Import substitution: An other important dimension

Most economic developers – at least the ones I know – are free traders as well.  They understand the importance of the free flow of investment and labour to efficient economies but they also predicate their support for free trade on the notion that it can be mutually beneficial.  For example, if free trade between two nations leads one to become very rich and the other poor, then free trade has failed.  Implied, therefore, is that each region in a free trade zone will have its comparative advantages and have exportable products and services to offset its imports (on which there is little local value added).  These comparative advantages can be natural – i.e. geography, natural resources, etc. or man-made – universities, research institutes, favourable tax environment, highly livable communities, etc.

Having set that as a baseline, import substitution is also an important dimension of economic development.  Import substitution occurs when an imported product (with little value added here) is replaced by a local producer (with high value added here).   The local jurisdiction gets the goods and the value added.

However, it is questionable whether we should pay a lot more for locally produced goods or sacrifice quality.  I think the Costco example is a clear reminder that the public puts price and quality ahead of any romantic notions of local retail.

Economic developers should be snooping around looking for opportunities to promote import substitution – on a province or even national basis.    For example, I struggle to understand how Maple Leaf can make hotdogs in Brampton and ship and distribute them across Atlantic Canada more cheaply than doing it from a Moncton facility.   My hunch is that they didn’t want to be bothered with the hassle of running multiple manufacturing sites and didn’t really worry about pennies per hot dog in the difference.  It’s convenient to have a  mega manufacturing facility in a central location but it might not be more cost effective.

However, that might create an opportunity for another hot dog manufacturer to zoom in an capture the Atlantic Canada market from a Moncton facility.

Obviously I don’ t know the economics of the hot dog business but you get my point, in theory at least.

This is just another dimension of economic development.  I am encouraging folks to think more broadly about how economies grow and about the role of both public and private sector players in fostering more development.

Some of us have boiled down economic development to handing out grants and loans.  That has never been economic development.


2 thoughts on “Import substitution: An other important dimension

  1. I think maybe you dont’ realize just how many savings derive from centralization. There is a reason that this has been the hallmark of capitalist economies since…well, since they existed. This is true of Hot Dogs and widgets and whatever. If you seriously think that it is MORE cost effective to run a plant with workers and local small suppliers in order to supply a small market with a product whose shelf life is MONTHS, then I’d suggest you are VERY mistaken. Companies don’t make decisions based on ‘romantic’ notions of centralization-they do it because its cheaper. In fact a CEO would VERY quickly find himself fired by shareholders if he were making business decisions that weren’t ‘cost effective’ but just, well, of the order of “look, if we just have one plant then its that much easier to count”.

    Your argument HANGS on the idea that you think its CHEAPER to service small markets from that market. That may be true someday when gas prices double, but certainly not today.

    There usually ARE options, but they focus on quality, not price. Lots of people go to the US for milk, but lots of people also know that there are practically no health regulations regarding growth hormones and BGH. And thats not the case for Canada (yet). For hot dogs, they are garbage, and its pretty easy to buy local sausages, which are far superior and far healthier.

    In order to grow those economies though, you either need a bigger population that has the disposable income, or you need to fall back on the grants and loans so that those places can get bigger. Virtually EVERY company will reach the medium stage point where in order to remain competitive they essentially have to sell the company. But grants and loans aren’t the only option as we know from Radian 6, the government can also purchase equity in the company.

    And I think you may be over exagerating the philanthropy of many ‘free traders’. There’s a reason we DON”T have a free trade agreement with China even though most of our goods come from there, but do have one with Columbia, where we only have mining interests.

  2. I agree, with the scale required for “economies of scale” these days on many things (do to people wanting ultra low prices), import substitution is not often a logical answer.
    Now there is also a huge issue with risk mitigation and traceability. The more manufacturing facilities you have, the harder it is to manage those risks, quality and to provide the traceability that is needed in some industries (or to comply with ISO).

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