Import Substitution with Free Trade

The import substitution policies in India, directly and indirectly, were responsible for 'islands of competitiveness' such as the software industry and also the general non-competitiveness of a large number of industries. They created certain supply side conditions that facilitated the birth of software industry as a by-product. Free trade with technologically advanced economies, especially with the US, from the initial stages of its birth provided scope for realisation of technological and informational externalities. The main lesson we can draw from the dynamics of this industry is that a combination of supply side policy support with trade-openness contributes to the creation and technological maturity of hi-tech industries in developing economies.