Import Substituion - Localization

Import substitution and sustainability of localized parochialist economy



One of the benefits of import substitution is that a country produces and consumes its own goods.

Even on a regional level within a country, import substitution leads to increase localization and sustainability as local consumers buy increasingly local products.
As large international players are removed from a  market, and thus competition, local companies can take over. For example, instead of buying a foreign brand of beer, a consumer can buy beer from a local brewer.
The local product, especially if it relies on local ingredient or historic local know-how, can be competitive in price as the transport costs are much lower,the product "fresher", more tailored to local tastes, than something sourced from far away or from abroad. This also makes the product and the business model more sustainable.
This leads to money flows remaining within a region and helps to the region's development. Therefore the regional authorities and businesses should push for "parochialism economics" to make consumers aware of local goods, and to send the message that by spending on locally produced goods, money will remain locally and their local communities will improve economically.
Within a country, healthy competition between neighbouring regions stimulate the overall efficiency of the economy. One example would be Irish vs Scottish whisky, which are neighbours,  if they are not strictly regions within the same state.

Financial incentives and GDP for Import Substitution vs Foreign Buy


Let’s suppose a large order for 100.000 USD for personal care products (shampoo).

Bought from abroad: 100K USD —> 100% GDP


Bought internally with import substitution: 100K USD –> 180% GDP


Additional local GDP:

5 % taxes(assuming 20% corporate taxes)

25% personnel (payslip + taxes/social)

25% operating and production cost

25% ingredients(base chemicals) costs

20% net profits for company

Import substitution and the importance of localization

This is a post in English of a post written in Russian: http://www.sovecomo.ru/2021/01/25/Импортозамещение-И-Важность-Локализации.aspx

Import substitution is a pillar of a sovereign economy: it is important for industrialization, developing skills and new technologies, generate direct and indirect jobs and profits for the local communities, and add money to state budgets through taxes.
Ideally, in such a business cycle the money is kept inside the country, if the production is fully localized.

Total or very high localization means that components, ingredients, materials, tools and related services are also produced inside the country. Which unfortunately is often not true.

I will try to layout an approximate schema:

There are different types of suppliers:
Foreign companies which sell items produced abroad: almost 0% of money stays inside the country
Foreign companies which sell items assembled inside the country but with components produced abroad: up to 25% of money stays inside the country
Foreign companies which sell items assembled inside the country and with localized components: up to 50% of money stays inside the country
Local companies which sell items produced abroad: up to 25% of money stays inside the country (mainly profits)
Local companies which sell items assembled inside the country but with components produced abroad: up to 50% of money stays inside the country
Local companies which sell items assembled inside the country and with localized components: up to 100% of money stays inside the country

As we see there are 3/4 main factors, which determine on how much money stays inside the country:
-Localization of labour(jobs)
-Localization of supply chain
-Taxes
-Profits

Summing them up even more, we can say that both the Tax residency of company(and main investors) and localization determine how much money stays inside the country. Especially the localization will keep the money inside the country, if the business is labour and manufacturing intensive e.g. industrial goods like car, ships, airplanes.

That why the Sovereign Economic Model whitepaper advocates the de-taxation of small-medium manufacturing businesses, in order to manufacture locally as much as possible, and therefore retaining the money inside a country.