Alliance politics and national arms industries: creating incentives for small states?

ABSTRACT

This article explores the effects of asymmetric alliances on states’ decisions to develop an arms industry. It conceptualises two types of asymmetric alliances: coercive asymmetric alliances and liberal asymmetric alliances and discusses their consequences for national decisions to build an arms industrial capability. Empirically, we analyse how the change in the alliance system (moving from the Warsaw Pact to NATO) affected the arms industry in small states, using the examples of Czechia and Estonia. We find that in a coercive asymmetric alliance, such as the Warsaw Pact, small states have little to no say about their arms industry. However, the trajectories of Czechian and Estonian arms industry after 1990 cannot be explained by NATO membership alone, since it is interwoven with other mechanisms coming into play. In particular, the EU may play an increasingly prominent role in shaping the future of arms industries in smaller states.

KEYWORDS:

• Arms industry
• alliances
• NATO
• EU
• Czechia
• Estonia

Introduction

Why do states establish a domestic arms industry and what shapes its development? As Marc De Vore (2021, p. 325) put it, “state investments in domestic defence industries are one of the most puzzling trends in international relations”. Andrew Moravcsik (1991, p. 23) summarised the issue as the autarky versus efficiency dilemma, “the inescapable fact that greater autonomy can be bought only at the price of reduced efficiency in armament production”. This puzzle stems from the fact that, from a purely economic standpoint, it is costlier for a state to dedicate significant resources to the development of the domestic arms industry, a hazardous and expensive process where the expected outcome is not guaranteed, than to procure weapon systems off-the-shelf from the international market.

The extant literature has uncovered two categories of factors influencing states’ choices for developing a domestic arms industry: strategic and economic. From a strategic standpoint, states tend to produce weapons domestically to gain independence from foreign suppliers, thereby ensuring that they would not be cut off in case of disagreement or change in policy from exporting nations. For instance, in studying Asian countries’ ambitions in developing domestic arms industries, Richard Bitzinger (2015, p. 454) identified a “techno-nationalist” trend. This concept applies to countries which aim to develop their own arms industry to secure and enhance their geopolitical status. From an economic perspective, the arms industry creates jobs and contributes to a country’s industrial and technological growth. Some scholars have also observed the existence of a “military-industrial complex” as a powerful lobby that influences the government to obtain additional resources (Dunne and Sköns 2010).

Once a state embarks on building its domestic arms industrial base, other factors shape its development. The industry’s growth is constrained by historical path dependency, innovation capabilities and the military requirements of the armed forces. The latter, in turn, depends on the state’s threat perception and military doctrine, among others (Singer 1958). However, these are all domestic factors. Yet, states’ defence-industrial policies do not operate in a vacuum and are also determined by international constraints. One such constraint is access to technology, which has been significant in the development of emerging arms industrial bases (Buzan and Herring 1998, Béraud-Sudreau et al. 2020). Other external factors such as the impact of globalisation on the development of the arms industry have also been studied (Ikegami 2013 DeVore 2015,), while technological factors of course play a crucial role.

But the literature has so far largely overlooked one crucial strategic and political, international constraint, namely states’ participation in an alliance system. Scholars in defence economics have extensively explored how alliance membership shapes countries’ military expenditure levels and distribution. Morrow (1993) argued that a country’s decisions to form alliances and build up military capabilities are two different sources of security, which countries need to choose from. However, the defence economics literature has identified more subtle connexions between these two dimensions of defence policies. The literature finds evidence supporting both the free riding argument (being a member of an alliance with larger members will lead to decline in military spending: Digiuseppe and Poast 2018, Sprangler 2018, Alley 2021) and the common security argument (military spending increases to contribute to collective defence: Ringsmose 2009, Flores 2011). For Nikolaidou (2008), whether alliance membership leads to higher or lower military spending varies among European states.

