Institute of Innovation in Technology & Management, New Delhi

(Affiliated to GGSIP University)

UNIT 4: ROLE OF ENTREPRENEUR

Programme: BBA Semester: VI Paper Code: BBA 306 Academic Year: 2016-17

Unit IV
Role of Entrepreneur: Role of an Entrepreneur in Economic Growth as an Innovator,
Generation of Employment Opportunities, Complimenting and Supplementing Economic
Growth, Bringing about Social Stability and Balanced Regional Development of Industries:
Role in Export Promotion and Import Substitution, Forex Earnings.

 ROLE ENTREPRENEUR IN BALANCED REGIONAL DEVELOPMENT

1. Promotes Capital Formation:
 Entrepreneurs promote capital formation by mobilising the idle savings of public. They
employ their own as well as borrowed resources for setting up their enterprises.
 Such type of entrepreneurial activities lead to value addition and creation of wealth,
which is very essential for the industrial and economic development of the country.
2. Creates Large-Scale Employment Opportunities:
 Entrepreneurs provide immediate large-scale employment to the unemployed which is a
chronic problem of underdeveloped nations.
 With the setting up.of more and more units by entrepreneurs, both on small and large-
scale numerous job opportunities are created for others.
3. Reduces Regional Disparities:
 Entrepreneurs help to remove regional disparities through setting up of industries in less
developed and backward areas.
 The growth of industries and business in these areas lead to a large number of public
benefits like road transport, health, education, entertainment.
 Setting up of more industries lead to more development of backward regions and thereby
promotes balanced regional development.
4. Reduces Concentration of Economic Power:
 Economic power is the natural outcome of industrial and business activity. Industrial
development normally lead to concentration of economic power in the hands of a few
individuals which results in the growth of monopolies.
 In order to redress this problem a large number of entrepreneurs need to be developed,
which will help reduce the concentration of economic power amongst the population.
5. Wealth Creation and Distribution:
 It stimulates equitable redistribution of wealth and income in the interest of the country to
more people and geographic areas, thus giving benefit to larger sections of the society.
 Entrepreneurial activities also generate more activities and give a multiplier effect in the
economy.
6. Increasing Gross National Product and Per Capita Income:

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 Entrepreneurs are always on the look out for opportunities. They explore and exploit
opportunities,, encourage effective resource mobilization of capital and skill, bring in new
products and services and develops markets for growth of the economy.
 In this way, they help increasing gross national product as well as per capita income of
the people in a country.
7. Improvement in the Standard of Living:
 Increase in the standard of living of the people is a characteristic feature of economic
development of the country.
 Entrepreneurs play a key role in increasing the standard of living of the people by
adopting latest innovations in the production of wide variety of goods and services in
large scale that too at a lower cost.
 This enables the people to avail better quality goods at lower prices which results in the
improvement of their standard of living.
8. Promotes Country's Export Trade:
 Entrepreneurs help in promoting a country's export-trade, which is an important
ingredient of economic development.
 They produce goods and services in large scale for the purpose earning huge amount of
foreign exchange from export in order to combat the import dues requirement. Hence
import substitution and export promotion ensure economic independence and
development.
9. Induces Backward and Forward Linkages:
 Entrepreneurs like to work in an environment of change and try to maximize profits by
innovation.
 When an enterprise is established in accordance with the changing technology, it induces
backward and forward linkages which stimulate the process of economic development in
the country.
10. Facilitates Overall Development:
 Entrepreneurs act as catalytic agent for change which results in chain reaction. Once an
enterprise is established, the process of industrialization is set in motion.
 This unit will generate demand for various types of units required by it and there will be
so many other units which require the output of this unit. This leads to overall
development of an area due to increase in demand and setting up of more and more units.

