what they produce most efficiently for goods that they would
produce inefficiently. As an industry or agricultural process becomes more efficient, prices can be lowered
and more can be produced and therefore more social benefit realized by trading. Our in class example
clearly showed how both countries can benefit from trade even if one country has an absolute advantage
over the other. Protectionism merely causes the social loss already illustrated.
Arguments for Infant Industry Protection
Brief Background
While laissez faire policies are seen by the developing world as the best way for a country to
benefit from the global economy, there are many critics of these policies and those who argue for infant
industry protection. Throughout history, even countries that dominate the global economic landscape have
used tariffs and other measures to protect their infant or simply domestic industries from foreign
competition. Therefore it is unreasonable to expect that a developing country in today’s interconnected
global economy will be able to develop any significant advanced technological enterprise without the
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benefit of infant industry protectionist policies. The protection of these industries is done not solely for the
present benefit, but is adopted to ensure the industries existence far into the future and some level of
economic security for the country. One such analogy of this idea is put forth by List, as he describes the
planting of a pear tree. He states that one would not forgo the planting of a pear tree simply because one
could purchase the pears now from some foreign supplier. The planting of the tree and subsequent
harvesting are presumed to last for a hundred years and not just the next planting season. xv Further, the
perfect competition between industries that are already developed can create a marked imbalance between
the rich and poor countries- those with the economic clout can dictate policies for their own benefit.
A Historical Perspective
While much of the developed world calls for trade liberalization and open markets, many of these
countries have been able to develop the strong industries they have today because they protected their
fledgling industries from international competition. The economic world powers of the past century,
especially Britain and the United States used “interventionist industrial, trade, and technology policies that
are aimed at promoting infant industries during their catch up periods.”xvi In the United States, Alexander
Hamilton set out the initial framework for protecting manufacturing. He proposed tariffs and in some cases
import quotas in order to develop the infant industries. Even Adam Smith warned that the US should they
adopt protectionist policies that the value of US output would be severely retarded.(Chang 2002) These
protectionist policies even created internal friction within the US leading up to the US Civil War.
Protectionist measures persisted in the US until the early 1900’s when there was some lowering of tariffs
and trade liberalization as well. The two World Wars saw the rise of more protectionism. Only in the post
World War II period where the US had established both military and economic superiority, did the US
relax some of its trade restrictions. (Chang 2002)
Tariff protection is not the only mechanism used by the US to protect its domestic industries,
infant or not. Other forms of protection include voluntary export restraints, quotas on textiles and
protection and subsidies for agriculture. It is interesting to note that the textile industry is still under some
form of protection, the multi fiber agreement. (Chang 2002) Another position pointed out by Bairoch ,
(1993) shows that the US had the fastest growing economy in the world from the nineteenth century up to
the 1920’s even though it had some of the highest tariffs in the world. Chang concludes that without
certain infant industry protections, the US economy would not have industrialized and remained largely
based on agriculture. Further, the newest industries, especially those based on technology and
pharmaceuticals are largely supported by the US governments R&D program.(Chang 2002)
It can also be highlighted, that while Great Britain was one of the first countries to truly eliminate
its very stiff tariff structure, though it only did this after it became a world economic leader. Until the
1600’s, Britain was an importer of technology from the European continent principally the Netherlands. Its
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first industry was the export of raw wool and some “low” technology wool products. It is widely held that
with the technological lead the Dutch had over Britain that if they had not protected their fledgling wool
producing industry, it never would have flourished. At one point, when Britain’s wool industry had gained
some scale through tariff protectionist measures, it pulled the ultimate checkmate, banning export of raw
wool, virtually eliminating the European manufacture of woolen cloth. (Chang 2002) What also needs to
be emphasized here is the fact that the wool industry provided half of the export revenue of Britain at the
time and without these protectionist policies in place, would never have allowed the British to grow as fast
as it did.