However, alliance membership has seldom been considered as a factor shaping arms industrial policies. Hartley (2006) explored what would be the most economically efficient arms industrial production model in a military alliance system, but this economic study did not consider technological and capability industrial developments, or the political incentives for states to develop their own arms industry. Fiott (2017) does explore NATO’s approach to foster arms industrial cooperation among its members but focused mainly on NATO-EU interactions in the field. In a multilateral security context, several authors have discussed the incentives and challenges to multinational arms procurement, particularly in Europe (for examples, see Calcara 2021 or Droff and Malizard 2023), but these works explain national decisions for multilateral cooperation in specific arms procurement processes (notably advanced weapons system), not the establishment of a arms industrial basis in the first place. The question of whether alliances impact, if at all, the national industrial policies of their members thus remains unanswered.

This paper’s focus on the influence of alliance membership on states’ arms industrial development means that the analysis relates to the factors shaping the demand for weapon systems. The role of industrial and commercial interests in the development of domestic arms industry has been extensively studied elsewhere, not least in the literature related to the “military industrial complex” (DeVore 2020). However, industrial interests more directly influence the supply side of the defence market in various countries, rather than the demand side.

The impact of alliances may be particularly relevant for small- and medium-sized states. For them, the economic rationale for developing an arms industry is less obvious than in larger states, given the high costs of developing and sustaining such an industry. Despite heightened threat perceptions in Eastern European countries for instance, they cannot domestically develop the full range of weapon systems required by their armed forces – a feat even larger countries cannot achieve. Instead, being a minor player in an alliance could lessen the incentives to develop a domestic arms industry, as junior allies may enjoy privileged access to the weapons systems of the dominant power. Nonetheless, some small states in alliance systems have attempted to develop their own arms industrial base. Why is it the case? How does alliance membership shape the production choices of small states if at all? In this paper, we do not attempt to explain the industrial interests of developing an arms industry but focus on the policy dimension of why states choose to support such investments.

To identify how alliances shape arms production patterns in small arms-producing states, this article builds on focusing events, namely the change of alliances systems. Focusing on historical turning points in alliance systems should help uncover causal mechanisms between alliance membership and arms production, as one may expect a change of alliances to lead to a reorientation of the domestic arms industry’s products.

Theoretically, this paper brings together the literatures on alliance politics and defence economics, thus opening a new field of research. Empirically, in exploring the influence of alliance systems on states’ motives for arms production, this paper will contribute to a further understanding of the drivers behind arms production policies of second- and third-tier arms-producing states.

The following section develops our analytical framework, derived from the scholarship on alliances. It will also specify the choice of case studies. The paper then tests these on the two selected case studies, Czechia and Estonia. The article concludes with a summary of the results and perspectives for future research.

Alliances and the arms industry

Scholarship on alliances has explored several issues in detail, notably the formation and breakdown of alliances, the effect of alliances on the international system (particularly their impact on the likelihood of war), and the internal management of alliances (Weitsman 2010, Rynning and Schmitt 2018, Lanoszka 2022). More recently, authors have also explored the battlefield and military performance of alliances and coalitions (Zielinski and Grauer 2022). A particularly influential model of alliance politics is the distinction established by James D. Morrow (1991) between symmetric and asymmetric alliances. Morrow purports that, in an asymmetric alliance, states must balance their desire for autonomy with their desire for security: there is a trade-off between these two preferences. A major power

could form an alliance with a minor power that reduces its security but raises its autonomy through concessions made by the minor power to secure the alliance. These concessions could include military bases that provide strategic locations for the projection of power or agreements that allow major power to intervene in the minor power’s domestic politics in the future. (…) The minor power will make autonomy concessions to the major power in return for the security the major power can provide. (Morrow 1991, p. 914)