Backward linkages

 can be defined as "the growth of an industry leads to the growth of the industries that
supply inputs to it".
 Example: As in the case of cotton industry, growth of the textile industry may support
the growth of the cotton industry, which will lead to higher incomes for cotton farmers and
will create a greater demand for goods and services in the countryside

Forward linkages

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 exist when the growth of an industry leads to the growth of other industries that uses its
output as input. The final product of cotton goes to consumers either through retailers
orthrough manufacturers who open up their own shops to directly sell to consumer,
thereby minimising the role of retailers in the channel process. A company can minimize
cost of production and can maximize revenue when both backward and forward linkages
work together in effective way.

 IMPACT OF STARTUPS AND THE IMPORTANCE OF THEIR SOCIO-

ECONOMIC CONTRIBUTIONS

1. Apart from delivering value to their customers, startups have a direct impact on the
cities they make their homes. Infosys has impacted Bangalore and Alibaba has changed
Hangzhou. What Google has done to Mountain View and how Microsoft transformed
Redmond are case studies in themselves. When these startups grew, they directly
impacted growth of their cities as well.
2. Employment opportunities for youth increase and new employment patterns came into
picture. Demand and employment opportunities for engineers see a steep rise. Local
youth had new opportunities to pursue, and experienced talent started moving to these
cities in pursuit of a challenging and high-growth career.
3. The demand for highly talented youth increase in these cities, there is a increase in inflow
of recent graduates. As more and more college graduates start settling down in these
cities, lifestyle patterns and culture also has a wave of change.
4. These startups not only create new industries and came up with more revolutionary
technology over time, but also created a stream of millionaires in the city. When these
startups go public, they became engines of creation not just for themselves, but for their
employees and their shareholders.
5. Apple created 300 millionaires instantly as it went public. In 2007, 1000 Google
employees were worth more than $5 million. It can be reasonably assumed that Microsoft
had created approximately 10,000 Microsoft millionaires by the year 2000. Narayan
Murthy, who co-founded Infosys, ushered in a new era of wealth creation among its
middle-class employees in India. Infosys was one of the first companies in India to offer
its employees ESOPs (employee stock ownership plans) and made millionaires of them.
In 2000, Infosys had almost 2,000 rupee-millionaires on its staff and over 200 dollar-
millionaires. According to securities filings, current and former Alibaba employees (non-
founders) hold 26.7 per cent of the company, Billion in value.
6. Alibaba has single-handedly changed the trade scenario for small and medium businesses
in China, a country with innumerable internal barriers to trade. The ease and confidence
with which these SMBs can buy and sell goods has increased many folds in the last
decade. Microsoft had created a new computing and industry revolution itself when it
started scaling up. For most of the technologists and people in their 20s and early 30s
today, the first operating system was Windows.
7. As India’s vibrant entrepreneurial ecosystem is emerging, it would do well to understand
the role of startups and create support for them to succeed. As we see some of the Indian
startup founders turning angel investors to support and encourage new innovation in

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 India, we will surely see the ripple effect of their efforts in the long run. Governments
should be well prepared to create a culture of startups to impact their cities, countries and
citizens.
8. India's robust start-up culture is thriving thanks to 72 percent of its founders at less than
35 years and the sector creating a whopping 80,000 jobs in the country in 2014-15.