Current Trends in Infant Industry Protection vs. Trade Liberalization
The arguments for infant industry protection are many. A few that bear examination relate to a
country’s need to develop beyond the basic industries of agriculture and raw materials. Countries that
produce only agricultural products or export only raw materials can be deemed at the mercy of the far more
technologically developed country. It has been argued that “the real wealth of a nation lies in its scientific
and manufacturing stock” as opposed to its natural resources. (Preparatta, Elliot 1996) This argument
states that the real gain in protecting the infant industry is twofold. First the country gains by developing a
technology that it does not have and can reasonably establish and second, the “beneficial” collateral
industries that support the infant industry will also help to increase the nations stock of technology and
manufacturing capacity.
In the first instance, many of the arguments for infant industry protection, is their development is
done in the interest of national security. Industries in many countries are protected by their governments in
order to maintain the ability to defend the sovereign nation from foreign attacks. This argument has been
used to protect the US aviation industry from foreign competition as well as other heavy industries that
have military defense related ties. A furthering of this argument can also be stated that if a nations goal is
to develop technologically and not be at the mercy of a powerful neighbor, it can and should develop with
protection if necessary many different industries. This extension justified in Cantillon’s work as he states
that the defence of a nation is the necessary development of industries that it is self sustaining, calling this
the “natural” state of affairs in the world.(Preparrata, Elliot 1996) Since all countries are striving for this
independence of sorts, there is clear justification for protection of these industries.
The secondary collateral effect has been labeled the “learning by doing model”. (Melitz 2004)
Even Adam Smith recognized that as the infant industries mature and improves; the developed technology
eventually influences and bolsters other sectors of the economy. The learning process creates a virtuous
cycle, eventually leading to the ability of these firms to compete without protection.(Preparatta, Elliot
1996)
Infant Industry Protection- review of various countries policies regarding protectionism
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Two countries that provide contrasting success of free trade versus protectionism are Vietnam and
Mexico. Mexico sits at the doorstep to the richest country in the world in terms of economic might and has
had a free trade agreement with the US for over a decade. Mexico generally trades quite freely with the US
and should be growing a great pace since the liberalization of trade with the US and Canada under NAFTA.
Unfortunately, the actual results do not bear this out, with Mexico’s per capita growth barely above 1% and
real wages have fallen.xvii Another more recent development is the massive imports of cheap goods from
Asia that are supplanting the domestic production of goods such as shoes and tableware. Even in the local
markets, stall vendors are selling goods made in China and other Asian countries in lieu of locally produced
goods.xviii While free trade has not vaulted the Mexican economy into high gear, one can also wonder what
it would be like without any free trade agreements in place. Other Latin American countries that have
adopted free trade policies have also shown wild swings in economic performance such as Argentina and
Chile.
Another country, notably Senegal also liberalized their trade policies prematurely and saw their
domestic industries wiped out by foreign competition. (Elliot 2005) Senegal is a third world country that is
debt in foreign debt with very little domestic industry. If Senegal were allowed to protect its domestic
industry and develop imports based on the production of goods rather than commodities and agricultural
products, it may be able to create a knowledge base and foster other more advanced industries. xix The
selling off of Senegal’s natural resources and public and private industry to foreign multinational
companies in the name of free trade and poverty reduction does little to establish a foundation on which to
build industry. (Elliot 2003)
Vietnam on the other hand has been isolated from the US market since the 1970’s and has been the
subject of many trade restrictions as well. Unlike Mexico, which has the geographic fortune of being next
to the US, Vietnam has focused on developing their domestic export industries and as such, has seen per
capital income grow by greater than 5%.(Elliot 2005) Vietnam followed the model much like Taiwan and
South Korea, focusing their energies on the right domestic policies that would eventually lead to the ability
to compete internationally. China has also followed a dual strategy of developing it internal industries for
export using protective policies.
Two of the greater success stories in Asia in terms of economic development are certainly Taiwan
and South Korea. It has been widely documented that neither of these two nations developed their
domestic industries using any free trade practices. Instead these countries focused “on land reform, the
protection and funding of key industries and the active promotion of exports by the state”. xx Only after
their domestic industries were healthy enough to compete on the world economic scene on their own were
foreign competitors allowed in and protectionist measures eased.
