Industrialisation (or industrialization) is the process of social and economic change that

transforms a human group from an agrarian society into an industrial one i.e. where
manufacturing dominate the economic activity of a country.
The concept of industrialization implies the movement of an economy from a primarily
agricultural basis to a mixed or industrial/service basis with an accompanying increase in
output and output per capita. Although the early stages of industrialization require systemic
and policy measures to steer resources into the productive process, eventually the growth of
output must be generated through the growth of productivity.
During the process of successful industrialization, measurement of the importance of the
agricultural and industrial sectors, characterized for example by output shares in GDP, will
indicate a relative shift away from agricultural production towards industrial production
along with the sustained growth of total output. The analysis of these changes differs if cast
within the framework of neoclassical economics (and its variations) as opposed to the
Marxist-Leninist framework.
Characteristic features of industrialization include the application of scientific methods to
solving problems, mechanization and a factory system, the division of labour, the growth of
the money economy, and the increased mobility of the labour forceboth geographically and
socially. One problem is that these are features of capitalism, and capitalism is not the same
thing as industrialization, although it was the first instrument of industrialization.
Industrialization is generally accompanied by social and economic changes, such as a fall in
the birth rate and a rise in per capita GNP. Urbanization is encouraged and groups of
manufacturing towns may form. Within the developed world, the growth of the factory
system led to the separation of home and workplace with major repercussions for urban social
geography. Initially there is an emphasis on primary and secondary industry, but as
industrialization continues, there is a shift to tertiary industry.

It is a part of a wider modernisation process, where social change and economic development
are closely related with technological innovation, particularly with the development of largescale energy and metallurgy production. It is the extensive organisation of an economy for the
purpose of manufacturing.

Industrialisation also introduces a form of philosophical change where people obtain a

different attitude towards their perception of nature, and a sociological process of ubiquitous
rationalisation.
Description
According to the original sector classification of Jean Fourasti, an economy consists of a
"Primary sector" of commodity production (farming, livestock breeding, exploitation of
mineral resources), a "secondary sector" of manufacturing and processing (as paid work), and
a "Tertiary Sector" of service industries. The industrialisation process is historically based on
the expansion of the secondary sector in an economy dominated by primary activities.
The first transformation to an industrial economy from an agricultural one is called the
Industrial Revolution and took place from the mid 18th to early 19th century in certain areas
in Western Europe and North America, starting in Great Britain Derby, followed by Germany,
f.i. Bergisches Land and France. This now is called the first industrial revolution.
The Second Industrial Revolution describes the later changes that came about in the mid 19th
century after the invention of steam engine, internal combustion engine, electricity and the
construction of canals, railways and electric power lines. The invention of the assembly line
gave this phase a boost.
The lack of an industrial sector in a country can be a handicap in improving the country's
economy and power, so governments encourage or enforce industrialisation. On the other
hand, the presence of industry in a country does not mean in general that it will bring wealth
and prosperity to the people of that country. And third, the presence of an industry in one
country can make it more difficult for other countries to develop the same type of industry.
This can be seen in the computer- software-, and internet industries. Started from the U.S.A.
around the 1990's these industries seemed to spread over the world. But after a period

of monopolisation less than a decade long, the globally leading companies are concentrated
in the U.S.A. Their economic power and capacity to dominate the media work against the
developing of the same types of industry in other states.

Factors influencing industrialisation

There is considerable literature on the factors facilitating industrial modernisation and
enterprise development.
Key positive factors identified by researchers have ranged from
Favourable political-legal environments for industry and commerce,
Abundant natural resources of various kinds,
Plentiful supplies of relatively low-cost, skilled and adaptable labour.
As industrial workers incomes rise, markets for consumer goods and services of all
kinds tend to expand and provide a further stimulus to industrial investment and
economic growth.
The first country to industrialise was the United Kingdom during the Industrial Revolution

commencing in the eighteenth century.[4]

By the end of the 20th century, East Asia had become one of the most recently
industrialised regions of the world .

Proto-industrialisation (also spelled proto-industrialization) is a phase in the development

of modern industrial economies that preceded, and created conditions for, the establishment
of fully industrial societies. Proto-industrialization was marked by the increasing involvement
of agrarian families in market-oriented craft production, mainly through the putting-out
system organized by merchant capitalists. It was a decentralised method of production which
was controlled by merchants and the goods were produced by a vast number of producers
located in different places unlike the industrialised era in which the production became
centralised.

Initially using surplus labor available during slow periods of the agricultural seasons, protoindustrialization led to specialization in both industrial production as well as commercial
agricultural production. This allowed reciprocal trade favored by regional economies of scale.
It resulted in accumulation of capital and the acquisition of entrepreneurial skills by merchant
capitalists, which facilitated the development of large-scale, capital-intensive production
methods in the full industrialization phase that followed.

Proto-industrialization sparked social changes in

traditional agrarian societies that would
become more marked during full
industrialization, such as greater
independence of women and children who
gained a means of income separate from the
family subsistence farm. During this phase of
Industrialization, machines were not used.
They were not even invented at that time.
People could only use their hands or any hand
made material to produce required goods.
Proto-industrialization refers to the regional growth of market-oriented rural industry
and contemporaneous agricultural growth in the 17th and 18th centuries, during the
decades that preceded the Industrial Revolution. The theories that accompany this concept
have stimulated a considerable amount of research and debate in the last few years among
European economic, social, family and demographic historians and continue to do so, as is
evident from several recent books, theses, and issues of journals in these fields. The questions
raised by proto-industrialization have now begun to interest a few African, Japanese, and
early American historians as well.
Professor Stone, in a review of some fourteen books, only one of which is devoted to protoindustrialization,* gives in passing a simplified and misleading impression to the readers of
this Review of what is really involved in this debate and controversy.
First, regarding the causes of the Industrial Revolution, it is misleading to say that the theory
of proto-industrialization for almost a decade has seemed the solution. To most scholars,

proto-industrialization has never been more than a plausible and interesting set of hypotheses,
in need of yet more data. That, together with its wide-ranging implications, is in fact what has
made it exciting and fruitful.
Secondly, the theory of proto-industrialization sheds useful light on the question of the causes
of the Industrial Revolution, but it is mostly about economic-demographic interactions during
its early stage. Its advocates have never claimed that it offers the solution to this very
complicated question. Indeed, proto-industrialization has never attained the status of being
the solution to anything, since it has remained controversial.
Thirdly, out of a dozen other recent publications, Professor Stone singles out one particularly
polemical and even sarcastic contribution by Professor Coleman to draw the conclusion that
Proto-industrialization, in short, seems to have been neither a sufficient, nor even a
necessary, cause of industrial revolution. In fact, proto-industrialization has never been
presented as a sufficient cause of industrial revolution; even a superficial acquaintance with
the economic history of the Industrial Revolution will make it at once clear that there were
many regions of Europe whose handloom weaving and other rural part-time peasant
industries disappeared without any factory industry to replace them locally. As for being
necessary, which I believe it was, in the sense that historians find very few regions of
Europe that had an industrial revolution without first going through a phase of protoindustrialization; Coleman did not address himself to this question.
History of industrialisation

A Watt steam engine, the steam engine fuelled primarily by coal that propelled the Industrial
Revolution in the United Kingdom and the world.[10]
Most pre-industrial economies had standards of living not much above subsistence, among
that the majority of the population were focused on producing their means of survival. For
example, in medieval Europe, 80% of the labour force was employed in subsistence
agriculture.
Some pre-industrial economies, such as classical Athens, had trade and commerce as
significant factors, so native Greeks could enjoy wealth far beyond a sustenance standard of

living through the use of slavery. Famines were frequent in most pre-industrial societies,
although some, such as the Netherlands and England of the seventeenth and eighteenth
centuries, the Italian city states of the fifteenth century, the medieval Islamic Caliphate, and
the ancient Greek and Roman civilisations were able to escape the famine cycle through
increasing trade and commercialisation of the agricultural sector. It is estimated that during
the seventeenth century Netherlands imported nearly 70% of its grain supply and in the fifth
century BC Athens imported three quarters of its total food supply.[citation needed]
Industrialisation through innovation in manufacturing processes first started with the
Industrial Revolution in the north-west and Midlands of England in the eighteenth century. [11]
It spread to Europe and North America in the nineteenth
Industrial revolution in Western Europe
Main article: Industrial Revolution

