Innovation and Liberalization in the European Defence Sector
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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.
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Chapter 4: Defence companies’ response to EU liberalization: a comparative study

Fulvio Castellacci and Arne Fevolden


As previously noted, the intention behind the EU Defence and Security Procurement Directive is to increase the trade of defence and security equipment within the European Economic Area (EEA) and thereby encourage competition, limit duplication, and eventually strengthen the productivity and competitiveness of the European defence sector (Guay and Callum, 2002; Kapstein and Oudot, 2009). Although the actual impact of the Directive is still uncertain, it is likely that most member states will find it harder to maintain their existing defence industrial policies – whether these policies take the form of import barriers to protect their domestic industry from foreign competitors or offset (counter-trade) requirements to ensure that their domestic industries have access to foreign markets (Hoeffler, 2012; Blauberger and Weiss, 2013). To understand the possible effects of market liberalization, a crucial issue to investigate relates to business firms’ response to this policy change. Are defence companies adjusting their business and internationalization strategies to prepare to compete in a more open European defence market in the future? This question is fundamental because the impact that the Directive will have depends to a large extent on private firms’ reaction to the new policy regime. The macro policy change will be more effective if micro agents (companies) internalize and adopt it rapidly.

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