LOIS: Who wins and who loses?

The goal of LOIS, or Local Ownership/Import Substitution, is to create sustainable growth and wealth for local communities by bolstering local production and keeping profits local. Practically, LOIS communities aim to use locally-produced goods to replace imported goods. While implementing a LOIS strategy can be advantageous for those citizens within a community, are there negative implications for the global economy? Can a venture be considered a “social venture” if it positively affects some and negatively affects others?

Historically, when countries have tried to implement import substitution policies, like many Latin American countries did from the 1930s-1980s, protectionist policies and inefficiencies ensued. While domestic industry improved, the locally-produced products were not competing in the global marketplace, and therefore many of the products were not of a standard quality and eventually became obsolete. Globalization, while making the local economies more susceptible to global shocks, increased the global workforce and production efficiency. By promoting LOIS policies, those workers around the world who produce products for TINA companies are being as effected as the large companies.

Furthermore, what of those communities that do not have the raw materials to produce goods? Importing raw materials may erode many of the profits intended to remain local. As with micro-finance, a LOIS strategy has the potential to increase self-sufficiency in small communities that have access to raw materials and natural resources. LOIS policies can protect local communities from feeling macroeconomic shocks or recessions. Problems arise, however, when LOIS strategies are adopted by countries or are implemented on larger scales. Those countries that have plentiful natural resources will be more successful that those that do not. In this more individualistic global economy, the separation between “haves” and “have nots” will continue to grow.

References:

Alter, Lloyd. “Cage Match: TINA vs. LOIS.” Treehugger 15 July 2006. Web. 29 Oct. 2012.

Sanderatme, Nimal. “Import Substitution: Is it a pragmatic economic policy?” The Sunday Times 6 Nov. 2011. Web. 28 Oct. 2012.

Advertisements

4 thoughts on “LOIS: Who wins and who loses?

  1. tlhill2012 October 30, 2012 at 8:51 PM Reply

    Thanks for your comments. It’s good to challenge the received wisdom, even when it’s “alternative.”

    First, you are right to point out that globalization leads simultaneously to less inequality (less of a gap between rich and poor countries) and more inequality (more of a gap between rich and poor within most countries). For (exhaustive) details, see the special report on the world economy in the October 13th eidtion of the Economist.

    More abstractly, the mechanism is the same. The circulatino of money spins off profits and investment (multiplier effect) each time the wheel spins. So, if a dollar is spent on a sandwhich locally, the 50c that stays in the community might be spent on gas (in which case 95% leaves) or on a local service like daycare (perhaps 95% stays)…but the longer the dollar stays and gets re-used, the more local value is created. This works as well on a global level, in that more circulation yields more goods and services (subject to environmental / resource constraints), except that the “more” tends to concentrate in certain places – notably urban centers of people and capital.

    The trick to effective import substitution is to remain competitive at a world level. This means creating import substitution through atttraction, spillovers and innovation – not through protectionist policies that are always incomplete and behind the times. This is the principle behind the growth of cities. (See Jane Jacobs excellent Economy of Cities for an early statement of cluster dynamics, but there is much more recent work on this, including a recent book by the CEO of the Gallup organziation.) See also the work of Saxenian, Porter and others (including Mercedes Delgado and Ram Mudambi at Fox) about the growth of clusters, fed by innovation, the circulation of people, and the circulation of capital – not (primarily) government policy.

    Finally, economics aside, what is the effect of LOIS v. TINA on government and the ideals of democracy, or some sort of representative or stakeholder system?

  2. jmcadams2012 October 31, 2012 at 5:55 PM Reply

    That is an interesting question. The article references the Hershey Trust considering diversifying investments, and selling off shares. The local and state government reacted quickly. Local politicians stepped up in attempt to persuade Hershey Trust not to take such actions, and furthermore, PA’s attorney general went to court to prevent such a sale. This is government intervention attempting to influence and block private enterprise. Perhaps the LOIS model of business leaves itself open to such action. A LOIS business is fundamentally more humane and community-friendly/oriented which perhaps lends to higher expectations of such enterprises conduct. Local governments have a stake in LOIS businesses continuing as usual, providing continued stimulus to their local economy. Local governments will be backed by their state governments, not wanting an industry town gone ghost town as a result of a corporate change of heart.