Aplerbecker Htte, an industrialised area of Dortmund, Germany around 1910. The old town
can be seen beyond and some remaining agricultural land is in the foreground
In the eighteenth and nineteenth centuries, the United Kingdom experienced a massive
increase in agricultural productivity known as the British Agricultural Revolution, which
enabled an unprecedented population growth, freeing a significant percentage of the
workforce from farming, and helping to drive the Industrial Revolution.
Due to the limited amount of arable land and the overwhelming efficiency of mechanised
farming, the increased population could not be dedicated to agriculture. New agricultural
techniques allowed a single peasant to feed more workers than previously; however, these
techniques also increased the demand for machines and other hardwares, which had
traditionally been provided by the urban artisans. Artisans, collectively called bourgeoisie,
employed rural exodus workers to increase their output and meet the country's needs.
The growth of their business coupled with the lack of experience of the new workers pushed
a rationalisation and standardisation of the duties the in workshops, thus leading to a division
of labour, that is, a primitive form of Fordism. The process of creating a good was divided

into simple tasks, each one of them being gradually mechanised in order to boost productivity
and thus increase income.
The accumulation of capital allowed investments in the conception and application of new
technologies, enabling the industrialisation process to continue to evolve. The
industrialisation process formed a class of industrial workers who had more money to spend
than their agricultural cousins. They spent this on items such as tobacco and sugar, creating
new mass markets that stimulated more investment as merchants sought to exploit them.[12]
The mechanisation of production spread to the countries surrounding England in western and
northern Europe and to British settler colonies, helping to make those areas the wealthiest,
and shaping what is now known as the Western world.

The Crystal Palace Great Exhibition. The United Kingdom was the first country in the world
to industrialise.[4]
Some economic historians argue that the possession of so-called exploitation colonies eased
the accumulation of capital to the countries that possessed them, speeding up their
development. The consequence was that the subject country integrated a bigger economic
system in a subaltern position, emulating the countryside, which demands manufactured
goods and offers raw materials, while the colonial power stressed its urban posture, providing
goods and importing food. A classical example of this mechanism is said to be the triangular
trade, which involved England, southern United States and western Africa. Critics argue that
this polarity still affects the world, and has deeply retarded industrialisation of what is now
known as the Third World.
Some have stressed the importance of natural or financial resources that Britain received
from its many overseas colonies or that profits from the British slave trade between Africa
and the Caribbean helped fuel industrial investment.
Early industrialisation in other countries
After the Convention of Kanagawa issued by Commodore Matthew C. Perry forced Japan to
open the ports of Shimoda and Hakodate to American trade, the Japanese government

realised that drastic reforms were necessary to stave off Western influence. The Tokugawa
shogunate abolished the feudal system. The government instituted military reforms to
modernise the Japanese army and also constructed the base for industrialisation. In the 1870s,
the Meiji government vigorously promoted technological and industrial development that
eventually changed Japan to a powerful modern country.
In a similar way, Russia suffered during the Allied intervention in the Russian Civil War. The
Soviet Union's centrally controlled economy decided to invest a big part of its resources to
enhance its industrial production and infrastructures to assure its survival, thus becoming a
world superpower.

During the Cold war, the other European socialist countries, organised under the Comecon
framework, followed the same developing scheme, albeit with a less emphasis on heavy
industry.
Benefits of industrialisation
Industrialisation has a number of advantages, chief among them:
Employment creation

improved economic perfomance, -- which includes a number of benefits such as

stability and self reliance: more stable than a farming economy that is more reliant on
seasons/weather, and more self reliant because it meant that we didn't have to buy
manufactured goods from other countries (avoiding tariffs and taxes).

Additionally it allowed us to sell to other countries, making them reliant on us,

ensuring our stability
-Growth of cities and infrastructures such as train ways, roads, shipping ports, etc.
-Availability of manufactured goods to the masses -- such as clothing, housewares,
bookes, etc'
Innovation -- without Industrialization, would we have ever had the manufacturing
techniques to invent a car?


Improved standards of living.
Negatives
Need for more government regulations to control the manufacturing industries, such
as child labour laws.
Automation of processes may leave some unemployed.
Pollution
Demand and use of more natural resources (which may or may not be renewable)
Loss of boutique services -- such as cobblers (shoe making and repair), blacksmiths,
seamstresses, fine carpenters, etc
Influx of immigration, because of the increased job opportunities, which our cities
may not necessarily equipped to maintain, leading to racial tensions as well as poor
living conditions
Technology, human development and industrialization
Rapid technical change is at the heart of globalization and the new competitive scene
The death of distance opens new markets and access to inputs, allowing narrower forms of
specialization in fragmented or segmented production and outsourcing
It changes the structural dynamics of industrial activity, shifting the production and exports
towards technology-intensive products and activities
It makes it imperative for all productive activities to constantly access and use new
technologies, while raising the minimum entry levels for using technologies efficiently
Technical change alters the organisation of production and trade
Harnessing innovation and globalization needs more than opening up to trade or FDI: it needs
building capabilities to use new technologies efficiently and moving up the technology scale
Thus: globalization offers new markets and mobile resources but competing for these calls for
more than primary resources or cheap labour it requires the ability to harness innovation

Globalization raises the role of MNCs in innovation, technology transfer, production and
particularly exports. Around 2/3 of world trade is handled by MNCs, about 1/3 is within
companies
Slippery slopes and sticky places
o

Productive factors, including highly skilled labour, are increasingly mobile - through
FDI but also various other means

One major driver of mobility is the search for low cost production and service sites

But increasing mobility does not mean factors spread themselves evenly over poor
countries: efficient production requires local capabilities to complement the mobile
factors

Thus, globalization needs efficient localisation: countries must provide the

technical, skill, quality and reliability needs of competitive production

Efficient localisation involves far more than passive opening up ...

o

Technologies cannot be effectively used by developing economies just by opening up

to global trade, technology or capital flows

Technology cannot be fully embodied in machines, licences or people: it has strong

tacit elements

These tacit elements need time, investment and effort: to understand, adapt, use &
improve technologies to build new capabilities

Such effort generally faces pervasive market and institutional failures: within the
firm, between firms and between enterprises and factor markets & institutions.

Proactive strategies, often selective in nature, are essential for industrial success, but
very few countries are able to design and implement them

New rules of the game prohibit many strategies

These features of technology and its efficient use, in combination with new rules, have
certain inevitable effects on the growth and distribution of industrial activity.
1. Minimum entry levels are rising
2. Leads and lags are cumulative: learning and agglomeration
3. Scale economies mean concentration in a few sites
4. Capacity to overcome market failures is very limited in most countries
5. Governments cannot build this capacity, partly because international rules &
indirect pressures constrain policy space for intervention.
The impact of globalization is therefore very uneven, across activities, across regions

and by country. There is, in effect, a growing wedge between the technological
haves and have-nots in the developing world.
Technological categories
o

Primary products

Manufactured products
RB (Resource based): e.g. food, wood & forestry products, processed
minerals, petroleum products
LT (Low technology): e.g. textiles, clothing, footwear, toys, sports goods,
simple metal products
MT (Medium technology): e.g. automotive products, TVs, machinery,
chemicals, steel
HT (High technology): Advanced ICT and electrical, pharmaceuticals,
aerospace, precision instruments
Studies the world have reflected divergent performance in technology and
industrialisation.
What then explains increasingly divergent performance?

Incomplete liberalization, macro mismanagement, poor governance etc.?

Adjustment lags? Just give it longer?

Underlying structural factors, market failures and & institutions i.e. the lack of
capabilities to respond to global competition?

All these matter to some extent, but the most important (and most difficult to tackle)
is the last

The normal course of globalisation exacerbates differences because of

cumulativeness, scale & agglomeration (national and regional) effects and systemic
development in building capabilities

Success provides resources, institutions and government capabilities to build further

success
Some structural drivers of industrial competitiveness and success
Its certainly not low wages per se
National tertiary technical enrolments, (1985-98, % population)
R&D financed by productive enterprises.

The new world policy environment

o

Facilitates globalization, trade and FDI

In doing so it levels the playing field in a way that disadvantages weak countries
It raises dependence on FDI for countries with weak local enterprise; if they
can attract FDI they risk being stuck at low technology levels
It does not leave sufficient policy space for countries to strengthen or develop
new capabilities and properly tap FDI
It can retard the development of capabilities and freeze comparative advantage

But human capital as embodied in local capabilities remain vital

o

For building domestic industry and related technology intensive services

For attracting high quality FDI: the stronger is domestic industry the more and better
are FDI inflows

For upgrading within value chains, as wages rise and technologies change

They are even more important because international production systems have inherent
limitations
o

Relatively few activities have technologies and logistics for widespread segmentation.
These are limited in geographical scope and offer strong first mover advantages

Other FDI does not cover very large parts of industrial activity local enterprise have
to carry bulk of industrialization in most economies

There is heavy concentration in FDI flows and cumulative agglomeration.

Most poor countries are marginal to globalised production and likely to remain so if
liberalization and globalization proceed as usual under present rules of the game

The way forward

o

This inequitable and anti-development outcome is neither inevitable nor necessary

Action needed at national and international levels to:

Build necessary skills and capabilities
Provide objective and detailed analysis of effects of successful industrial
policy
Create greater policy space, differentiated by level of development
Help countries build the government capabilities needed for effective policy

 Actively assist governments in designing, implementing and monitoring

strategy

Understanding Foreign Direct Investment (FDI)

Definition
Foreign direct investment (FDI) or foreign investment refers to the net inflows
ofinvestment to acquire a lasting management interest (10 percent or more of voting stock) in
an enterprise operating in an economy other than that of the investor. It is the sum of equity
capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in
the balance of payments. It usually involves participation in management, joint-venture,
transfer of technology and expertise.
Foreign Direct Investment, or FDI, is a measure of foreign ownership of domestic
productive assets such as factories, land and organizations. Foreign direct investments
have become the major economic driver of globalization, accounting for over had of
allcross-border investments.
Foreign direct investment, in its classic definition, is defined as a company from one country
making a physical investment into building a factory in another country. The direct
investment in buildings, machinery and equipment is in contrast with making a portfolio
investment, which is considered an indirect investment. In recent years, given rapid growth
and change in global investment patterns, the definition has been broadened to include the
acquisition of a lasting management interest in a company or enterprise outside the investing
firms home country. As such, it may take many forms, such as a direct acquisition of a
foreign firm, construction of a facility, or investment in a joint venture or strategic alliance
with a local firm with attendant input of technology, licensing of intellectual property, In the
past decade, FDI has come to play a major role in the internationalization of business.
FDI is a measure of foreign ownership of productive assets, such as factories, mines and land.
Increasing foreign investment can be used as one measure of growing economic
globalization.

There are two types of FDI: inward foreign direct investment and outward foreign direct
investment, resulting in a net FDI inflow (positive or negative) and "stock of foreign direct
investment", which is the cumulative number for a given period. Direct investment excludes
investment through purchase of shares.[2] FDI is one example of international factor
movements.
The foreign direct investor may acquire voting power of an enterprise in an economy through
any of the following methods:

by incorporating a wholly owned subsidiary or company

by acquiring shares in an associated enterprise

through a merger or an acquisition of an unrelated enterprise

participating in an equity joint venture with another investor or enterprise

FDI Theories
5. Explain the internalization theory of FDI. What are the strength and weakness of the
theory?
Answer:

According to the internalization theory, firms that have intangible assets with a

public good property tend to undertake FDI to take advantage of the assets on a large scale
and, at the same time, prevent misappropriation of returns from the assets that may occur
during arms length transactions in foreign countries. The theory can be effective in
explaining green field investments, but not in explaining mergers and acquisitions.
6. Explain Vernons product life-cycle theory of FDI. What are the strength and weakness of
the theory?
Answer: According to the product life-cycle theory, firms undertake FDI at a particular stage in
the life-cycle of the products that they initially introduced. When a new product is introduced, the
firm chooses to keep production at home, close to customers. But when the product become
mature and foreign demands develop, the firm may be induced to start production in foreign
countries, especially in low-cost countries, to serve the local markets as well as to export the
product back to the home country. As can be inferred from the boxed reading on Singer in the

text, the product life-cycle theory can explain historical development of FDI quite well. In recent
years, however, the international system of production has become too complicated to be
explained neatly by the life-cycle theory. For example, new products are often introduced
simultaneously in many countries and production facilities may be located in many countries at
the same time.
Foreign direct investment incentives may take the following forms:

low corporate tax and income tax rates

tax holidays

other types of tax concessions

preferential tariffs

special economic zones

EPZ - Export Processing Zones

Bonded Warehouses

Maquiladoras

investment financial subsidies

soft loan or loan guarantees

free land or land subsidies

relocation & expatriation subsidies

job training & employment subsidies

infrastructure subsidies

Reacting to changes in technology, growing liberalization of the national regulatory

framework governing investment in enterprises, and changes in capital markets profound

changes have occurred in the size, scope and methods of FDI. New information technology
systems, decline in global communication costs have made management of foreign
investments far easier than in the past. The sea change in trade and investment policies and
the regulatory environment globally in the past decade, including trade policy and tariff
liberalization, easing of restrictions on foreign investment and acquisition in many nations,
and the deregulation and privitazation of many industries, has probably been been the most
significant catalyst for FDIs expanded role.
Foreign direct investment (FDI) plays an extraordinary and growing role in global business.
It can provide a firm with new markets and marketing channels, cheaper production facilities,
access to new technology, products, skills and financing. For a host country or the foreign
firm which receives the investment, it can provide a source of new technologies, capital,
processes, products, organizational technologies and management skills, and as such can
provide a strong impetus to economic development.
The most profound effect has been seen in developing countries, where yearly foreign direct
investment flows have increased from an average of less than $10 billion in the 1970s to a
yearly average of less than $20 billion in the 1980s, to explode in the 1990s from
$26.7billion in 1990 to $179 billion in 1998 and $208 billion in 1999 and now comprise a
large portion of global FDI.. Driven by mergers and acquisitions and internationalization of
production in a range of industries, FDI into developed countries last year rose to $636
billion, from $481 billion in 1998 (Source: UNCTAD)
Proponents of foreign investment point out that the exchange of investment flows benefits
both the home country (the country from which the investment originates) and the host
country (the destination of the investment). Opponents of FDI note that multinational
conglomerates are able to wield great power over smaller and weaker economies and can
drive out much local competition. The truth lies somewhere in the middle.
For small and medium sized companies, FDI represents an opportunity to become more
actively involved in international business activities. In the past 15 years, the classic
definition of FDI as noted above has changed considerably. This notion of a change in the
classic definition, however, must be kept in the proper context. Very clearly, over 2/3 of direct
foreign investment is still made in the form of fixtures, machinery, equipment and buildings.
Moreover, larger multinational corporations and conglomerates still make the overwhelming

percentage of FDI. But, with the advent of the Internet, the increasing role of technology,
loosening of direct investment restrictions in many markets and decreasing communication
costs means that newer, non-traditional forms of investment will play an important role in the
future.

Many governments, especially in industrialized and developed nations, pay very

close attention to foreign direct investment because the investment flows into and out of their
economies can and does have a significant impact. In the United States, the Bureau of
Economic Analysis, a section of the U.S. Department of Commerce, is responsible for
collecting economic data about the economy including information about foreign direct
investment flows. Monitoring this data is very helpful in trying to determine the impact of
such investments on the overall economy, but is especially helpful in evaluating industry
segments. State and local governments watch closely because they want to track their foreign
investment attraction programs for successful outcomes.

How Has FDI Changed in the Past Decade?

