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 6: Policy scenario analysis: small countries in a European perspective

Fulvio Castellacci and Arne Fevolden

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


Faced with the ongoing liberalization process in the European defence market, many member states will arguably find it more difficult to maintain protectionist policies such as national favouritism and offset (counter-trade) requirements. Nevertheless, it is reasonable to expect that the new EU Directive will not affect each member country in the same way or to the same extent. Some authors have already begun to speculate that the Directive will impact member countries differently according to the size of their national defence markets and the strengths of their defence industrial base (Edwards, 2011). One concern, in this regard, is that although a higher degree of market liberalization in the European defence market might lead to rationalization of production and lower costs of defence equipment for the EU as a whole, smaller member states might find that these benefits are offset by the impediments that the Directive creates with respect to achieving other important policy goals. The first part of this chapter will carry out a simulation analysis of the model presented in chapter 5 in order to analyse the effects of liberalization under different policy scenarios, and how these effects will differ between large and smaller European countries. This comparative policy analysis will show that the effects of market liberalization will differ in large and smaller EU economies.

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