In principle, the type of concessions that minor powers would like to make could include purchasing weapons systems from the dominant power in an asymmetric alliance. This would be a tangible benefit, increasing the major power’s autonomy and the minor power’s security. This is particularly true in a post-World War II alliance context where the character of war, marked by an important volume of fire on the battlefield and a requirement for mobility and concealment (Biddle 2005), incentivises integrated alliance warfighting through greater interoperability (Schmitt 2018). For minor powers, purchasing weapons systems provided by the major power would certainly be a way to increase interoperability. Indeed, quantitative studies seem to indicate that alliances increase the arms trade among allies (Callado-Muñoz et al. 2019, Lambert Carter 2019). Moreover, detailed empirical studies abound about the effect of alliances on arms purchase decisions, for example, the Canadian decision to purchase “Leopard” Tanks for Canada’s NATO Brigade in the 1970s (Maas 2017), or more recently states’ decisions to purchase the F-35 fighter jet produced by the United States (Vucetic and Tago 2015; Von Hlatky and Rice 2018).

Yet, evidence shows that at least within NATO, the major power is far from being the only supplier of defence systems to other alliance members, as the existence of large arms industrial bases in France, the United Kingdom, Italy or Germany demonstrates. Moreover, US weapons are not guaranteed to win competitions for standards or procurement organised by NATO or NATO member states. This is best illustrated by the fact that during the Cold War, NATO’s Main Battle Tanks (MBTs) were designed and produced in the US (M-48, M-60, M-1), France (AMX-30, Leclerc), Germany (Leopard 1 and 2) and the UK (Chieftain and Challenger), while the Warsaw Pact’s MBTs (T-55, T-62, T-64, T-72, T-80) were all designed in the USSR, with some tanks, such as T-72, being produced under licence in other Warsaw Pact countries (Chalmers and Unterseher 1988). A similar observation could be made about the NATO and Warsaw Pact jet fighter fleets: the NATO fleet was much more diverse than the Warsaw Pact fleet owing to countries’ development of their own designs.

It seems that not all asymmetric alliances favour the major power in the same way when it comes to arms production, and that alliance management matters. Thus, we introduce a distinction between liberal asymmetric alliances and coercive asymmetric alliances and argue that this distinction in terms of alliance management creates incentives for smaller countries to develop, or not, an arms industrial base. Based on the existing literature, we define liberal asymmetric alliances as alliances in which the major power incentivises minor powers to act in certain ways and coercive asymmetric alliances as alliances in which the major power forces minor powers to act in certain ways, with NATO as a primary example of the former and the Soviet Union as an illustration of the latter. As explained below, the liberal asymmetric alliance accounts for the agency of minor powers in the decision to develop an arms industry.

This distinction echoes the difference established by Snidal (1985) between coercive and benevolent leaderships in international regimes. Building on the wave of research related to hegemonic stability theory, which was prevalent in the US International Political Economy scholarship of the 1980s (Cohen 2008), Snyder argued that hegemonic states can provide public goods in two substantially different manners: either through benevolence or coercion. In the benevolent approach, there is no centralised coercive authority, either because the leader lacks capabilities or because they exercise restraint. In contrast, the coercive model implies that the hegemonic actor will be able to coerce others to contribute to the provision of the public good.

Hence, both NATO and the Warsaw Pact can be conceptualised as heavily integrated regimes dominated by a hegemonic actor and focusing on providing the public good that is collective security. However, while the US has been a “benevolent hegemon”, the USSR was not: “many analysts and states reached the determination that while the United States often acted in ways that were frustrating and selfish, it was nevertheless more benevolent (or less predatory) than Moscow” (Brooks 2012, p. 36). This approach is consistent with the scholarship which identifies NATO as an exceptional alliance, notably owing to its liberal features (Thies 2009, Webber and Hyde-Price 2015, Johnston 2017).

