Innovation and Liberalization in the European Defence Sector

Innovation and Liberalization in the European Defence Sector

A Small Country Perspective

Fulvio Castellacci and Arne Fevolden

This book investigates the ongoing liberalization of the European defence market and explores how companies can respond to these changes by adjusting their innovation and internationalization strategies. Traditionally, the EU defence sector has been fragmented into several weakly integrated and highly protected domestic markets which often leads to the duplication of innovative efforts, rising production costs and an overall lack of competitiveness. Using a variety of methods including case studies, econometric analyses and agent-based modelling, the authors reveal that liberalization will provide new and relevant opportunities for European defence companies. However, any potential benefits will only be realized if private firms perceive that a full and well-coordinated implementation process is in place.

Chapter 1: Introduction

Fulvio Castellacci and Arne Fevolden

Subjects: economics and finance, economics of innovation, international economics, innovation and technology, economics of innovation, innovation policy

Extract

In the period from the end of the Cold War to the end of the 1990s, several European countries have experienced a substantial decrease in their military budget and a significant loss of market shares vis-à-vis other international competitors. This weakening international competitiveness can largely be explained by the fact that the European defence sector is fragmented into several weakly integrated and highly protected domestic markets. This high level of industry concentration and the low level of integration among the domestic markets of European Union (EU) countries have forced economies in this area to accept more costly and less efficient defence equipment, which hampers the international competitiveness of this industry vis-à-vis other regions in the world (Edwards, 2011).Since the mid 1990s, European defence firms and national authorities have reacted to these challenges by undertaking a process of restructuring and consolidation aimed at obtaining cost reductions through, for example, inter-firm collaborations, mergers and acquisitions. This process is currently coupled with the recent attempt of EU public authorities to introduce a greater degree of market liberalization in the future in order to avoid duplications and achieve stronger efficiency and international competitiveness in this market (Guay and Callum, 2002).