As mentioned above, the overwhelming majority of foreign direct investment is made in the
form of fixtures, machinery, equipment and buildings. This investment is achieved or
accomplished mostly via mergers & acquisitions. In the case of traditional manufacturing,
this has been the primary mechanism for investment and it has been heretofore very efficient.
Within the past decade, however, there has been a dramatic increase in the number of
technology startups and this, together with the rise in prominence of Internet usage, has
fostered increasing changes in foreign investment patterns. Many of these high tech startups
are very small companies that have grown out of research & development projects often
affiliated with major universities and with some government sponsorship. Unlike traditional
manufacturers, many of these companies do not require huge manufacturing plants and
immense warehouses to store inventory. Another factor to consider is the number of
companies whose primary product is an intellectual property right such as a software program
or a software-based technology or process. Companies such as these can be housed almost
anywhere and therefore making a capital investment in them does not require huge outlays
for fixtures, machinery and plants.
In many cases, large companies still play a dominant role in investment activities in small,
high tech oriented companies. However, unlike in the past, these larger companies are not

necessarily acquiring smaller companies outright. There are several reasons for this, but the
most important one is most likely the risk associated with such high tech ventures. In the
case of mature industries, the products are well defined. The manufacturer usually wants to
get closer to its foreign market or wants to circumvent some trade barrier by making a direct
foreign investment. The major risk here is that you do not sell enough of the product that you
manufactured. However, you have added additional capacity and in the case of multinational
corporations this capacity can be used in a variety of ways.
High tech ventures tend to have longer incubation periods. That is, the product tends to
require significant development time. In the case of software and other intellectual property
type products, the product is constantly changing even before it hits the marketplace. This
makes the investment decision more complicated. When you invest in fixtures and
machinery, you know what the real and book value of your investment will be. When you
invest in a high tech venture, there is always an element of uncertainty. Unfortunately, the
recent spate of dot.com failures is quite illustrative of this point.
Therefore, the expanded role of technology and intellectual property has changed the foreign
direct investment playing field. Companies are still motivated to make foreign investments,
but because of the vagaries of technology investments, they are now finding new vehicles to
accomplish their goals. Consider the following:

Licensing and technology transfer. Licensing and tech transfer have been essential in
promoting collaboration between the academic and business communities. Ever since legal
hurdles were removed that allowed universities to hold title to research and development
done in their labs, licensing agreements have helped turned raw technology into finished
products that are viable in competitive marketplaces. With some help from a variety of
government agencies in the form of grants for R&D as well as other financial assistance for
such things as incubator programs, once timid college researchers are now stepping out and
becoming cutting edge entrepreneurs. These strategic alliances have had a serious impact in
several high tech industries, including but not limited to: medical and agricultural
biotechnology, computer software engineering, telecommunications, advanced materials
processing, ceramics, thin materials processing, photonics, digital multimedia production
and publishing, optics and imaging and robotics and automation. Industry clusters are now

growing up around the university labs where their derivative technologies were first
discovered and nurtured. Licensing agreements allow companies to take full advantage of
new and exciting technologies while limiting their overall risk to royalty payments until a
particular technology is fully developed and thus ready to put new products into the
manufacturing pipeline.
Reciprocal distribution agreements. Actually, this type of strategic alliance is more tradebased, but in a very real sense it does in fact represent a type of direct investment. Basically,
two companies, usually within the same or affiliated industries, agree to act as a national
distributor for each others products. The classical example is to be found in the furniture
industry. A U.S.-based manufacturer of tables signs a reciprocal distribution agreement with a
Spanish-based manufacturer of chairs. Both companies gain direct access to the others
distribution network without having to pay distributor support payments and other related
expenses found within the distribution channel and neither company can hurt the others
market for its products. Without such an agreement in place, the Spanish manufacturer might
very well have to invest in a national sales office to coordinate its distributor network, manage
warehousing, inventory and shipping as well as to handle administrative tasks such as
accounting, public relations and advertising.
Joint venture and other hybrid strategic alliances. The more traditional joint venture is bilateral, that is it involves two parties who are within the same industry who are partnering for
some strategic advantage. Typical reasons might include a need for access to proprietary
technology that might tip the competitive edge in another competitors favor, desire to gain
access to intellectual capital in the form of ultra-expensive human resources, access to
heretofore closed channels of distribution in key regions of the world. One very good reason
why many joint ventures only involve two parties is the difficulty in integrating different
corporate cultures. With two domestic companies from the same country, it would still be very
difficult. However, with two companies from different cultures, it is almost impossible at
times. This is probably why pure joint ventures have a fairly high failure rate only five years
after inception. Joint ventures involving three or more parties are usually called syndicates and
are most often formed for specific projects such as large construction or public works projects
that might involve a wide variety of expertise and resources for successful completion. In
some cases, syndicates are actually easier to manage because the project itself sets certain
limits on each party and close cooperation is not always a prerequisite for ultimate success of
the endeavor.
Portfolio investment. Yes, we know that youre paying attention and no were not trying to

trip you up here. Remember our definition of foreign direct investment as it pertains to
controlling interest. For most of the latter part of the 20th century when FDI became an issue, a
companys portfolio investments were not considered a direct investment if the amount of
stock and/or capital was not enough to garner a significant voting interest amongst
shareholders or owners. However, two or three companies with "soft" investments in another
company could find some mutual interests and use their shareholder power effectively for
management control. This is another form of strategic alliance, sometimes called "shadow
alliances". So, while most company portfolio investments do not strictly qualify as a direct
foreign investment, there are instances within a certain context that they are in fact a real direct
investment.

Why is FDI important for any consideration of going global?

The simple answer is that making a direct foreign investment allows companies to
accomplish several tasks:
Avoiding foreign government pressure for local production.
Circumventing trade barriers, hidden and otherwise.
Making the move from domestic export sales to a locally-based national sales office.
Capability to increase total production capacity.
Opportunities for co-production, joint ventures with local partners, joint marketing
arrangements, licensing, etc;
A more complete response might address the issue of global business partnering in very
general terms. While it is nice that many business writers like the expression, think globally,
act locally, this often used clich does not really mean very much to the average business
executive in a small and medium sized company. The phrase does have significant
connotations for multinational corporations. But for executives in SMEs, it is still just
another buzzword. The simple explanation for this is the difference in perspective between
executives of multinational corporations and small and medium sized companies.
Multinational corporations are almost always concerned with worldwide manufacturing
capacity and proximity to major markets. Small and medium sized companies tend to be
more concerned with selling their products in overseas markets. The advent of the Internet
has ushered in a new and very different mindset that tends to focus more on access issues.

SMEs in particular are now focusing on access to markets, access to expertise and most of
all access to technology.
L
What would be some of the basic requirements for companies considering a foreign
investment?
Depending on the industry sector and type of business, a foreign direct investment may be an
attractive and viable option. With rapid globalization of many industries and vertical
integration rapidly taking place on a global level, at a minimum a firm needs to keep abreast
of global trends in their industry. From a competitive standpoint, it is important to be aware
of whether a companys competitors are expanding into a foreign market and how they are
doing that. At the same time, it also becomes important to monitor how globalization is
affecting domestic clients. Often, it becomes imperative to follow the expansion of key
clients overseas if an active business relationship is to be maintained.
New market access is also another major reason to invest in a foreign country. At some stage,
export of product or service reaches a critical mass of amount and cost where foreign
production or location begins to be more cost effective. Any decision on investing is thus a
combination of a number of key factors including:
assessment of internal resources,
competitiveness,
market analysis
market expectations.
From an internal resources standpoint, does the firm have senior management support for the
investment and the internal management and system capabilities to support the set up time as
well as ongoing management of a foreign subsidiary? Has the company conducted extensive
market research involving both the industry, product and local regulations governing foreign
investment which will set the broad market parameters for any investment decision? Is there a
realistic assessment in place of what resource utilization the investment will entail? Has
information on local industry and foreign investment regulations, incentives, profit retention,
financing, distribution, and other factors been completely analyzed to determine the most
viable vehicle for entering the market (greenfield, acquisition, merger, joint venture, etc.)?
Has a plan been drawn up with reasonable expectations for expansion into the market through

that local vehicle? If the foreign economy, industry or foreign investment climate is
characterized by government regulation, have the relevant government agencies been
contacted and concurred? Have political risk and foreign exchange risk been factored into the
business plan?
Outside of the analysis of internal resources, a vast amount of information is needed to assess
the viability and ultimate method of foreign investment as outlined above. Much of this
information is available online through a range of websites and portals. They include:
Indigenisation
Is the process in which citizens of a country redefine their native land for better use in
agriculture and mass marketing by taking active roles in economic and social activities at
national level.
Broadly, indigenisation aims at bringing about economic justice between races; at
democratising the economic system and at creating favourable economic conditions for the
promotion of basic human rights, such as the right to development, the right to employment,
the right to own property (productive and non productive) and the right to an adequate
standard of living.
For such rights to be realised all the people must have equal opportunities and unhindered
access to resources and skills in a country. An enabling environment and a level playing field
should therefore be created to pave the way for equal participation in economic development
by all citizens. Economic injustice is one of the major factors, which brings about social and
political conflicts.
In short, economic indigenisation is a strategy for the development of a democratic socioeconomic system, nation building and poverty eradication among the majority of citizen of a
country . The master key to indigenisation of the economy includes an increase of indigenous
productive investment in the economy, industrialisation, skills development, land
redistribution and mobilisation of financial resources.
Policy Objectives and Constraints
The main policy objectives for indigenization of the economy are as follows:

