In an interview related to his (somewhat) new book, Ha-Joon Chang makes the case for infant industry protection:
When you are trying to get into a more difficult and thereby higher return activity, developing countries have to invest in it. The investment comes in the form of protection, which makes, for the moment, your local consumer use expensive and inferior domestic products. But unless you do that, these industries are not going to grow. You accept that you will use inferior products from inefficient producers for the time being. In the meantime, you do certain things to make sure that these firms grow up, i.e. they increase their productivity and eventually give you cheaper domestic goods, create jobs and stimulate other activities. In the end, you are better off that way.
I agree with this view in part. I think it is possible that protection could result in the development of efficient local firms: There is a chance that if given access to a protected market for enough time, local firms could eventually become competitive with their foreign competitors. On the other hand, I think it is just as likely they will not become competitive, even after the "20, 40, even 100 years" that Chang would like to give them.
Here's what I don't understand, though. Why not just let foreign firms who are already efficient producers set up shop in your country? Take the car industry for example. Sure, you could put up high tariffs and hope local car companies become good enough that they can compete on the world market. But wouldn't you be better off if you let Toyota come in and build a factory? While there is a chance that local firms will become competitive, there is a much better chance that a Toyota factory would be competitive, and it would be competitive much sooner.
What is it about having a local firm that is preferable? Here are some of the arguments I've heard (there are probably others as well):
(1) Foreign companies are too powerful and would exert too much influence over the government.
(2) Foreign companies are more likely than domestic companies to shift production to another country at some point in the future.
(3) National pride.
(4) Foreign companies are unwilling to do much beyond basic assembly operations.
I can't really argue with the national pride point. If that's the way some people feel, I don't think there is much I can do to talk them out of it (I haven't had much sucess in the past, anyway).
As for the other points, I'm not convinced that the situation is any worse than it would be with locally-owned companies. I would be curious to see any empirical research on these issues. Do developing countries really fare better on these issues with domestic companies?
I wanted to offer one final thought, related to the historical use of protection by the current crop of industrialized countries, which many people, including Ha-Joon Chang, use as part of the basis for arguing that today's developing countries should use protection. In the 19th century, when much of the West industrialized, foreign investment wasn't a realistic option for countries trying to industrialize. For example, the English steel industry was not going to open subsidiaries in the U.S. As a result, if the U.S. wanted a steel industry, it had to develop its own. Today, by contrast, the situation is different. Established companies are more than happy to look around the world for production locations. It seems to me that it is a good idea to take advantage of this.