Answer
The Import substitution (IS) method and the export-oriented (EO) method of promoting economic growth are both used by less developed countries (LDC's) to promote industrialization. One is an inward-looking strategy and the other is an outward-looking strategy .
The import substitution strategy involves government protection of small national industries until they achieve economies of scale, after which imports are allowed to compete with the erstwhile infant industries. The critical factor for success is government protection against external competition during the period of development of these national industries.
Countries that adopt the export-oriented method of economic growth welcome foreign investments to build factories that will manufacture large amounts of goods for foreign markets: in this way the manufacturing industries quickly develop economies of scale.
The export-oriented method of economic growth has proven to be faster, in recent times.
Work Step by Step
In the import substitution strategy the government decides which sector or sectors of the LDC economy is best suited for industrialization. It then raises barriers to trade on the products from these sectors in order to encourage local investment. Tariffs and subsidies are used to support these infant national industries. These protections are gradually lowered as the national industries achieve economies of scale.
The export-oriented strategy concentrates on increasing export of products. It is supported by export subsidies, by encouragement of skill formation in the national labor force, by the use of the most advanced technology, and by tax concessions-- measures aimed at generating more exports.
Countries like Brazil, India , Pakistan and some African countries employed the import substitution (IS) method for stimulating economic growth-- for short periods. However, most abandoned it after a while because of economic stagnation. Countries that have used the export-oriented(EO) method of promoting economic growth are Japan, Singapore and Hong Kong.
