A strategy for the industrialization of less developed countries (LDCs), of concentrating initially on replacing imports by domestically produced substitutes. This has the advantage that it is already known what markets exist for the products, but the disadvantage that as the imports most easily displaced fall, further progress becomes ever more difficult. If a country is small, its whole domestic market for a product may make it impossible for domestic producers to take full advantage of economies of scale. The strategy of import substitution is contrasted with that of export promotion, where LDCs’ industrial effort concentrates on products that can be sold in world markets.
Reference: Oxford Press Dictonary of Economics, 5th edt.