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 2: The defence sector and industrial policies: background, stylized facts and the liberalization scenario

Fulvio Castellacci and Arne Fevolden

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


The European defence industry is highly concentrated. This is to a large extent the result of an extensive and wide-ranging use of protectionist policies – such as discriminatory procurement practices and offset (counter-trade) requirements. Regardless of country size, specialization pattern and GDP per capita, the defence sector in European countries is almost always dominated by a few oligopolistic defence contractors. But, as several commentators have pointed out, this industry structure comes at a price (Edwards, 2011). This high level of industry concentration and the low level of integration among the domestic markets of the EU have forced the EU member states to accept more costly and less efficient defence equipment, which has hampered the international competitiveness of this industry and weakened the member states’ military capabilities vis-à-vis other regions of the world. This weak competitiveness prompted the EU to introduce a new Directive (The European Union’s Defence and Security Procurement Directive, 2009/81/EC) that is supposed to ensure a greater level of freedom in the trade of defence materiel and make the European defence industries more efficient and competitive. Although the actual impact of this Directive is still uncertain, it has already spawned a wide-ranging debate about how the different member countries will be affected, and whether it will actually succeed in creating a more open and competitive European defence sector (Edwards, 2011; Blom et al., 2013).

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