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Economic Model for Illustrating Social Welfare of Infant Industry Protection
A brief discussion is warranted describing the tools available for analyzing the impact of adopting
infant industry. Economists have used the Mills-Bastable Test to describe the impact of adopting
protectionist measures in order to develop a successful infant industry. The positive outcome of the test
depends on industries learning potential, the speed of learning and the degree to which goods are
substitutable between the foreign and domestic goods. What the Mills-Bastable Test describes is the impact
of welfare flows based on the selected protection tool and the domestic industries potential to have costs
equivalent, based on a learning curve, to that of the foreign competitor. The Total Welfare or TW must be
positive over time no matter which path (qt or q`t), protection or free trade, is chosen less the fixed learning
cost. (Melitz 2004)
(
6)
The speed of learning is critical in determining the level of fixed cost that needs to be invested in
order to achieve the competitive cost c (with the superscript line). If it is slow, it will be significantly
higher and have a greater impact on Total Welfare. The graphs below are reproduced to illustrate this
point.
The learning curve and the fixed learning cost.
Melitz also concludes that as the domestic good becomes more of a perfect substitute for the
foreign good, protections need to be removed as the FLC (the cost of protection) will begin to negatively
impact welfare and ultimately drive the difference to zero.
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The Mills –Bastable Test provides a decent framework for analyzing both the potential benefits of
protection and the impact of the type of protection used whether subsidies or tariffs. (Melitz 2004) Though
there are certain drawbacks to this approach. Like many economic models, it relies on some assumptions
that in the short term are stable, but may not hold up over the long term. Thus as technology advances and
other foreign competitors enter the market, the dynamic which may have supported the infant industry
protection no longer applies and further protection will be needed to support an industry that never grows
beyond the need for protection.
Alternatives to Infant Industry Protection
While the simplistic view of the infant industry protection argument allows for basically two
choices, protect and develop or abandon and trade, a third alternative does exist. Governments can form
partnerships with multinational companies in order to develop the domestic industry. The term given to
this option is Inward Foreign Direct Investment, in which the sovereign government hosts the multinational
company in the country in exchange for certain technology transfers. The aim is that as the trade with the
multinational companies increases, this will enhance the domestic market as well due to the catalyzing
impact of the production being done domestically. This helps the developing country raise revenues by
increasing employment and consumption.xxi Coincidentally, the host country will also benefit from other
revenues generated via taxes on imported intermediate goods used by the multinational company.
Multinational companies are motivated by the profit motive and thus will provide goods in the
domestic market a profit maximizing rate. Thus, consumers will benefit from the domestic production in
the form of employment and the aforementioned spill over effect of related industries. Consumers will also
be able to purchase the good at the international price and not a domestically protected one. This multiplier
effect is very powerful.(Tomohara, 2004)
Alliance Strategy- a current example
General Motors is considered by many to be an old slow moving US multinational corporation, a
dinosaur from the glory days of the US dominance of the world wide auto industry. While GM’s problems
concerning its legacy costs in its US manufacturing units make most of the headlines, GM has aggressively
developed a global strategy of partnerships and alliances around the globe. In 2006 GM had 55 percent of
its unit sales outside the US, mostly to countries in the developing world. xxii According the 2006 annual
report, GM believes areas such as China, India, Russia, South America and the Middle East will provide
nearly all of the global growth in terms of vehicles sales. (GM 2006) General Motors is correct in its
assessment of the world market as only 12% of the world’s population have the use of a passenger vehicle.
GM has formed a global alliance network in order to tap into these emerging markets. These alliances
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include some direct investment in companies such as Opel/Vauxhall/Holden, Saab, Fiat, Isuzu and
Suzuki.xxiii In some countries, such as Russia and China, the governments have erected quasi restrictive
barriers to direct investment. Here GM has created major joint ventures in order to access these markets.