As mentioned, states must balance autonomy and security within an alliance framework. Major states can have an interest in favouring their arms industries but simultaneously benefit from minor states, increasing their own security. Thus, they have two main options: either let minor states answer their security needs as they see fit (which includes letting them decide on their procurement decisions), thus sacrificing a degree of autonomy, or maximising their autonomy by coercing alliance members into adopting specific doctrines or weapons systems. In the former situation, minor powers have several options: develop their own weapons systems, purchase from external suppliers (likely in the alliance), or a combination of both. In other words, the type of alliance management adopted by the major power in an asymmetric alliance may or may not provide structural incentives for minor powers to develop an arms industrial base: there is thus a major difference in terms of incentives between liberal asymmetric alliances and coercive asymmetric alliances.

If the type of alliance management allows for it, minor powers can develop an arms industrial base, depending on how they value “the pursuit of wealth, the pursuit of power, and the pursuit of victory”, which are the three main drivers of the acquisition of weapons systems (Krause 1992, pp. 13–18).

To understand the effect of the type of asymmetric alliance on states’ decisions to develop an arms industrial base, we need country case studies who were previously in the Warsaw Pact (coercive asymmetric alliance) and then joined NATO (liberal asymmetric alliance). Except for the Soviet Union, the Warsaw Pact members were Albania, Bulgaria, Czechoslovakia, East Germany, Hungary, Poland; and Romania. Of these, only Bulgaria, Czechia¹ and Poland have a robust arms industry today. Czechia remains the second largest central European arms producer (Kimla 2023) and thus is a representative example of this group of countries. To explore causal mechanisms, we need to include another set of countries, tied even closer to the Soviet Union, the USSR Republics. Apart from Russia, these included Armenia, Azerbaijan, Belarus, Estonia, Georgia, Kazakhstan, Kirghizstan, Latvia, Lithuania, Moldova, Tajikistan, Turkmenistan, Ukraine, Uzbekistan. In this group, only the three Baltic states have joined NATO. Among them, Estonia is the only one that has actively developed an arms industrial policy, with distinctive niche capabilities focused on cyber and emerging technologies, starting from a baseline comparable to the other Baltic states of mainly MRO capabilities (Kolin 2015, p. 2). The two case studies also allow to contrast a relatively “large” with a relatively “small” arms producer (at the scale of Central European states). We expect that Estonia being smaller should have had more agility in steering its arms industrial policy to meet NATO requirements.

For each case study, we first explore the historical setting under which the arms industry was developed during the Cold War. We expect that, during the period of coercive asymmetric alliance, neither Czechoslovakia nor Estonia had much room to direct their arms industry development. We then expect that in the run-up to and since NATO membership, both countries were incentivised to develop an arms industry geared towards production of equipment valued within the NATO alliance.

Although the European Union (EU) is not a military alliance, we also touch upon to what extent membership of the EU may have interfered with the impact of NATO membership on Czech and Estonia’s arms industrial strategies. Both countries joined the EU in 2004, and it is empirically difficult to purely disentangling NATO-related considerations from EU-related considerations in defence policymaking: while it is possible to hierarchise which organisation had a greater effect at specific moments, they cannot be fully separated. A growing body of literature argues that NATO continues to be the collective security provider while the EU’s role as an arms industrial power is emerging (Besch and Quencez 2022, Matlé 2023). This article contributes to this debate as our findings lay some support to this new “division of labor” argument. The paper also indirectly touches upon whether liberal asymmetric alliances “incentivise” arms industrial policies to go in a certain direction, or merely “allow” countries to develop their own policies. The study’s initial finding is that NATO’s effect works mostly through the possibility for smaller states to integrate transatlantic industrial networks: the EU mechanisms appear to have more influence in that respect.

Methodologically, we conduct a comparative process-tracing (CPT) of the development of the arms industrial bases in Czechia and Estonia since the Cold War. The objective is to investigate the importance of the type of asymmetric alliance in creating incentives for the development of arms industrial bases. CPT proceeds in two steps. First, for each studied case, the processes leading “from A to B” are reconstructed and analysed in terms of ideal-type social mechanisms. In the second step, these processes are compared using the identified mechanisms and ideal-type periodisation (Bengtsson and Ruonavaara 2017).