 INDIAN STARTUP ENVIRONMENT

1. E-commerce will continue to be the focus in the future too, with more than 50 percent of
1,200 startups born in 2015 focusing on e-commerce, consumer services and aggregators.
2. The Indian technology start-ups landscape has seen a tremendous growth in the
emergence of innovative start-ups and creative entrepreneurs. In terms of providing a
conducive ecosystem for the start-ups to thrive, India has moved up to third position and has
emerged the fastest growing base of start-ups worldwide.
3. India is one amongst the first five largest startup communities in the world with the
number of start-ups crossing 4,200, a growth of 40 per cent, by the end of 2015.
4. Nine percent female founders and co-founders in startup ecosystem
5. With 100 per cent growth in number of private equity, venture capitalists, angel investors
along with a 125 per cent growth in funding over last year, Indian start-up ecosystem has
risen to the next level.
6. The total funding in the India based start-ups is estimated to be nearly $5 billion by 2015.
Various central and state government start-up initiatives are further supporting this
progressive phase of start-ups in India.
7. Apart from positively impacting the lifestyles of citizens involved, start-ups are now
creating innovative technology solutions that are addressing the key social problems that
India is facing and creating significant growth opportunities for every stakeholders.
8. To enable the next stage of growth for these start-ups, NASSCOM will work closely with
the government to ensure ease of doing business, by simplifying procedures and create a
conducive environment for these start-ups to grow.
9. NASSCOM has recommended easing the rules and regulation for registration of a
business in India, funding, and simplifying compliance procedures by minimising licences/
permits/ approvals/ tax for start-ups. Removal of angel tax, simplifying norms for capital
raising, enabling easier exit for entrepreneurs and requisite changes in the credit guarantee for
loans to start-ups are few recommendations that will further enhance a smoother functioning
of the start-ups in India.
10. Stakeholders across the ecosystem must also come together to create market access by
way of guidance in regulatory requirements for project participations and specialized training
for start-ups working in innovative areas.
11. Steps must be taken to create an even more conducive environment by facilitating
incubation, IPR, and innovation norms and also encourage academia-industry tie-up and
collaborate to develop the right kind of talent and capabilities that will propel the growth
further.
12. Another important aspect will be to encourage and recognize these start-ups for the
innovation and rapid growth by sharing their success stories on a national-level and awarding

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at relevant Indian and global platforms to help India build a reputation of a startup-friendly
nation.
13. NASSCOM has a partnership with the governments for start-up warehouses to create a
micro-ecosystem where start-ups and entrepreneurs can work together, share their learnings
and best practices with each other.
14. Rapid growth of Indian startups has created significant growth opportunities for every
stakeholder within the ecosystem.
15. Further, start-ups are providing an exciting work culture along with attractive financial
benefits to attract new and retain existing talent. This maturing start-up ecosystem is
contributing to the Indian economy in multiple ways. There is a need to regularly nurture the
startup ecosystem through regulations, branding, collaboration, mentorship and funding to
stay ahead of disruptive growth.
16. NASSCOM The report identifies the current scale and size of the startup landscape,
factors that are impacting the growth of the overall ecosystem and steps that need to be taken
to make the environment more conducive for start-ups. It analyses the existing scenario and
evolving trends across the various dimensions that define the Indian startup ecosystem, and
measure India's position as a global startup hub that is becoming attractive for investors,
startups, & corporate.

 MAKE IN INDIA INITIATIVE OF PRIME MINISTER NARENDRA MODI

 Make in India is the BJP-led NDA government's flagship campaign intended to boost the
domestic manufacturing industry and attract foreign investors to invest into the Indian
economy.
 The Indian Prime Minister, Mr. Narendra Modi first mentioned the keyphrase in his
maiden Independence Day address in 2014 with an intention of reviving manufacturing
businesses and emphasizing key sectors in India amidst growing concerns that most
entrepreneurs are moving out of the country due to its low rank in ease of doing business
ratings.
 Manufacturing currently contributes just over 15% to the national GDP. The aim of this
campaign is to grow this to a 25% contribution as seen with other developing nations of
Asia. In the process, the government expects to generate jobs, attract much foreign direct
investment, and transform India into a manufacturing hub preferred around the globe.

 The logo for the Make In India campaign is a an elegant lion, inspired by the Ashoka
Chakra and designed to represent India's success in all spheres. The campaign was
dedicated by the Prime Minister to the eminent patriot, philosopher and political
personality, Pandit Deen Dayal Upadhyaya who had been born on the same date in 1916.
 The Prime Minister called for all those associated with the campaign, especially the
entrepreneurs and the corporates, to step and discharge their duties as Indian nationals by
First Developing India and for investors to endow the country with foreign direct
investments.

