Import-Substituting Industrialization Market Failure Justifications for Infant Industry Protection Two market failures are identified as reasons why infant industry protection may be a good idea Imperfect capital markets justification If a developing country does not have a set of financial institutions that would allow savings from traditional sectors (such as agriculture) to be used to finance investment in new sectors(such as manufacturing), then growth of new industries will be restricted Appropriability argument Firms in a new industry generate social benefits for which they are not compensated(e.g. start-up costs of adapting technology) Copyright C 2003 Pearson Education, Inc Slide 10-8Copyright © 2003 Pearson Education, Inc. Slide 10-8 ▪ Market Failure Justifications for Infant Industry Protection • Two market failures are identified as reasons why infant industry protection may be a good idea: – Imperfect capital markets justification – If a developing country does not have a set of financial institutions that would allow savings from traditional sectors (such as agriculture) to be used to finance investment in new sectors (such as manufacturing), then growth of new industries will be restricted. – Appropriability argument – Firms in a new industry generate social benefits for which they are not compensated (e.g. start-up costs of adapting technology). Import-Substituting Industrialization