Import Substitution Industrialization (ISI) was an economic theory and policy adopted by many developing countries in the 1950s-1980s. It is based on the idea of substituting imported manufactured goods with domestically produced ones, thus encouraging the development and growth of domestic industries.

In theory, ISI promotes the development of the manufacturing sector in the target country and strengthens the local economy. The policy was widely adopted throughout the developing world and in Latin America, in particular. It was part of the socio-economic modernization agenda promoted by the “dependency theorists”. ISI was also an important part of import-substitution policies which were implemented as an alternative to the liberalization of markets and free-market policies.

ISI focused on protecting newly formed domestic industries from foreign competition through import tariffs and subsidies, encouraging their growth and permitting them to gradually become competitive with imported goods. ISI sought to promote economic self-sufficiency by limiting imports in the domestic market and providing additional resources for research and development within the domestic sector. Through ISI, countries could improve their ability to produce higher-quality products with more competitive prices, while simultaneously bolstering their local employment base by protecting and creating local jobs in the manufacturing sector.

However, as the effects of globalization increased and as the dependence of many countries on foreign imports grew, the drawbacks of ISI became more apparent. Many countries experienced increased budget deficits and rising levels of inflation as a result of government subsidies and protectionism associated with ISI. In addition, countries adopting ISI often lacked an effective industrial policy and as a result, domestic industries were unable to become more competitive and make the transition from protected domestic producers to exporters.

By the late 1980s and early 1990s, many countries had abandoned ISI in favor of a more liberalized approach to economic development. Nonetheless, the concept of government intervention to foster local industry remains important in many developing countries and is still applicable in some respects today. From a broader perspective, the concept of ISI is also relevant to contemporary debates on global industrial strategy, particularly in relation to the development of high-value industries in emerging economies.