To create more wealth and eradicate poverty among the majority of a countrys
citizen

To create conditions that will allow the hitherto disadvantaged Zimbabweans to

participate in the economic development of their country and earn themselves self
respect and dignity;

To democratize the ownership of productive assets of the economy so as to eliminate

racial differences arising from economic disparities;

To develop competitive domestic private sector to spearhead economic growth and

development; and

To develop a self sustaining economy.

Reasons for imbalances

a) an unstable macro-economic environment characterised by the following:

high budget deficit

high interest rates

high inflation levels

low levels of domestic saving-

low levels of new productive investments.

b) Inadequate medium and long-term financing facilities.
c) Lack of production know-how - graduates from most of the skills development
institutions are trained to meet the requirements of the job market. They lack
entrepreneurship skills that are necessary to start and run businesses.
d) inhibitive legislation - legislation governing the operations of the different sectors restrict
the easy entry by indigenous entrepreneurs e.g. title deeds, local authorities by-laws etc.
e) absence of decentralised business information centres

f) lack of collateral - most aspiring indigenous entrepreneurs have no collateral; a condition

that financial institutions place before loans are advanced for start-ups.

Strategy for Indigenisation of the Economy

Economic indigenisation is a nation building programme that requires the unreserved support
from all sections of the society. Resources in the public sector, the private sector and the
community at large should be mobilised and channelled towards the achievement of the
policy objectives set-out above.
The main component parts of the strategy for indigenisation of the economy are as
follows:
Creating an enabling macro-economic environment
Experience elsewhere has shown that indigenisation of the economy will succeed in an
environment characterised by economic growth and spearheaded by a vibrant domestic
private sector. In order to bring about macro-economic stability it is necessary to put a two
year or three year ceiling on government consumption expenditure accompanied by fiscal
incentives to stimulate productive investment, and to accelerate privatisation of state
enterprises.
Industrialisation of the economy
Industrialisation will provide the country with an engine of economic growth as well as bring
about economic expansion (establishment of new industrial enterprises and related economic
activities). Economic expansion will result in business expansion, employment creation and
poverty eradication among the majority of Zimbabweans, expansion of the domestic market
and widening of the tax base. The widening of the tax base will lead to the reduction of
budget deficit. Furthermore, industrialisation will lay a strong foundation for the development
of a competitive domestic private sector and self sustaining market economy. Industrialisation
will increase the countrys exports of manufactured goods and reduce its dependence on
export of primary commodities.

Land redistribution:
Land redistribution is aimed at providing the indigenous population with agricultural land.
Access to agricultural land, rural economic infrastructure (roads, communications, water for

irrigation and market facilities) including credit facilities, as well as security of tenure and
development of production know-how (agricultural technical skills and entrepreneurship) are
key to the development of indigenous commercial agriculture. The development of
indigenous commercial agriculture is a strategy for rural development, and rural development
in turn, is a strategy for employment and wealth creation as well as poverty eradication in
rural areas.
Employment and wealth creation in rural areas will also reduce disparities in social and
economic development between urban and rural areas. Furthermore, employment and wealth
creation in rural areas will accelerate the industrialisation process in the country by providing
the manufacturing industry with a expanded domestic market for manufactured goods.
In order to promote the development of indigenous commercial agriculture,
Government will introduce the following

commercial farm settlement scheme and 99 year lease scheme with option to buy after
10 years(the two schemes are for those who have qualifications in agriculture);

principle of one person one farm;

prohibition of agricultural land ownership by foreigners and companies except in

special circumstances;

limit the sizes of farms; and

land tax for un-utilised and under-utilised agricultural land.

The imposition of land tax on un-utilised and under-utilised agricultural land will encourage
the release of surplus land onto the market. The land tax will also provide the government
with funds for promoting indigenous commercial agriculture.
Increasing indigenous private investment in the economy
The increase of indigenous private investment in the economy will be achieved through the
establishment of new indigenous enterprises and new joint ventures, buying of shares in the
existing non-indigenous companies privatisation of state enterprises, takeovers, employee
stock ownership schemes, subcontracting and outsourcing. It must be emphasised that the
establishment of new enterprises is the main strategy for increasing indigenous private

investment in the economy as this will lead to economic expansion, creation of employment
and more wealth as well as poverty eradication among the majority of Zimbabweans.
Mobilisation of financial resources
Mobilisation of financial resources, especially medium to long-term finance, is crucial for
increasing indigenous private investment in the economy and for economic expansion. In
order to create an enabling environment for the mobilisation of financial resources,
Government

will

further

reduce

its

consumption

expenditure

and

accelerate

commercialisation and privatisation process so as to reduce high budget deficit. The reduction
of budget deficit will create macro-economic stability, conducive for productive investment
and mobilisation of financial resources.
Furthermore, educational campaigns for promoting domestic savings will include themes like
savings against drought, savings for poverty eradication, etc will be introduced. Joint
ventures between foreign and indigenous companies will also be encouraged as a way of
mobilising foreign investment. In order to mobilise medium and long-term finance there is
need to promote the establishment of leasing and venture capital companies. Venture capital
and leasing companies will also help to solve the problem of collateral.
Skills development
Skills development is crucial for the development of a competitive and self sustaining
domestic private sector which is the engine of economic growth and development. Zimbabwe
particularly requires entrepreneurial skills, technological know-how and economic
development management skills. Entrepreneurs are required for setting up and running new
enterprises. Manpower with technological know-how is needed for research and development
as well as for manufacturing products in the newly set up enterprises. It is also needed for
developing a strong endogenous technological base for industrialisation, which is a
prerequisite for developing a self sustaining and competitive market economy. Economic
development management skills are needed for designing appropriate polices that will
promote indigenisation of the economy as well as economic growth and development.
Review of legislation that constrain indigenisation of the economy

Current legislation governing the operations of the different sectors of the economy which
have a constraining effect on the indigenisation process will be identified, reviewed and
updated where necessary. The review process will require consultation with indigenous
pressure groups and other stakeholders in the economy. The objective is to ensure that
legislative framework provides an enabling environment for the successful implementation of
the indigenisation policy.
Some of the Broad Policy Measures for Implementing Indigenisation Strategy
Some of the broad policy measures for implementing indigenisation strategy are as follows:
Joint ventures between indigenous and foreign firms as well as between local and indigenous
firms will be encouraged through incentives.
Establishment of more venture capital and lease companies will be encouraged
The scheme of savings for employment creation, poverty eradication and indigenisation of
the economy will be promoted by Government through tax-free interest arrangement.
Sub-contracting arrangements between large companies and small and medium scale
indigenous

enterprises

will

be

encouraged

through

incentive

Government will establish National investment Trust as a vehicle for indigenous population
participation

in

privatisation

of

state

enterprise

Employee stock ownership schemes will encourage in the private sector and in enterprises,
which are being privatised.
Steps will be taken to improve the marketing techniques of indigenous enterprises to make
them more effective and results oriented.
A study will be commissioned to identify all laws that inhibit the development of indigenous
enterprises so that they can be changed.
In the view of the lack of entreprenuership and technical skills among the indigenous people,
Government will:
Review curriculum at vocational and technical training institutions to ensure that it caters
adequately for the needs of indigenous entrepreneurs;

enter into tripartite arrangements involving the indigenous entrepreneurs; vocational training
institutes and non- indigenous entrepreneurs for development of a meaningful training
programme which will include job training, part-time short courses and hands on competency
based training; expand staff development programmes to produce enough high level
manpower; establish a mechanism for providing training and information to informal sector
participants which resembles that of the agricultural extension worker.
The Department of State Enterprises and Indigenisation will co-ordinate, monitor and
evaluate the implementation of indigenisation policy and privatisation.
Indigenisation and Empowerment Lessons From SA
Broad-Based Black Economic Empowerment (B-BBEE) is a form of Economic
Empowerment initiated by the South African government in response to criticism against
Narrow Based Empowerment instituted in the country during 2003/2004. While Narrow
Based Black Economic Empowerment led to the enrichment of a few black (Black African,
Coloured or Indian) individuals, the goal of Broad-Based Empowerment is to distribute
wealth across as broad a spectrum of South African society as possible. In contrast, Narrow
Based empowerment measures only equity ownership and management representation.
EXPORT PROCESSING ZONES
A free trade zone (FTZ) or export processing zone (EPZ) is an area of a country where some
normal trade barriers such as tariffs and quotas are eliminated and bureaucratic requirements
are lowered in hopes of attracting new business and foreign investments.[1] It is a region
where a group of countries has agreed to reduce or eliminate trade barriers. [2] Free trade zones
can be defined as labor intensive manufacturing centers that involve the import of raw
materials or components and the export of factory products. The world's first Free Trade Zone
was established in Shannon, Co. Clare, Ireland Shannon Free Zone.[3] This was an attempt by
the Irish Government to promote employment within a rural area, make use of a small
regional airport and generate revenue for the Irish economy. It was hugely successful, and is
still in operation today.
Most FTZs are located in developing countries: Brazil, Indonesia, El Salvador, China, the
Philippines, Malaysia, Bangladesh, Pakistan, Mexico, Costa Rica, Honduras, Guatemala,
Kenya, and Madagascar have EPZ programs.[4] In 1997, 93 countries had set up export

processing zones (EPZs) employing 22.5 million people, and five years later, in 2003, EPZs
in 116 countries employed 43 million people.[4]
Corporations setting up in a zone may be given tax breaks as an incentive. Usually, these
zones are set up in underdeveloped parts of the host country; the rationale is that the zones
will attract employers and thus reduce poverty and unemployment, and stimulate the area's
economy. These zones are often used by multinational corporations to set up factories to
produce goods (such as clothing or shoes).
Free trade zones in Latin America date back to the early decades of the 20th century. The first
free trade regulations in this region were enacted in Argentina and Uruguay in the 1920s. The
Latin American Free Trade Association (LAFTA) was created in the 1960 Treaty of
Montevideo by Argentina, Brazil, Chile, Mexico, Paraguay, Peru, and Uruguay. However, the
rapid development of free trade zones across the region dates from the late 1960s and the
early 1970s. Latin American Integration Association is a Latin American trade integration
association, based in Montevideo.
Free Trade Zones are also known as Special Economic Zones in some countries. Special
Economic Zones (SEZs) have been established in many countries as testing grounds for the
implementation of liberal market economy principles. SEZs are viewed as instruments to
enhance the acceptability and the credibility of the transformation policies and to attract
domestic and foreign investment.
In 1999, there were 43 million people working in about 3000 FTZs spanning 116 countries
producing clothes, shoes, sneakers, electronics, and toys. The basic objectives of EPZs are to
enhance foreign exchange earnings, develop export-oriented industries and to generate
employment opportunities.

Criticism
Free trade zones are domesticall criticized for encouraging businesses to set up operations
under the influence of other governments, and for giving foreign corporations more economic
liberty than is given indigenous employers who face large and sometimes insurmountable
"regulatory" hurdles in developing nations. However, many countries are increasingly

allowing local entrepreneurs to locate inside FTZs in order to access export-based incentives.
[verification needed]

. Because the multinational corporation is able to choose between a wide range of

underdeveloped or depressed nations in setting up overseas factories, and most of these

countries do not have limited governments, bidding wars (or 'races to the bottom') sometimes
erupt between competing governments .[verification needed].
Sometimes the domestic government pays part of the initial cost of factory setup, loosens
environmental protections and rules regarding negligence and the treatment of workers, and
promises not to ask payment of taxes for the next few years. When the taxation-free years are
over, the corporation that set up the factory without fully assuming its costs is often able to
set up operations elsewhere for less expense than the taxes to be paid, giving it leverage to
take the host government to the bargaining table with more demands, but parent companies in
the United States are rarely held accountable.[5]
The widespread use of free trade zones by companies such as Nike has received criticism
from numerous writers such as Naomi Klein in her book No Logo.
Why a Science and Technology Policy for Zimbabwe
The Science and Technology Policy of Zimbabwe was launched on 5 th June 2002 by His
Excellency, President R.G. Mugabe. The Government of Zimbabwe (GoZ) had noted that
while there were many institutions involved in science and technology, particularly in
Research and Development in the country, most of them were pursuing R&D focussed on
personal or private institutional interests and not necessarily from the point of view of a
collective national interest. There was, therefore, need to harness all the scattered expertise
and sectional interests, and coordinate them for the promotion and achievement of national
interests.
The Objectives of the S&T Policy of Zimbabwe
The overall objective of the S&T Policy is to promote national scientific and technological
self-reliance by ensuring:

Rapid and sustainable industrialization through R&D which focuses on import

substitution;

Adequate food production and shelter that utilizes appropriate and affordable
technologies;

A good health delivery system that uses R&D to explore both modern and
traditional medicines;

Environmentally sound development programs;

Provision of sufficient energy resources using Science and Technology to

exploit renewable and non-renewable sources of energy;

Sustained employment creation.

The ministry aims to stimulate the generation of scientific and technological capabilities in all
sectors of the economy, and thereby unleash the power of S&T for national development.
Implementation of the S&T Policy Objectives
The implementation of the S&T Policy objectives is to be carried out within institutional
arrangements past and present, and a resource base that initially has to rely on effective and
efficient collaboration and strategic smart partnership linkages.
Institutional Arrangements
The launch of the Science and Technology Policy resulted in the creation of the portfolio of
Minister of State for Science and Technology Development and the establishment of the
Department of Science and Technology Development in the Office of the President and
Cabinet in August 2002. The Minister of State for S&T Development administers the
Research Act.
The overall functions of the Department of Science and Technology Development are to:

Coordinate the formulation of science and technology development policies;

Coordinate science and technology issues across all sectors;

Assist in the establishment and rationalization of centres of innovation and

production of S&T in line with the Research Act;

Assist in building capacity for the local production of specified import

substitution goods;

Promote public awareness of science and technology;

Promote Scientific and ICT literacy to enhance Zimbabwe's competitiveness

in the global economy;

Industrialisation strategies
Schools of thoughts- handout
Import substitution industrialization or "Import-substituting Industrialization" (called
ISI) is a trade and economic policy based on the premise that a country should attempt to
reduce its foreign dependency through the local production of industrialized products. The
term primarily refers to 20th century development economics policies, though it was
advocated since the 18th century.
It has been applied to many countries in Latin America, with the intention of helping
countries to become more self-sufficient and less vulnerable by creating jobs and relying less
on other nations. The ISI is more triggered toward the internal market. The ISI works by
having the state lead and assuming the roles to nationalize, subsidize industries (to make food
cheaper), and tax and to protect. Some of the good things that came out of ISI was that it
increased jobs and created employment strengthened stabilization on the state. Ultimately, the
ISI model was exhausted, because the size of internal markets were too small. As a result,
there were fewer people buying products in the industrial market. Further, countries could not
delink themselves with other countries and depended very much on exports, imports, and
multinational corporations.
Adopted in many Latin American countries from the 1930s until around the 1980s, and in
some Asian and African countries from the 1950s on, ISI was theoretically organized in the
works of Ral Prebisch, Hans Singer, Celso Furtado and other structural economic thinkers,
and gained prominence with the creation of the United Nations Economic Commission for

Latin America and the Caribbean (UNECLAC or CEPAL). Insofar as its suggestion of stateinduced industrialization through governmental spending, it is largely influenced by
Keynesian thinking, as well as the infant industry arguments adopted by some highly
industrialized countries, such as the United States, until the 1940s. ISI is often associated
with dependency theory, though the latter adopts a much broader sociological outlook which
also addresses cultural elements thought to be linked with underdevelopment.
Even though ISI is a development theory, its political implementation and theoretical
rationale are rooted in trade theory it has been argued that all or virtually all nations that
have industrialized have followed ISI.
Mercantilist economic theory and practices of the 16th, 17th, and 18th century frequently
advocated building up domestic manufacturing and import substitution. In the early United
States, the Hamiltonian economic program, specifically the third report and magnum opus of
Alexander Hamilton, the Report on Manufactures, advocated that the US become selfsufficient in manufactured goods. This formed the basis of the American School, which was
an influential force during the United States's 19th century industrialization.
Indeed, Baer contends that all countries which have industrialized after the United Kingdom
went through a stage of ISI in which the large part of investment in industry was directed to
replace imports (Baer, pp.95-96).[1] Going further, in his book Kicking away the ladder,
Korean economist Ha-Joon Chang also argues, based on economic history, that all major
developed countries including the United Kingdom used interventionist economic
policies to promote industrialization and protected national companies until they had reached
a level of development in which they were able to compete in the global market, after which
those countries adopted free market discourses directed at other countries in order to obtain
two objectives: to open their markets to local products and to prevent them from adopting the
same development strategies which led to the developed nations' industrialization.
Theoretical basis
As a set of development policies, ISI policies are theoretically grounded on the SingerPrebisch thesis, on the infant industry argument, and on Keynesian economics. From these
postulates it derives a body of practices, which are commonly: an active industrial policy to
subsidize and orchestrate production of strategic substitutes, protective barriers to trade (e.g.

tariffs), an overvalued currency to help manufacturers import capital goods (heavy

machinery), and discouragement of foreign direct investment.
In many cases, however, these postulates did not apply: on several occasions, the Brazilian
ISI process, which occurred from 1930 until the end of the 1980s, involved currency
devaluation as a means of boosting exports and discouraging imports (thus promoting the
consumption of locally manufactured products), as well as the adoption of different exchange
rates for importing capital goods and for importing consumer goods. Moreover, governmental
policies toward investment were not always opposed to foreign capital: the Brazilian
industrialization process was based on a tripod which involved governmental, private, and
foreign capital the first being directed to infrastructure and heavy industry, the second to
manufacturing consumer goods, and the third, to the production of durable goods (such as
automobiles). Volkswagen, Ford, GM and Mercedes all established in Brazil in the 1950s and
1960's.
The major and unifying postulate of ISI can thus be described as an attempt to reduce foreign
dependency of a country's economy through local production of industrialized products,
whether through national or foreign investment, for domestic or foreign consumption. It
should be noted, as well, that import substitution does not mean import elimination: as a
country industrializes, it begins to import other kinds of goods which become necessary for
its industry, such as petroleum, chemicals, and the raw materials it may lack. The real
objective of import substitution is therefore not to eliminate trade, but to lift it to higher stage
that of exporting value-added products, which are not as susceptible to economic
fluctuations as raw materials, according to the Singer-Prebisch thesis.
Outward and inward development
Conceptually, ISI could be outward-looking in that it promotes exports (like in Asia,
especially South Korea) or inward-looking without significant links to world markets (like in
Latin America). The decision to adopt one or another perspective is frequently determined by
external factors. The industrialization of South Korea and other Asian Tigers, for example,
was in line with the United States's geopolitical strategy of building a "contention belt" of
capitalist countries around China and other communist states in Asia, which involved the
granting of incentives for these countries to export to the United States.

In contrast, Latin American countries, which were outside the main areas of geopolitical
concern, did not receive these incentives despite requests that they be extended to them, for
example in the Pan-American Operation proposed by Brazilian President Juscelino
Kubitscheck. Consequently, Latin American countries concentrated on producing for their
domestic markets, or on building expanded areas which could absorb scale-production, such
as the Latin American Free Trade Association (ALALC) and the Latin American Integration
Association (ALADI), which were never fully implemented.
Both in inward and outward-oriented ISI, however, external competition by imports in the
markets of the targeted industries are discouraged, by tariffs, devalued currencies and other
factors. Hence, policies to pursue ISI have a strong protectionist component and are not
favored by advocates of absolute free trade.
Latin America
Import substitution policies were adopted by most nations in Latin America from the 1930s
until the late 1980s. The initial date is largely attributed to the impact of the Great Depression
of the 1930s, when Latin American countries, which exported primary products and imported
almost all of the industrialized goods they consumed, were prevented from importing due to a
sharp decline in their foreign sales. This served as an incentive for the domestic production of
the goods they needed.
The first steps in import substitution were largely untheoretical and based on pragmatic
choices of how to face the limitations imposed by recession, even though Populist
governments in Argentina (Pern) and Brazil (Vargas) had the precedent of Fascist Italy (and,
to some extent, of the Soviet Union) as inspirations of state-induced industrialization.
Positivist thinking which sought a "strong government" to "modernize" society played a
major influence on Latin American military thinking in the 20th century. Among the officials
many of whom rose to power, like Pern and Vargas industrialization (especially steel
production) was synonymous of "progress" and was naturally placed as a priority.
ISI only gained a theoretical foundation in the 1950s, when Argentine economist and
UNECLAC head Ral Prebisch was a visible proponent of the idea, as well as Brazilian
economist Celso Furtado. Prebisch believed that developing countries needed to create local
vertical linkages, and they could only succeed by creating industries that used the primary

products already being produced domestically. The tariffs were designed to allow domestic
infant industries to prosper.
ISI was most successful in countries with large populations and income levels which allowed
for the consumption of locally produced products. Latin American countries such as
Argentina, Brazil, Mexico, and, to a lesser extent, Chile, Uruguay and Venezuela, had the
most success with ISI[2]. This is so because while the investment to produce cheap consumer
products may pay off in a small consumer market, the same can not be said for capitalintensive industries such as automobiles and heavy machinery , which depend on larger
consumer markets to survive. Thus, smaller and poorer countries, such as Ecuador, Honduras,
and the Dominican Republic, could only implement ISI to a limited extent. Peru implemented
ISI in 1961, and the policy lasted through to the end of the decade in some form.[3]
To overcome the difficulties of implementing ISI in small-scale economies, proponents of
this economic policy some within UNECLAC suggested two alternatives to enlarge
consumer markets: income distribution within each country, through agrarian reform and
other initiatives aimed at bringing Latin America's enormous marginalized population into the
consumer market, and regional integration through initiatives such as the Latin American
Free Trade Association (ALALC), which would allow for the products of one country to be
sold in another.
In Latin American countries where ISI was most successful, it was accompanied by structural
changes to the government. Old neocolonial governments were replaced by more or less
democratic governments. Banks and utilities and certain foreign-owned companies were
nationalized or transferred ownership to local businesspeople.
Many economists contend that ISI failed in Latin America, being one of many factors leading
to the so-called lost decade of Latin American economics. Other economists contend that ISI
led to the "Mexican Miracle," the period that lasted from 1940 to 1975 in which economic
growth stood at 6 percent or higher.
East Asia
The inward-looking variant of ISI was rejected by most nations in East Asia in the 1960s, and
some economists attribute the superior performance of East Asia in the 1970s and 1980s to

this difference in policies. Indeed, East Asian policies are most commonly not referred to as
ISI, even though some would argue the rationale and execution of policy design largely
followed those recipes.
Most East Asian countries, while rejecting the inward-looking component of classical import
substitution policies, also maintained high tariff barriers. The strategy followed by those
countries was to focus subsidies and investment on industries which would make goods for
export, and not to attempt to undervalue the local currency. In pursuing this and to boost its
competitiveness in the 1970s, South Korea made large investments into heavy and chemical
industries, such as shipbuilding, steel and petrochemicals. This focus on export markets
allowed them to create competitive industries.
It should be contended, however, that outward-looking development did not pose as a choice
for many countries. As mentioned before, for geopolitical reasons, many East Asian countries
received open market policies and incentives for industrialization from the United States
government, as a means of creating a "contention belt" of capitalist countries around
communist nations in Asia. For instance: from 1953 until 1960, the United States financed
70% of South Korea's imports of commodities, which allowed it to rise from a rural producer
to an exporter of manufactured goods in just seven years (Hong & Krueger, Trade and
Development in Korea. Seoul: Korea Development Institute, 1975). With such a clear path for
development laid out, South Korea naturally invested in educating its population to meet the
needs of its exports-driven industry.
Advantages and disadvantages
The major advantages claimed for ISI include: increases in domestic employment (reducing
dependence on labour non-intensive industries such as raw resource extraction and export);
resilience in the face of a global economic shocks (such as recessions and depressions); less
long-distance transportation of goods (and concomitant fuel consumption and greenhouse gas
and other emissions).
The disadvantages claimed for ISI is that the industries that it creates are inefficient and
obsolete as they aren't exposed to internationally competitive industries which constitute their
rivals and that the focus on industrial development impoverishes local commodity producers

who are primarily rural. Other disadvantages include unemployment

increasing

internationally as World GDP decreases through the promotion of inefficiency.[citation needed]

In most manufacturing processes a point of output is reached after which the cost of
producing every additional unit of output diminishes. Different types of industries, given their
different production functions (combinations of capital and labor, etc.) obtain different scale
thresholds or minimum levels of output necessarily to begin accruing cost savings from largescale output. For example, a mechanical pencil factory may need to sell 5 million units of
output (pencils) each year before it can achieve economies of scale of production efficient
level of production. An automobile industry may need to sell 519, 001 units of output (cars)
to achieve the same level of efficiency.
Clearly, the more units of anything manufactured you can sell the better the chances that your
factories (consumer goods and intermediate, and ultimately capital goods) will achieve
economies of scale, efficient production. In a free market global economy, industries that
produce inefficiently (without obtaining economies of scale of production) under the
protections of ISI have been subject to criticism from more efficient foreign industries a
force driving the neo-liberal campaign for open markets.
What determines whether a country obtains efficiency (defined as economies of scale in
production)? Market size (number of consumers, population) and purchasing power (usually
but unreliably indicated by GNP/capita). Hence, larger, richer economies were more likely to
make ISI succeed efficiently, whereas smaller countries with lower per capita incomes were
less likely to succeed with ISI.
Export led strategies

is a trade and economic policy aiming to speed-up the industrialization process of a

country through exporting goods for which the nation has a comparative advantage.
Export-led growth implies opening domestic markets to foreign competition in
exchange for market access in other countries.

The trade strategy is underpinned by a substantial neo-classical revival in the applied

trade and development literature (Diaz-Alejandro 1975: 94). Consequently, policy
transition toward greater outward orientation of the trade regime and fairly uniform

incentives for production across exporting and import substituting goods became the
centerpiece of the mainstream policy advocacy of economic policy reforms.

ELI transforms a primary product exporting economy into one which manufacturers
dominate exports. The idea is to value add primary products by supporting export
oriented industries with financial resources and enhancing their capabilities (training).

Reduced tariff barriers, floating exchange rate (devaluation of national currency is

often employed to facilitate exports), and government support for exporting sectors
are all an example of policies adopted to promote EOI, and ultimately economic
development. Export-oriented Industrialization was particularly characteristic of the
development of the national economies of the Asian Tigers: Hong Kong, South Korea,
Taiwan and Singapore in the post World War II period.
Merits of ELI

export oriented industrialization is credited with significant improvement in output

and total factor productivity growth, employment generation and terms of trade gains
in most economies

Due to liberalisation the industries produce efficiently since the industries are exposed
to internationally competitive industries.

World employment increases internationally as world GDP increases through the

promotion of efficiency
Drawbacks of ELI

Despite its support in mainstream economic circles, its success has been increasingly
challenged over recent years due to a growing number of examples in which it has not
yielded the expected results.

ELI increases market sensitivity to exogenous factors, and is partially responsible for
the damage done by the 1998 economic crisis to the economies of countries who used
export-oriented industrialization. It is also criticized for its lack of product diversity as
economies pursue their comparative advantage, which makes the economies
potentially unstable if demand for their specialization falls i.e. the financial crisis of
20072010 and subsequent global recession.

Other criticisms include that export orientated industrialization has limited success if
the economy is experiencing a decline in its terms of trade, where prices for its
exports are rising at a slower rate than that of its import .
Experiences from Sri Lanka

Sri Lanka prior to 1977 was following an import led industrialization with limited
success, the self dependency objective was not attained (Athukorala:2006).
Inefficiencies were rampant and products were obsolete as the industries were not
exposed to internationally competitive industries which constitute their rivals.

the focus on industrial development impoverishes local commodity producers who are
primarily rural.

According to Athukorala (2006), with the adoption of outward oriented trade and
investment policy in industrialization in Sri Lanka the economy experienced improved
performance of domestic manufacturing through greater export orientation that has
brought about significant improvement in output and total factor productivity growth,
employment generation and terms of trade gains.

The Sri Lankan experience also highlights the complementary role of investment
liberalization for exploiting the potential gains from trade liberalization.

The reform outcome was particularly impressive given that it occurred during a
period of persistent civil strife (war) and macroeconomic instability. The experience
makes a strong case for firm commitment to an export-led growth strategy as the
main pillar of national development policy while guarding against possible policy
back-sliding emanating from policy makers.
Experiences from South Korea

The period 1962-89 witnessed a remarkable transformation of the South Korean

economy, from being poverty ridden to the attainment of the status of newly
industrialized nation.

This transformation was achieved through the adoption of an outward oriented

industry led strategy, based, particularly during the period of the 1970s, upon the

development of large-scale industrial conglomerates and the attainment of economies

of scale and technology to achieve international competitiveness
Experiences form Zimbabwe

After independence, industrialization was identified as the key long-term requirement

for economic development.

Aspects involved in formulating an industrial strategy included the dominance by

foreign and settler capital, the orientation towards production for an elite, the
consequent need for an expanded state role. The balance between import substitution
and export orientation, the orientation to agriculture and the mining, the pressure
exerted by the World Bank, and the need to raise the proportion of the population in
employment.

The government adopted more of import substitution fused with the export led
industrialization.

The major thrust was to realize self reliance by supporting local products at the same
time taking over number of ailing companies, and becoming involved in a wider range
of investments, sometimes of a majority nature; in 1983 it had total assets of about
ZW$ 40 million, under 1 % of total industrial assets.

The idea was to correct historical imbalances which was skewed in favour of the
white minority.

Government also made direct (usually controlling) investments in CAPS

(pharmaceuticals),Zimpapers (publishing), Heinz-Olivine (oils, fats and canned food)
and Zimbank (now ZB bank, just to mention a few.

Most of these expansions of state ownership followed from tactical decisions relating
to such factors as the need for cheap drugs for the expanded health service and the
reduction of South African influence in key areas such as information and banking.

All this was done in a bid to ensure self reliance.

In fact since independence, state policy towards industry has been very conservative,
with the inherited structures of state intervention and protection through control
foreign exchange and trade, being preserved with only marginal changes.

However, through the pressure from World Bank in the late 80s, the government had
to liberalize the economy and fused its policy with some outward looking strategies.

This was supported by the establishment of Export Processing Zones throughout the
country as a way of enhancing value addition on the exports.

To emphasize their commitment to industrialization, the then department of

cooperatives and small enterprise was removed from the ministry of industry and
commerce to be a stand alone ministry in 2002 and SEDCO was established to
spearhead entrepreneurial training and funding for Small Medium Enterprises.

This saw the emergence of backyard businesses and establishment of factory shells.
conclusion

Having looked at pros and cons of the different policy strategies of industrialization, it
is advisable for a developing economy like Zimbabwe to adopt a hybrid strategy. This
will enhance protection of infant industries at the same time supporting export
oriented firms to enhance improved export earnings.

Look as well at other specific strategies such as market based, structural reform based,
Harold model, neo classical as well as Keynesian view.