By investing in these joint ventures and partnerships, GM gains access to the market and the countries
benefit by having GM invest in plant and equipment, creating jobs and providing an opportunity for low
skilled workers jobs in a heavy manufacturing industry. Again the spill over effect of these ventures is
large, creating the need and opportunity for local suppliers of semi finished parts and sub assemblies, which
can now be sourced and developed domestically. (Howell, Hsu, 2002)
Another example that supports the alliance strategy is illustrated by the situation in India. As
mentioned previously, India had begun to open its economy in the 1990’s, and is now one of the fastest
growing economies is Asia. As India removed tariffs, some old line and inefficient manufacturers saw
their market share collapse.(Chu, 2007) But other auto component industry suppliers have flourished.
Bajaj Auto, who’s Chairman originally blasted the removal of tariffs and protections, is now one of the
most successful auto component suppliers in India today. It competes successfully with other companies
such as Hero Honda, the industry leader that has a multinational partner.xxiv This is a clear example of both
the benefits of a more open system, the success of Bajaj Auto, and the beneficial impact of multinational
partnerships, Hero Honda, coexisting and in turn making each one more competitive.
Conclusion
Infant industry protectionist policies have a definite cost in terms of inefficient economic waste to
the country implementing these policies and the world economy as a whole. Prices for the goods are
initially made artificially high in order support the inefficient industry. These costs are born by consumers
who are denied access to less expensive and more likely higher quality goods. The failures of countries
implementing these policies are many- the auto industry in India and the computer industry in Brazil.
India’s refusal to liberalize its markets cost its citizens likely million if not billions in lost opportunity cost
and supplied the country with inferior automobiles. The industry was protected for nearly half a century
and only when allowed to compete freely, has it seen success. The Brazilian computer industry is a story of
complete disaster in terms of producing computers. The only upside to this situation resulted in workers in
Brazil gaining valuable skills while attempting to develop a domestic computer industry. Many of these
people were able to use these skills to support the foreign companies that sold into Brazil when the
restrictions were finally lifted.
But there are also very good arguments for allowing countries to develop technologically
advanced industries, even if there is a cost to society in the short run. South Korea and Taiwan provide
clear examples of countries that focused their efforts on developing industries for exports, especially in the
high technology field of computers and to a certain extent heavy manufacturing. The key to their success
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appears to be the fact that they had a clear goal of establishing an economy that could support free trade,
but not before they could effectively participate in it. While these countries are not completely open in
terms of free trade- South Korea still have very stringent capital restrictions- they have become important
in the economic fabric of the world’s economy. Further, the historical evidence suggests that most of
today’s economic super powers used a variety of protectionist measures to both develop industry and
protect others from foreign competition under the guise of infant industry protection.
Developing countries need to grow beyond agriculture and raw material suppliers for the
developed world if they are to truly recognize their economic potential. Therefore, in most cases some
form of infant industry protection- Tariffs, quotas, subsidies- can be used to establish a domestic industry
for which a country has some skill and in most cases need. As these industries mature and become
competitive they must be opened to foreign competition and in some cases be allowed to fail- a very
difficult and unlikely political position. Korea stands as a country that followed these ideals whereas
Malaysia failed to open its domestic industries to the international economy and maintains this dualistic
economy.
As an alternative, sovereign governments can promote education towards technical excellence in
order to attract multinational corporate partners who are willing to invest in infrastructure in the country,
thus forming partnerships that bring industrial activity into the country. A virtuous cycle of growth can
result from this, creating jobs and ultimately wealth for its citizens.
i When and how should infant industries be protected?, Marc J. Melitz, Department of Economics, NBER, and CEPR, Harvard University, Cambridge, MA 02138,
USA July 2004.
ii Mill, J.S. 1987, Principles of Political Economy with some of their Applications to Social Philosophy, Augustus M. Kelley, New York, NY (first published 1848).
