The Economics of the Global Defence Industry

Keith Hartley, Jean Belin, Keith Hartley, Jean Belin

• Publisher: Routledge
• Year: 2019
• Print ISBN: 9781032085807
• eBook ISBN: 9780429882692
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book makes an original contribution to our knowledge of the world's major defence industries. Experts from a wide range of different countries – from the major economies of North America and Western Europe to developing economies and some unique cases such as China, India, Singapore, South Africa and North Korea – describe and analyse the structure, conduct and performance of the defence industry in that country.

Each chapter opens with statistics on a key nation's defence spending, its spending on defence R&D and on procurement over the period 1980 to 2017, allowing for an analysis of industry changes following the end of the Cold War. After the facts of each industry, the authors describe and analyse the structure, conduct and performance of the industry. The analysis of 'structure' includes discussions of entry conditions, domestic monopoly/oligopoly structures and opportunities for competition. The section on 'conduct' analyses price/non-price competition, including private and state funded R&D, and 'performance' incorporates profitability, imports and exports together with spin-offs and technical progress. The conclusion explores the future prospects for each nation's defence industry. Do defence industries have a future? What might the future defence firm and industry look like in 50 years' time?

This volume is a vital resource and reference for anyone interested in defence economics, industrial economics, international relations, strategic studies and public procurement.

1 The global defence industry

An overview

Keith Hartley and Jean Belin

Introduction: aims and objectives

This book makes an original contribution to knowledge and fills a major gap in the literature. Currently, there are no recent and up-to-date economics books dealing with the world’s defence industries. The book has two further features. First, defence industries are important and major users of scarce resources but very little is known about these industries. Second, each author is an authority on their industry. By bringing together these specialists, each following a standard format, we make a unique and distinctive contribution to our knowledge and understanding of the global defence industry.

Criteria for selecting the countries

Various criteria were used to select the countries included in the study. The list of companies in the SIPRI Top 100 arms firms in 2016 provided the starting point. All countries listed in the Top 100 were included. Some countries were obvious candidates, such as the USA, Russia, the UK, France, Germany and Italy. It was also necessary to identify authors for each country’s defence industry.

The editors selected authors on the basis of their knowledge, expertise, and availability. Some authors are leading defence economists; others are specialists from and for each nation. A further requirement was the publisher’s word limit on the book’s length which provided a constraint on the number of chapters and countries included in the book.

The SIPRI Top 100 arms producers is a comprehensive and publicly available database for arms producers and military service companies. It is published annually in the SIPRI Yearbook and is available in the SIPRI Database. It shows the names of each arms producer, its country of location, annual arms sales in current and constant prices, total sales, arms sales as a share of total sales, as well as total company profits and total employment. Subsidiaries are shown (SIPRI, 2018a).

The Top 100 includes private and public companies but not manufacturing or maintenance units of the armed forces. The Database contains financial and employment information on arms producing companies in Organisation for Economic Co-operation and Development (OECD) and developing nations (excluding China). The data are based on open sources and open information (e.g. company annual reports; articles in journals and newspapers). The Database was launched initially in 1989 and the current version contains data from 2002, including data for Russian arms companies. Collecting such data is a costly and time-consuming exercise for SIPRI but the result is a valuable and original contribution to knowledge. This book would not have been possible without the SIPRI Arms Industry Database. At the same time, this book’s country studies of each nation’s defence industry adds to the knowledge provided by the list of SIPRI Top 100 firms.

Table 1.1 shows the countries included in the book and the number of Top 100 arms companies by country in 2016. US arms companies dominated the number of Top 100 arms firms by country, accounting for almost 40% of the total. European countries accounted for a further 26% of the total numbers. Elsewhere, South Korea, Japan, India and Israel combined accounted for 20% of the total numbers in 2016.

Table 1.1 Top 100 arms companies by country, 2016

Country	Number of Top 100 arms companies by country
USA	38
China	Not known: see Chapter 3
Russia	10
UK	8
France	6
Trans-European	2
Italy	2
Germany	3
Spain	1
Greece	0
Poland	1
Ukraine	1
Switzerland	1
Sweden	1
Norway	1
Turkey	2
Israel	3
South Korea	7
Japan	5
Canada	1
Australia	1
Brazil	1
India	4
Singapore	1
South Africa	0
North Korea	Not known: see Chapter 27

Source: SIPRI (2018a).

Notes:

1. Top 100 ranked by arms sales and based on SIPRI Arms Industry Database, 2016. Subsidiaries are excluded.
2. Trans-European companies are defined as companies whose ownership and control structures are located in more than one European country.
3. China and North Korea are not listed in the SIPRI Top 100 arms companies: hence they are shown as not known.

Two countries, namely, China and North Korea, are included in the book, although neither are listed in the SIPRI Top 100. China is a major arms producer but little is known about its defence industrial base. Similarly, little is known about the arms industry of North Korea but its position in international relations made it a candidate for inclusion. The absence of published information on the defence industries of China and North Korea makes an original contribution to knowledge.

Two other countries were included even though they had no Top 100 companies, namely, Greece and South Africa. Greece is an example of a country whose defence industry is facing major financial and economic problems. South Africa is an example of a developing country and a country from the continent of Africa. Also, the South African company Denel was listed in the Top 100 arms companies until relatively recently.

