DEFENSE INDUSTRY

Defense industry companies provide governments with military capabilities across the naval, land, aerospace, and electronic systems domains in support of current and future defense and military requirements. Besides, defense companies work closely with governments as key strategic partners for major military operations around the world. Defense is a complex and challenging sector due to the high development of technology and the large defense contracts that are executed and managed.

Every country needs national defense. National defense industries are usually characterized by high capital intensity, long R&D cycles, and large-scale economies. In general, such industries are not compatible with a country’s comparative advantages, and especially so in the case of developing countries. However, some of those industries may be essential for national defense and the country needs to own them domestically. Firms in such industries will not be viable in an open, competitive market. Subsidies and protection from the government are indispensable. The structuralist perspective discussed in Section, “Why We Need to Rethink Development Economics” of this chapter proposed the use of distortions in factor prices and of market monopolies as means of subsidies/protection for comparative advantage-defying advanced industries. A better approach is to subsidize these firms directly by R&D grants or indirectly through the procurement of products. This is similar to the practices in the United States and other advanced countries. In a developing country, the government’s fiscal capacity to subsidize strategic industries is limited. Therefore, the choice of strategic industries should be very selective and their number should remain small. In effect, only those industries essential for national defense and having a large externality to civil industries should be chosen.