iii Indian car industry accelerates, Siddharth Srivastava ,Asian Times Online , Dec 2006, http://www.atimes.com/atimes/South_Asia/HL15Df01.html
iv India's ugly icon of the road; The boxy, pug-nosed Ambassador is a fixture on the streets and in the nation's history. But with more choices today, few want to
drive it.; [HOME EDITION]Henry Chu. Los Angeles Times. Los Angeles, Calif.: Jul 2, 2007. pg. A.1
v The Next People's Car., Meredith, Robyn, Forbes, 00156914, 4/16/2007, Vol. 179, Issue
vi India turns a corner,Trade Finance. London: Dec 2006/Jan 2007. pg. 1
vii The trade gap: The fallacy of anti world-trade sentiment Emile Dreuil, James Anderson, Walter Block, Michael Saliba. Journal of Business
Ethics. Dordrecht: Jul 2003. Vol.45, Iss. 3; pg. 269
viii The time for steel tariffs has passed; [Second Edition]David Nicklaus. St. Louis Post - Dispatch. St. Louis, Mo.: Oct 20, 2006. pg. B.1
ix An Empirical Test of the Infant Industry Argument, Krueger, Anne O., Tuncer, Baran. The American Economic Review. Nashville: Dec 1982. Vol. 72, Iss. 5; p.
1142
x An Empirical Test of the Infant Industry Argument: Comment,Harrison, Ann E.,. The American Economic Review, Sep 1994, Vol. 84, Iss. 5; p. 1090
xi Measuring the Performance of a Protected Infant Industry: The Case of Brazilian Microcomputers, Luzio, Eduardo and Greenstein, Shane, University of Illinois,
1995, pg 622
xii Interview with Monica Simsek, Manager National Accounts, ADVO a Valassis Company, July 23, 2007. Mrs. Simsek is an expatriate Brazilian National. She
currently resides in the US.
xiii Industrialization in Malaysia :Import Substitution and Infant Industry Performance, Esman, Milton J, The Journal of Asian Studies, Ann Arbor, Nov 1997 Vol.56
Iss..4 p 1148.
xiv Outsourcing: Fed chairman warns U.S. against 'protectionist cures'; [FINAL Edition] Carolyn Lochhead. San Francisco Chronicle. San Francisco, Calif.: Feb 21,
2004. pg. A.1
xv Protecting the infant industry, Cosmopolitan versus Nationalist Economits, Preparata, Guido Giacomo, Elliot, John E. International Journal of Social Economics.
Bradford, 1996 Vol 23, Iss 2 Pg 4.
xvi Kicking Away the Ladder : An Unofficial History of Capitalism, Especially in Britain and the United States, Chang,Ha-Joon, Challenge, September/October
2002, p 63.
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xvii Two countries, one booming, one struggling: which one followed the free-trade route?: A look at Vietnam and Mexico exposes the myth of market
liberalization,Larry Elliott, Economics editor. The Guardian. London (UK): Dec 12, 2005. ; p. 23
xviii My wife is embarking on a small E-bay business, figuring to bring back some hand made goods from Mexico to sell here on E-Bay. As she went to some of the
larger regional markets in the neighboring states of Mexico, she discovered much of the “hand made” authentic Mexican lace cloth that she wanted to buy was
imported from Mexico. Even the stall that were selling “hand made” sandals and shoes were importing from China. July 2007.
xix Policy made on the road to perdition Larry Elliott. The Guardian. Manchester (UK): Oct 13, 2003. pg. 25
,
xx Enslaved by free trade, Monbiot, George, NEW SCIENTIST, London, May 31, 2003, Vol 178, Iss 2397, pg 25.
xxi Globalization for Development? Inward FDI and the Size of the Market, Akinori Tomohara. Southern Business Review. Statesboro: Fall 2004. Vol. 30, Iss. 1; p.
5
xxii GM Annual Report, 2006, pg 45.
xxiii Globalization within the auto industry, Howell, Larry J., Hsu, Jamie C., Research Technology Management, Washington, Jul/Aug 2002, Vol 45. Iss..4 Pg 43.
xxiv The Auto Mission, Chennai, Businessline, Feb 6, 2007 pg. 1
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