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 5: A simulation model of the European defence industry

Fulvio Castellacci and Arne Fevolden


The previous three chapters have presented new empirical evidence on how defence firms are starting to respond to the future scenario of market liberalization, focusing on defence contractors and policy frameworks in small, open economies such as Norway and Sweden. The present chapter and the next will extend this analysis of the possible future impacts of market liberalization in the defence industry by means of simulation modelling analysis. Specifically, we will in this chapter present a theoretical model of the defence industry that resembles some of the main characteristics and empirical stylized facts that we have highlighted in this book so far. Chapter 6 will then present the results of simulation analysis intended to compare different policy scenarios for the future and the different impacts of liberalization in large and smaller European economies. The framework presented in this chapter is based on agent-based modelling (Dosi et al., 2010; Almudi et al., 2012; Ciarli et al., 2012). ABM has never previously been used to analyse the question of exporting firms’ reaction to market liberalization and, more specifically, it has never previously been applied within the context of the defence industry. A specific model of interest is the so-called SKIN model (‘Simulating Knowledge Dynamics in Innovation Networks’), introduced in a number of papers by Gilbert et al. (2007), Pyka et al. (2007) and Ahrweiler et al. (2011). This is an agent-based model that provides an accurate analysis of private firms’ interactions and knowledge dynamics in high-tech (or knowledge-intensive) industries.

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