This approach allows us to focus on the comparison between the two states and to identify the key mechanisms at play in the evolution of their arms industrial bases. The case studies relied on secondary literature, official government and industry documentation, expert reports, and a small set of semi-structured interviews conducted between November and December 2021.² The interviewees were selected to represent viewpoints from the industry, from the government in each country. The interviewees were selected also with a relative length of experience to have witnessed the turnaround between the end of the USSR and NATO membership and help understand changes in the arms industrial policy. Questions asked related to the situation pre-1990, the evolution of arms production over time, and the role and influence of NATO membership in decision-making processes related to the arms industry. These interviews thus contributed to the process tracing approach, in addition to the primary and secondary sources explored through desk research.

The arms industry in Czechia

This section examines the evolution of the arms industry in Czechia from the Cold War to 2020, showing the importance of opportunities and incentives in an asymmetric alliance. We expect the Czechoslovakian arms industry to be heavily dependent on instructions from the USSR, thus shaping its development and structure. Indeed, we observe that during the Cold War, the Czechoslovak arms industry was geared toward strengthening the USSR’s security goals within the Warsaw Pact and its international network of proteges. In the post-Cold War context, we expect that the prospect of NATO membership to have incentivised the arms industry to explore cooperation and market opportunities with members of the alliance. Indeed, the collapse of the USSR led to a reorganisation of the Czech arms industry, which then capitalised on the expertise acquired during the Cold War and tried to leverage the opportunities created by NATO membership with mixed success.

The Czechoslovakian arms industry in the USSR

During the Cold War, the Czechoslovak arms industry was an important element of the USSR’s defence-industrial strategy. Czechoslovakia was one of the few central European countries where the Second World War had not destroyed the industrial landscape. After the communist takeover in Czechoslovakia in 1948, the country was integrated into industrial plans developed by the USSR through the framework of the Council of Mutual Economic Assistance (COMECON), which Prague joined in 1949 (Waisová 2012).

After the Warsaw Pact was established in 1955, Czechoslovakia became the cornerstone of the USSR’s industrial strategy. The objective was to sustain national armed forces of a significant size (145,000 soldiers for the Czechoslovak army alone), but also to build the industrial base necessary to export soviet-designed weapons systems to the USSR’s allies in the world, thus contributing to Soviet defence diplomacy.

However, the cooperation was deeply asymmetrical. The weapons systems that were fully manufactured in Czechoslovakia were one or two generations older than those that were fully manufactured in the USSR. For example, between 1955 and 1980, the T-55 tanks were the only tanks fully manufactured in Czechoslovakia, whereas the more modern T-62 and T-64 tanks were simply assembled in the country. When, in the 80s, Czechoslovakia was authorised to fully manufacture the T-72 tank, it was not the most advanced system in the USSR, which was producing the more recent T-80 (Crane 1988b). Moreover, there was an imbalance between the Czech and Slovakian parts of the country: while two-thirds of the arms industrial capability was located on the Slovakian side, the Czech part was mostly concentrated in the aeronautic and telecommunication industries (Tuma 2006). Overall, Czechoslovakia was one of the world’s main producers of jet trainer aircraft, tanks and infantry fighting vehicles.

The USSR imported a relatively small proportion of the Warsaw Pact’s arms production, most of which was exported to the USSR’s partners worldwide or to other Warsaw Pact Countries (Crane 1988a). Czechoslovakia played an important role in this defence diplomacy, becoming the 7th largest exporting country between 1984 and 1988. At that time, arms production amounted to 11% of Czechoslovakian industrial production. Its relationship with Syria is illustrative. During the Cold War period, Czechoslovakia supported Syria through arms transfers and knowledge transfer via the deployment of Czechoslovakian trainers. By the end of the 1980s, Syria had accumulated debt to Czechoslovakia worth US$900 million (Adamec 2013).