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 The Prime Minister also promised that his administration would aid the investors by
making India a pleasant experience and that his government considered overall
development of the nation an article of faith rather than a political agenda. He also laid a
robust foundation for his vision of a technology-savvy Digital India as complementary to
Make In India.
 He stressed on the employment generation and poverty alleviation that would inevitably
accompany the success of this campaign.
 For the Make in India campaign, the government of India has identified 25 priority
sectors that shall be promoted adequately. These are the sectors where likelihood of FDI
(foreign direct investment) is the highest and investment shall be promoted by the
government of India.
 On the campaign launch, the Prime Minister Mr. Modi said that the development of these
sectors would ensure that the world shall readily come to Asia, particularly to India where
the availability of both democratic conditions and manufacturing superiority made it the
best destinations, especially when combined with the effective governance intended by
his administration.

Automobiles Food Processing Renewable Energy

Automobile Components IT and BPM Roads and highways
Aviation Leather Space
Biotechnology Media and Entertainment Textiles and garments
Chemicals Mining Thermal Power
Construction Oil and Gas Tourism and Hospitality
Defence manufacturing Pharmaceuticals Wellness
Electrical Machinery Ports
Electronic Systems Railways

Why Companies were not manufacturing in India

 India's ailing infrastructure scenario and defunct logistics facilities make it difficult for
the country to achieve an elite status as a manufacturing hub.
 The bureaucratic approach of former governments, lack of robust transport networks, and
widespread corruption makes it difficult for manufacturers to achieve timely and adequate
production.
 The Modi government has vowed to remove these hurdles and make the nation an ideal
destination for investors to set up industries.

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 ROLE OF ENTREPRENEURSHIP IN ECONOMIC DEVELOPMENT

1. Entrepreneurship promotes capital formation by mobilising the idle saving of the public.
2. It provides immediate large-scale employment. Thus, it helps reduce the unemployment
problem in the country, i.e., the root of all socio-economic problems.
3. It promotes balanced regional development.
4. It helps reduce the concentration of economic power.
5. It stimulates the equitable redistribution of wealth, income and even political power in the
interest of the country.
6. It encourages effective resource mobilisation of capital and skill which might otherwise
remain unutilized and idle.
7. It also induces backward and forward linkages which stimulate the process of economic
development in the country.
8. Last but no means the least, it also promotes country’s export trade i.e., an important
ingredient to economic development.

 FEW SUCCESSFUL ENTREPRENEURS AND THEIR 'CONTRIBUTION TO

INDIAN SOCIETY
1. AMAR BOSE - BOSE CORPORATION
 Amar Gopal Bose born in 1929 is the Founder Chairman of Bose Corporation. An
American electrical engineer of Bengali descent, he was listed on the 2007 Forbes 400
with a net worth of $1.8 billion.
 The child of an Indian Bengali father and white American mother, Bose was born and
raised in Philadelphia, Pennsylvania. Bose graduated from Abington Senior High School
and entered the Massachusetts Institute of Technology, graduating with a BS in Electrical
Engineering in the early 1950s. Bose spent a year in Eindhoven, Netherlands, in the
research labs at NV Philips Electronics and a year in Delhi, India, as a Fulbright student.
 He completed his Ph.D. in electrical engineering from MIT, writing a highly
mathematical thesis on non-linear systems. Following graduation, Bose took a position at
MIT as an Assistant Professor.
 He focused his research on acoustics, leading him to invent a stereo loudspeaker that
would reproduce, in a domestic setting, the dominantly reflected sound field that
characterizes the listening space of the audience in a concert hall.
 Bose was awarded significant patents in two fields which, to this day, are important to the
Bose Corporation. These patents were in the area of loud speaker design and non-linear,
two-state modulated, Class-D, power processing.
 To found his company in 1964, for initial capital, he turned to angel investors including
his MIT thesis advisor and Professor, Dr. Y. W. Lee (who invested his life savings on the
effort). Today, the Bose Corporation is a multifaceted entity with more than 12,000
employees, worldwide, that produces products for home, car, and professional audio, as
well as conducts basic Research in acoustics, automotive systems, and other fields. In
addition to running his company, Bose remained a Professor at MIT until 2000.

