Globalization: What Are The Disadvantages Of Using Import Substitution?

The term globalization refers to the process of the world movement toward economic, financial, trade, and communications integration with free transfer of capital, goods, and services across national frontiers. Globalization not only move people closer but also companies. You can make a call to someone who lives in another part of the world, a click to purchase American products and a word to start business. Behind benefits there is also costs of globalization that not often revealed because the truth is not always what people want to hear. Some country makes them comfortable at the expense of making others miserable. Globalization can be formed at the expenses of others finance, resources and stability. According to the theory of comparative advantage, country gains comparative advantage when they are able to produce goods and services at a lower

Some Latin American countries adopted import substitution as a method to achieve growth and self-sufficiency. Import substitution was used for establishing domestic production of manufacture goods which are country’s main import. However, they are failed to allocate resources efficiently. Since the fixed costs of manufacture goods are high, in order to take down the cost, firms must have large-scale production. The permission of establishing too many firms eliminate opportunity of economies of scale which make firms not able to bring the costs down. Moreover, a high level of protection also creates less incentive for firms to improve the production process to the more effective way. The result is contrary to what it aimed for because the import substitution turns out to slower growth as resources are not used in sector where they will produce the highest possible output. Country’s spent a lot of money protecting local firms in order to be self-sufficient, but it turns out to affect economy by increasing unemployment