This brief overview confirms that in a coercive asymmetric alliance, Czechoslovakia had little leeway to establish its own priorities, but functioned mostly to support the USSR’s needs, either as a producer of weapons systems to equip other Warsaw Pact countries or as a support for the USSR’s partners worldwide.

The end of the cold war and the transformation of the Czech arms industry

The Czech arms industry has experienced a deep crisis following the fall of the USSR. State support for the industry was terminated abruptly. The disintegration of the Warsaw Pact and the closure of foreign markets that used to be Soviet clients led to a collapse in demand for Czechoslovak-produced weapons systems. The global socio-economic transformation of the region to market-oriented economies also impacted the defence sector (Kiss 1995). Moreover, the government decided that the state would stop subsidising the sector. Consequently, the volume of arms production and exports was halved in 1991, and half of the country’s arms industries were insolvent by the end of that year.

The peaceful separation between Czechia and Slovakia in 1992 led to the gradual establishment of a public policy towards the Czech arms industry. It first underwent several waves of privatisation (Kiss 1997). Since the Czech part of the former Czechoslovak arms industrial base specialised in military electronics, telecommunications and aeronautics, the government decided to adopt a policy of “selective interventionism” by strategically investing in specific companies, notably in the aviation industry (Kiss 2014).

Simultaneously, Czechia applied for NATO membership, an objective which became the driving force of the transformation of the Czechian armed forces. “Atlanticization” was thus, more than Europeanisation, a driver of military change (Kříž and Chovančík 2013). Prague joined the “Partnership for Peace” programme in 1994 and participated in 210 multinational military exercises between 1994 and 1998 in this framework. In 1996, the Czech armed forces published the Concept for the Army of the Czech Republic Development, which provided the roadmap for military transformation to NATO standards, including doctrinal adaptations, reform of the C3 (command, control and communication), language training, air defence and logistical reform. Czechia was invited to apply for NATO membership in 1997, and officially joined the alliance in 1999 (Svěrák 1999). In 2004, the Ministry of Defence published a National Armaments Strategy aimed at streamlining the sector’s policies. Among the core objectives of the strategy, which also includes the provision of the Czechian armed forces, one can notably read (Czechia Ministry of Defence 2004):

• “meeting of NATO standards in the sphere of armaments necessary for the achievement of operational capabilities (…)

• Cooperation with the partners in NATO and European Union (EU) on the joint projects leading towards joint security support (…)

• Securing of national projects within NATO Security Investment Programme (NSIP) and Foreign Military Financing (FMF) programs implemented by the USA resources”

This first strategy was complemented in 2013 by a Strategy for the relationship between the Government and the Defence and Security Industry of the Czech Republic, which stated that

the regulation in private business should be minimal except to ensure essential interests of the Armed Forces [and that] the role of the “power ministries” is to work on the “harmonization of required defence capabilities in NATO and the EU” while attempting to create the conditions for economic growth by sponsoring “research and development, fostering innovation and ensuring access to international markets.” (Michelot and Milan Šuplata 2016, p. 5)

Together, these two documents clearly illustrate officials’ perception that the perspective of alliance membership created opportunities for the Czechian arms industry in two ways: by developing systems that would be interoperable and up to NATO standards, and thus fit for new markets, and by providing opportunities for joint ventures with companies based in NATO countries. An interviewee goes as far as saying that “NATO membership was a major factor in the structuration of our arms industry”.³

