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 3: What explains the export performance of firms in the defence industry?

Fulvio Castellacci and Arne Fevolden

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


As noted in chapter 1, a recent strand of research in international economics has started to investigate the factors that may explain why only a small number of firms within each sector are able to export their products to foreign markets whereas most other companies in the same industry are not able to do so. The present chapter extends this strand of research by focusing on one specific sector that has so far received only limited attention in the international economics, innovation and business literature: the defence industry. What are the factors explaining the export performance of firms in the defence sector, and how do they differ from the general framework that is typically described in the firm heterogeneity and international trade literature? The question motivating this chapter is not only interesting from an academic point of view, but is also highly relevant for policy. In fact, as noted in the previous chapters, EU Directive 2009/81/EC intends to provide a new framework for policy interventions in the European defence market by limiting the extent of national protection, extending cooperation and cross-border trade within the EU, and eventually introducing a higher degree of market liberalization (Hartley, 2008; Kollias, 2008; Edwards, 2011). The future scenario of openness and liberalization certainly represents an important change for firms in the defence industry.

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