Back to: ECONOMIC ANALYSIS & MONETARY POLICY
Infant-Industry Theory Definition
The infant-industry theory is an economic rationale with economic policy to protect domestic industries against international competition until they attain the same economies of scale. Infant industries are young companies or businesses that are still in the early stages of development.
At this stage, they are not in a position to compete against the already established competitors in the industry. So, the infant-industry theory looks after the upcoming industry until they are mature, stable, and capable of surviving the competition pressure.
A Little More on What is Infant-Industry Theory
infant industry is usually vulnerable at the time of entry into the world. It is at its stages of development and, therefore, too weak to withstand economic pressures and market challenges. They lack the assets and potentials that the established competitors have in place to be able to compete in the global market.
- Skilled workforce
- Experienced managers
- Efficient production processes
- Established market share
- Sales channels
The practical way of governments protecting the infant industry is by applying several tools like quotas, tariffs, and duty taxes. These tools make it difficult for international competitors to beat or match the infant industry’s prices. Taxes and tariffs usually increase competitors’ costs. By doing so, the new industry gets a chance of building efficient operations and establishing its existence in the market.
Infant-Industry Theory Real-life experience
After the United States gaining independence from Britain, it considered the infant-industry theory its basis for trade policy. During that time, Britain had a well-established economy. Also, consumers from the United States sought products from other European products. However, these goods were made costly through duties and tariffs. The move provided the young industries in the United States an opportunity to grow its own marketplace.
After some years, in the late nineteenth and twentieth centuries, the steel industry in the United States was given protection from international competition. To ensure this, the government applied quotas and tariffs that ensured that other competitors were kept out of the United States market.
Infant Industry Theory Implications
Infant industry theory provides the young industry with the opportunity to establish itself. However, at the same time, it interferes with the economics of pricing and production.
If the government imposes tariffs and taxes for a long time, foreign countries may also be forced to initiate the same policies from their end. By doing so, it limits the growing industries to expand into foreign markets.
The Bottom Line
However, this infant-industry theory is controversial. Compared to other economic protection rationales, there is the tendency of rent-seeking interests abusing it. Though a government may apply this theory with good intentions, sometimes it finds it difficult to identify which industry to protect. The reason is that some industries are likely not to grow relative to mature foreign competitors, even with protection in place.
Most countries across the world have been able to achieve industrialization by applying tariff barriers and subsidies. The United States is among the many nations that applied the highest tariffs, and it was able to grow and expand.
References for “Infant-Industry Theory”