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, and that the focus on industrial development impoverishes local commodity producers who are primarily rural.
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 large-scale 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 ...