It was not possible to include all countries. Notable exclusions comprised Belgium, the Czech Republic, Finland and the Netherlands. Nonetheless, these omissions are offset by the inclusion of the major European arms producers. Elsewhere, some South American and Asian nations are excluded (e.g. Argentina; Indonesia) but, again, these are balanced by the inclusion of other nations from these regions. Another notable omission is Iran where there is an absence of known specialists for that country. Overall, the key criterion in country selection was their representation in the SIPRI Top 100 arms producers. All countries with an arms producer in the SIPRI Top 100 in 2016 were included in the book.

The Top 100 list is not static and changes continuously. It is subject to new entry and exits reflecting increases and decreases in defence spending as well as new technology and industrial re-structuring. Firms merge to create new companies with new names and new business products (e.g. military outsourcing; emergence of drones and UAVs). Some large arms firms were only created relatively recently. For example, aircraft companies did not exist in 1900 and aerospace firms and missile companies only emerged after 1945. Similarly, there were changes between 2016 and 2017. In 2017, there were 42 US arms firms in the Top 100, followed by 10 Russian and seven from the UK. The sole Norwegian firm in 2016 was no longer in the Top 100 in 2017 and the seven South Korean arms firms of 2016 were reduced to four firms in 2017 (SIPRI, 2018b).

The Top 100 also excludes specialist small arms firms which manufacture ammunition, rifles and light weapons. Estimates suggest that the small arms sector comprises some 1,000 companies and about 100 countries. However, some small arms production takes place in countries such as Brazil, Canada, China, Germany, India, Italy, Russia, Switzerland, Turkey, the UK and USA: these countries are included in this book. Also, some small arms production occurs in the Top 100 arms firms.

Outline of the book

Defence or arms industries (the terms are used interchangeably) invite questions about what we know; what we don’t know; and what we need to know for further understanding and debates about policy choices for these industries. This book examines these issues starting with what is known about each industry.

Table 1.1 shows the countries included in the book. Authors for each chapter were asked to follow a standard format, namely, an introduction, summary of argument, industry description, case studies and conclusion. In more detail, each chapter uses the following standard format:

1. A short statistical review of national defence spending with data on annual defence R&D and procurement spending, defence equipment imports and defence equipment exports. Data are annual figures for the period 1980 to 2017 which covers years before and after the end of the Cold War. Where available, officially published data are presented; or where such data are unavailable, authors identify the data gaps; and where official data are not available, authors were asked to identify and review alternative data sources (e.g. trade association data; company data, etc.). In this way, the book identifies major gaps in the data on the world’s defence industries.
2. Definition of the national defence industry and data on its size and trends (e.g. annual sales and employment data for 1980–2017) as well as identifying the industry’s major locations. This section includes a short historical overview of the industry and changes in industry definitions. Employment data distinguishes between direct and indirect numbers (supply chains), and proportions of R&D staff, skilled and unskilled (where available). The regional distribution of national defence industries is described with supporting data where available. Identifying the absence of official data on national defence industries will be an important research finding.
3. Industry structure assesses whether the national industry is competitive, oligopolistic or a national monopoly, including the long-run trends in structure and the opportunities for competition. The leading arms firm and the top 10 major arms firms in 2016/17 are identified and if data permits, compared with the leader and top 10 in 1980. Entry conditions are described, including any preference for national procurement. Again, where data allows, information on the national/global supply chain and trends is described and assessed.
4. Industry conduct deals with price and non-price competition and long-run trends in conduct. Here, national procurement policy is introduced, including any preference for national equipment, the role of competition in procurement and the use of various forms of contract (e.g. cost-plus; fixed price and target cost incentives). Rules and the regulation of profitability are described and assessed.
5. Industry performance. Data on various performance indicators are reported and evaluated. These include defence industry productivity and profitability, exports and imports of defence equipment. Where possible comparisons are made with comparable civil industries (e.g. the whole economy; cars, pharmaceuticals, etc.). Other performance indicators include cost overruns and delays on major defence projects (e.g. aircraft carriers; submarines; tanks; combat aircraft). Examples are provided of any technical spin-offs and spin-ins. What are the strengths and weaknesses ...

Table of contents

• Cover
• Half Title
• Series Page
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• List of figures
• List of tables
• Notes on contributors
• Preface
• 1. The global defence industry: an overview
• 2. The United States and its defense industries
• 3. China’s defence industry
• 4. The Russian defence industry, 1980–2025: systemic change, policies, performance and prospects
• 5. The United Kingdom
• 6. The French defence industry
• 7. Trans-European arms companies and industries
• 8. The Italian defence industry
• 9. Germany
• 10. The Spanish defence industry: a long way to go
• 11. Greece
• 12. Polish defence industry: learning to walk again
• 13. Ukraine
• 14. Switzerland
• 15. The Swedish defence industry: drawn between globalization and the domestic pendulum of doctrine and governance
• 16. The Norwegian defence industry
• 17. Turkey
• 18. The Israeli defense industry
• 19. The defense industry of the Republic of Korea
• 20. Japan’s defence industry: from indigenisation to exploring internationalisation
• 21. Canadian defence industrial base
• 22. Defence industry in Australia
• 23. Brazil Reassessing Brazil’s arms industry
• 24. Indian defence industry: will ‘Make in India’ turn it around?
• 25. Singapore’s defence-industrial ecosystem
• 26. South Africa and its defence industry
• 27. North Korea’s defense industry
• 28. Overall conclusion
• Index