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2. AZIM PREMJI - WIPRO
 Azim Premji has several achievements to his credit. In 2000, the Asia week magazine
voted Premji among the 20 most powerful men in the world. He was among the 50 richest
people in the world from 2001 to 2003 as listed by Forbes.
 In April 2004, Time magazine rated him among the 100 most influential people in the
world. In 2005, the Indian Government honoured Azim Premji with the Padma Bhushan.
Chairman of Wipro Technologies; one of the richest Indians for the past several years; his
success story is a source of inspiration to a number of budding entrepreneurs.
 He was studying Electrical Engineering from Stanford University, USA, when due to
sudden demise of his father he was called upon to handle the family business. He took
over the reins of family business in 1966 at the age of 21 years.
 At the first general meeting of the company attended by Azim Premji, a shareholder
doubted Premji’s ability to handle business at such a young age and publicly advised him
to sell his shareholding and give to a more mature management. This spurred him and
made him all the more determined to make Wipro a success story. And the rest is history.
 When Azim Premji occupied the hot seat, Wipro dealt with in hydrogenated cooking fats
and later diversified into bakery fats, ethnic ingredient based toiletries, hair care soaps,
baby toiletries, lighting products and hydraulic cylinders.
 Thereafter Premji made a focused Shift from soaps to software. Under his leadership
Wipro has metamorphosed from a Rs.70 million company in hydrogenated cooking fats
to a pioneer in providing integrated business, technology and process solutions on a
global delivery platform.
 Today, Wipro Technologies is the largest independent R&D service provider in the
world. Under his leadership, the fledgling US$ 2 million hydrogenated cooking fat
company has grown to a US$1.76 billion IT Services organization serving customers
across the globe. In the past two years Wipro has also become the largest BPO services
provider, based in India. Wipro’s growth continues be driven by its core values.

3. BRIJMOHAN LAL MUNJAL - THE HERO GROUP

 Chairman of Hero Group; honoured with Ernst & Young Entrepreneur of the Year in
2001. Today, the Hero Group is the largest anufacturer of two-wheelers in the world and
B.M.Munjal is the man credited with its success.
 His journey began in 1944 at the age of 20. He along with his three brothers moved from
his birthplace Kamalia in Pakistan to Amritsar. The brothers started supplying
components to the local bicycle business. After partition in 1947, the family was forced to
move to Ludhiana. In 1952, Munjals made a shift from supplying to manufacturing. They
started manufacturing handlebars, front forks and chains. In 1956, the Punjab state
government announced the issue of 12 new industrial licenses to make bicycles in
Ludhiana.
 The Munjal brothers cashed on this opportunity. Soon Hero Cycles started giving well
established players such as Raleigh, Hind Cycles and Atlas Cycles a run for their money.
The Hero Cycle was comparatively cheaper and was sturdy and reliable. It gave the
customers value for their money.

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 In 1984, Japan’s Honda, the largest manufacturer of motorcycles elicited interest in
collaborating with the Hero Group to manufacture motorcycles in India. Even after the
collaboration has broken, the Hero Group is the largest manufacturer of motorcycles in
the world.

4. DHIRUBHAI AMBANI – RELIANCE GROUP

 Dhiru Bhai Ambani built India’s largest private sector company. He created an equity cult
in the Indian capital market. Reliance is the first Indian company to feature in Forbes 500
list. Dhirubhai Ambani was the most enterprising Indian entrepreneur.
 His life journey is reminiscent of the rags to riches story. Dhirajlal Hirachand Ambani
was born in 1932, at Chorwad, Gujarat, into a Modh family. His father was a school
teacher. Ambani started his entrepreneurial career selling “bhajias” to pilgrims in Mount
Girnar over the weekends.
 After doing his matriculation at the age of 16, Ambani moved to Aden, Yemen. He
worked there as a gas-station attendant, and as a clerk in an oil company.
 He returned to India in 1958 with Rs.50, 000 and set up a textile trading company.
Assisted by his two sons, Mukesh and Anil, Dhirubhai built India’s largest private sector
company, Reliance India Limited, from scratch.
 Over time his business has diversified into a core specialization in petrochemicals with
additional interests in telecommunications, information technology, energy, power, retail,
textiles, infrastructure services, capital markets and logistics.
 Reliance also became the first Indian company to feature in Forbes 500 list. Dhirubhai
Ambani was named the Indian entrepreneur of the 20th century by the Federation of
Indian Camber of Commerce and Industry. Innovation is the specific instrument of
entrepreneurship. The act that endows resources with a new capacity to create wealth.

 INDIAN STARTUP ECOSYSTEM: CURRENT CHALLENGES

1. Fragmented policy and policy implementation:
 There has been no comprehensive policy focusing on innovation and entrepreneurship so
far.
 Also, the mechanisms to operate existing, fragmented policies were not uniform, which
resulted in gaps in understanding and failure to achieve the desired effects of such
policies.

2. Inadequate funding of R&D:

 Little national funding was available for R&D: from 2011 to 2012 it was only 0.88% of
gross domestic product. Consequentially, even less funding is available to the academic
and R&D institutions.
 Out of the total R&D expenditure incurred in the country, about 63% of the expenditure is
incurred by the government itself and the total R&D expenditure incurred by industry
altogether is equivalent to the amount just one global multinational spends on its in-house
R&D.

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3. Difficult and lengthy funding procedures:
 Although funding is available from banks and public sources the procedures for accessing
such funding are often complex, cumbersome, lengthy, and bureaucratic, in other words,
not conducive to innovation and entrepreneurship.
 Moreover, despite these difficult and lengthy procedures, the system seeks immediate
returns. However, the returns from innovation are often uncertain, late, or not quantifiable
immediately.
4. Angel, venture capital, and seed funding:
 Despite 100 angel networks operating in India only tens of deals are made each year
(Planning Commission, 2012).
 For such a populous country, this magnitude of deals is very low compared to the
numbers from abroad and fall short of India’s requirements. The report also indicates low
levels of early-stage venture capital investment: around US$ 240 million per year.
5. Weak linkages between stakeholders:
 The linkages between industry, especially medium and small-scale enterprises and R&D
or academic institutions are weak. Industry requires proven technologies, but the
institutions can only offer technologies at considerably earlier stages (i.e., at mostly a
laboratory or pilot scale), meaning there is still much work to be done to bring the
technologies to market.
 There is also considerably less funding and mentorship support available from the private
sector. There is no easy exchange of manpower between the industries and academia or
R&D institutions, which limits their capacity for mutual understanding and technology
transfer.
6. Non-conducive education system:
 The general education system is still too focused on grades and careers and is not oriented
toward innovation and entrepreneurship. This situation is further worsened by the
inherent problems of lack of infrastructure and good facilities in the educational
institutions; delays in the funding system; and delays in the funds or other support
reaching innovation projects.
 While industry craves solutions to their problems, the academic institutions are generally
too busy performing routine academic exercises, churning out educated manpower that is
often ill suited to either innovative industries or entrepreneurship. However, exceptions to
this general view include a few high-end academic institutions such as Indian Institutes of
Technology and similar institutions.
7. Poor infrastructure facilities in villages:
 Basic infrastructure facilities such as electricity, Internet, roads and rail, and even the
availability of a skilled workforce, are not evenly distributed in India and often weak in
smaller cities or towns and rural parts of the country.
 Thereby, there is less scope for innovation and entrepreneurship to flourish in such areas.
In most cases, innovators and entrepreneurs must travel long distances – at their own
expense – to receive mentorship or other support.

