Two models shaped postwar industrial strategy: import substitution (ISI) and export orientation (EOI).

ISI tries to build industry by protecting it from foreign competition. Governments raise tariffs, restrict imports, control access to foreign currency, and often support domestic firms with credit or state ownership. The goal is to reduce reliance on imports, diversify beyond raw materials, and produce more goods at home. The weakness is that protection reduces pressure to improve. Once firms are shielded, they focus on keeping that protection. Because they mostly sell to their own country, they are limited by domestic demand, which in most developing economies is small. Without strong exports, foreign currency remains scarce, making it harder to import machinery and technology. Over time, many ISI economies ended up with industries that existed but were not globally competitive, along with repeated financial and balance-of-payments crises. This pattern appeared across much of Latin America and in India before the 1990s. Real factories were built, but productivity lagged and growth slowed. Protection became permanent, and firms rarely faced global competition. Smaller and poorer countries struggled even more because their internal markets were too small to support efficient scale.

EOI starts from a different premise: industries must compete internationally from early on. Governments may still intervene — through credit, exchange-rate policy, infrastructure, and temporary protection — but firms must export to survive and keep support. Success is measured by whether firms can sell abroad at world prices. Exporting solves three problems at once. It removes the demand ceiling imposed by a small domestic market. It generates foreign currency to pay for imported machinery and technology. And it forces firms to meet global standards, which raises productivity. Japan, South Korea, Taiwan, Singapore, and later China followed this path most successfully. Their governments supported industry but tied that support to export performance and withdrew help from firms that failed. The consistent historical pattern is that countries that exposed firms to global competition while maintaining stable macroeconomic policy achieved faster productivity growth and income convergence than countries that relied on long-term protection of domestic markets.