Explain how import substitution can protect domestic industry.

Import substitution means a strategy that discourages the import of those goods which can be produced domestically. Import substitution not only reduces the dependency on foreign countries for goods but also encourages the domestic firms to produce more. Governments also help the domestic firms financially by providing them subsidies, licenses, incentives etc. to produce domestically. In this way, the domestic firms don’t have competition with other foreign goods, thus, it provides a protective and free environment.