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8. Risk aversion among entrepreneurs:
 Indian entrepreneurs often seek established technology as a basis for starting their
business; they are hesitant to take on innovative ideas because of the risks involved,
including the low availability and high cost of funds that often arrive too late. As a result,
they look for minimum risk and quick returns.
 The potentially higher returns from innovation take time to realize, and not enough
entrepreneurs are willing (or able) to accept the risks.
9. Inadequate protection of intellectual property rights:
 In India, the intellectual property regime is weak. Innovators do not generally seek
protection for their intellectual property unless forced to.
 For most entrepreneurs, patents and other forms of protection take too long and cost too
much. Patent literacy is very low, even among educated innovators, and there is a lack of
expert help available, except in the medicine and pharmaceutical industry.

 ROLE OF ENTREPRENEURSHIP IN IMPORT SUBSTITUTION/ EXPORT

PROMOTION

 EXPORT PROMOTION

Export promotion: measures taken by the government to increase the quantity and variety of
goods and services that are exported.

Reasons
 To eventually achieve significant export-led economic growth.
 Export enlarges the production capacity of a country because more and larger industries
are established.
 Export markets are much bigger than domestic markets.
Methods
1. Incentives
 Encourage manufacturers to export and increase in the volume of production.
 E.g. information on export markets, research into new markets, export credit guarantees
and publicity.
2. Subsidies
E.g. cash payments to exporters, refunds on import tariffs, tax rebates, tax concessions, and
assistance in financing exports.
3. Trade neutrality
 Incentives in favour of exports, equal import substitution protection.
 EPZs
 Free trade enclaves within a protected country.
 Fenced and controlled industrial park that falls outside the domestic customs area, and is
usually near a harbour or airport.

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4. Dumping: prices of export goods must not be viewed as “dumping”, i.e. selling goods in a
foreign market at prices that are below their cost of production.

Advantages
 No limitations – world market is very large.
 Cost and efficiency – organised along lines of competitive advantage.
 Increased domestic production.
 Exchange rates – realistic, no need to exchange controls.
Disadvantages
 Real cost of production – subsidies and incentives reduce the cost of production.
 Lack of competition – low prices can force competitors out of the market. Increased
tariffs and quotas – overseas competitors may retaliate.
 Protection of labour-intensive industries.
 Dumping.

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  IMPORT SUBSTITUTION
 Import substitution: The replacement of goods that were previously imported by
domestic production.

 Reasons
 Diversification
 Expansion of manufacturing.
 Infant industry argument: new industries try to establish themselves, can’t really
compete with imports and need to be protected.
 To accelerate economic growth, developing countries have to produce manufactured
goods.

Methods
1. Tariffs
 (Customs duties or import duties) are taxes on imported goods.
 Effect: raises prices of imported goods for customers and demand shifts from imports
to domestically produced goods.
2. Quotas
 Limit on supply of a good or service.
 Effect: reduce supply and increase price.
3. Subsidies
 Subsidies paid to domestic producers.
4. Exchange controls
 Limiting amount of foreign exchange available to those wishing to import goods and
services or to invest or to travel abroad.
5. Physical controls
 Complete ban or embargo on import of certain goods.
6. Diverting trade
 Import deposits, time consuming customs procedures, quality standards.
 Makes it difficult to import goods.

Advantages
 Increased employment
 More choice
 Diversification

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 Disadvantages
 Capital and entrepreneurial talent are dawn away from the areas of competitive
advantage to areas with higher profits due to protection.
 Technology from abroad may not be feasible locally.
 Lowers competitiveness and efficiency.
 Leads to more demands for protection.
 protection does not promote backward linkages to other industries that aren’t
protected.

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