    I can think of many examples of government stepping in to assist TINA businesses in accomplishing their goals, but far less of government blocking “big” (TINA) business. Perhaps the argument could be made that the government regulates TINA businesses already. I would definitely like to explore this issue a bit more.

  3. Cheryl October 31, 2012 at 8:44 PM Reply

    The whole concept of import substitution raises some interesting questions and it seems that the execution of the concept rather than the concept itself is what proves to be so important. After reading through the various posts and articles the benefits of globalization, while it does detract from localization, continued to come to mind and made me wonder whether LOIS companies are the best option in certain cases. Globalization has created a more competitive, connected and smaller market providing people with more access to products, services and technologies that previously may have seemed unimaginable in small, local markets. Greater access provides people at the bottom of the pyramid availability to affordable services they would not have otherwise had. One example of this is the case of MTC and Celtel, a telecommunications company who opened up the telecommunications market in Africa providing people with low cost phones and affordable plans that allowed them to utilize their cell phone across borders. This would not have been obtainable with small local players and therefore the African market would have been much more limited in their communication options and the range of use available to them.

    Additionally large TINA companies have had a focus on social entrepreneurship by expanding the reach of their organization at the bottom of the pyramid through the development of local entrepreneurs. Danimal wanted to expand its presence in the South African and realized they needed to find an innovative way to gain access to the base of the pyramid. Additionally this market lacked job opportunities for entrepreneurs and Danimal saw a chance to provide that opportunity. People in this market would not have had access to the products provided by Danimal, although it’s debatable if these products were necessary for an improvement in their quality of life, but more importantly this provided people at the BOP an opportunity to increase their income and better support their families and develop their local communities. Without globalization this opportunity would not have been provided.

    While these examples support globalization and TINA organizations were advantageous, there are many examples where TINA companies have severely damaged local economies and communities. Therefore I feel the choice between supporting a TINA organization versus a LOIS company is very much dependent on the situation, the market and the industry. This is where it seems the point made by Professor Hill about how import substitution is more important than whether it should be allowed or not. Protectionist policies are detrimental to all involved and while they may protect the local businesses temporarily the long-term effect is not beneficial. It is important to understand what the benefits and downsides are to localization in each scenario to determine whether LOIS companies should be protected and encouraged vs. TINA companies.

    References
    Khan, Ayesha K., Tarun Khanna. (2009). Crossing Borders: MTC’s Journey Through Africa. Harvard Business School.

    Barnard, Helena, Verity Hawarden. (2010). Danimal in South Africa: Management Innovation at the Bottom of the Pyramid. Richard Ivey School of Business.

  4. slunday November 1, 2012 at 4:28 PM Reply

    TL,

    I am intrigued by your comment, “economics aside, what is the effect of LOIS v. TINA on government…” Unfortunately, (or fortunately?), when we are discussing representative democracy (or really any form of government for that matter), economics must always be included in the discussion.

    TINA in its extreme form continues to concentrate wealth and therefore power into the hands of those in control of the financial inflows and outflows of their nation’s capital markets. The Political Economy Research Institute (PERI) at UMass Amherst has conducted extensive financial and macroeconomic analysis of sub-Saharan African economies in the period of 1970 – 2010 to measure foreign direct investment and GDP growth. Lack of financing has long been a detriment to sustainable growth of sub-Saharan economies. Thus, liberalizing these economies towards globalization was seen as a means to spur development. PERI found that during this time period, there was extensive capital-flight (to the tune of $815 billion USD, further research found here: http://www.peri.umass.edu/236/hash/d76a3192e770678316c1ab39712994be/publication/532/) making these nations a net creditor to the world. Deep corruption and ineffective legal and capital systems greatly contributed to this capital flight which enriched the top echelon and left the majority saddled with even more national debt. The takeaway: political power can be leveraged into economic power (and vice versa) and it often is. Thus, TINA policies that were meant to (I hope) empower local stakeholders through economic development and prosperity have fallen short, further disenfranchising local stakeholders.

    On the other side of the spectrum, TINA can help to reinforce local economies and increase stakeholder power. TL, you mentioned the rise and importance of geographic industry clusters, and I think this is a great point. Industry clusters such as Silicon Valley were largely driven by and exist because of globalization but they also serve to pump money back into the local economy. These global companies are strengthening their local communities and creating more powerful voices; witness Silicon Valley’s efforts to support immigration reform and same-sex benefits for employees.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: