Stage One

• The local government establishes policies to encourage new industries to be set up in the country. It forms agreements with foreign companies for supplies and resources. It creates a political environment and protections locally that is supportive of local industry and less so on foreign trade. In "The Puzzle of Latin American Economic Development," Patricia Franko explains the government may indulge in "targeted lending" to those companies who can produce goods locally, provide them with subsidies and tax exemptions and create stricter rules for foreign ownership.
  
  

Stage Two

• The second stage in import substitutions begins with importing the production resources necessary for producing the goods at home. In the book, "Development Problems and Policies," TR Jain writes these production resources allow for the production of "non-durable consumer goods, such as clothing, shoes, and household goods, and of their inputs such as textile fabrics, leather and wood, by domestic production, since these commodities suit the combination existing in developing countries that are the beginning of industrialization process."
  
  

Stage Three

• The companies created by these new industries and the governments supporting these industries must win over customers and market share through adaptive innovation. In the book "Insight in Innovation," Jan Verloop explains that adaptive innovation is essential in a "turbulent transition period in the business environment." The new industry adapts products specifically for the local markets, tests unproven marketing strategies to attract customers who may have been loyal to other businesses and brands, and adapts products based on resources available within the country.
  
  

Pros and Cons of Import Substitution

• Import substitution encourages citizens to spend their money within the local economy. When businesses in the local economy are more profitable, they are able to hire more people, further improving the local economy and potentially encouraging new businesses to form around those new industries. There are also drawbacks. University of Michigan professor Avik Basu writes in a report that "Local industries often cannot take advantage of economies of scale in manufacturing their products." Economies of scale, in the manufacturing world, refers to producing large amounts of the product which reduces the per unit cost to produce. This allows companies to sell their products cheaper and potentially pricing out competition.