A snapshot of the Czechian arms industry in the late 2010s provides an idea of the extent to which NATO membership provided such new opportunities. In the land domain, the key company CSG produces the armoured personal carrier (APC) Titus in partnership with the French land-manufacturer Nexter and has obtained a licence from General Dynamics to produce the APC Pandur II. Overall, the partnership with General Dynamics has a structuring impact on the group: “the strategic partnership with General Dynamics allows CSG to build on established markets based on the modernization and servicing of old systems (…) and to produce new higher-tier vehicles also competitive on Western markets” (Chovančík 2018, p. 275). In the aviation sector, the key player Aero Vodochody is involved in the full production of S-76 helicopters and UH-60M Black Hawk cockpits for Sikorsky, some components of the C-27J Spartan for Leonardo/Lockheed Martin as well as components of the F/A-18E/F (also for Lockheed Martin). It has also exported 20 L-159 multipurpose fighters to the US for training. Among radar technologies, ERA has successfully exported its VERA passive radio-location system, which was acquired by the NATO Communications and Information Agency. Finally, in small arms, CZUB has found several successes in its production, notably in the US and Europe (Chovančík 2018). Overall, in 2020, 52% of Czech export licences were destined for NATO countries (Czechia Ministry of Industry and Trade 2021). As one interviewee mentioned, “since we are a comparatively small country, it is important for the Czechian arms industry to establish key partnerships”.⁴ NATO membership creates opportunities to develop such partnerships.

By 2020, Czechia’s top 5 companies, ranked by arms sales (revenue generated from the sale of military products and services) showed the continued specialisation on traditional military equipment such as armoured combat vehicles, training aircraft and small arms and light weapons (Table 1).

Table 1. Czechia’s top 5 arms companies, 2020.

Rank	2020	Arms sales €m	Total sales €m	Key sectors
1	Czechoslovak Group	262	568	Armoured and unarmoured vehicles; Small arms and light weapons; Ammunition; Surface-to-Surface Missile (SSM); Radio systems; Artillery armaments components; Air sensors; Avionics; Maintenance, Repair and Overhaul (MRO); Training services;
2	Aero Vodochody Aerospace	63	94	Training aircraft; Airframe and structure MRO; Training services
3	Ceska Zbrojovka	45	178	Small arms and Light weapons
4	LOM Praha	36	38	MRO; Training services; Hardware components
5	Omnipol	20	22	Radio systems; Electronic Warfare (EW) systems; Command and control systems of systems; Air sensors; Ground sensors; MRO

Source: Stockholm International Peace Research Institute. The authors wish to thank Lorenzo Scarazzato, research assistant at SIPRI, for data collection assistance.

Yet, the perceived incentives created by alliance membership led to mobilisations and transformations of the Czech arms industry that did not always have the intended benefits. In the 1990s, the Czech government decided to specifically support the Aero Vodochody company, producer of L-159, due to its reputation for developing high-quality products and having access to international markets. In 1998, Aero entered a joint venture with Boeing, a move that was highly hailed as a success at the time because decision-makers assumed it would automatically enhance efficiency, sales and profitability. Aero received funding from the government and started adapting its organisation to implement the project. However, Boeing failed to promote L-159, and by 2004, the Czech government acknowledged that the American company had not delivered on its promises. As such, concentrating the country’s scarce resources on one project at a single company proved to be a mistake. Had the project worked as expected, it would have lifted the entire sector. Instead, its failure made the entire sector vulnerable: Recovery for Aero and a handful of entrepreneurial Czech firms took nearly a decade” (Kiss 2014, p. 202). This endeavour shows attempts to integrate the domestic arms industry with that of the major power within NATO. It also responded to an overall economic rationale, according to which cooperation with foreign partners was a way to salvage the sector from its post-Cold War crisis (Kiss 1997, p. 45).

Another example is the Czech participation in a missile defence system. In 2002, the Bush administration announced its intention to establish a ballistic missile defence system in Europe, with a radar base in Czechia and interceptors in Poland. Czech decision-makers perceived the situation as an opportunity to benefit from offsets, particularly in research and development. The government expected that the US would finance multiple areas of research, including defence, robotics, optics and nanotechnology, with large benefits for the arms industry. A Status of Forces Agreement was signed in 2008 but, in 2009, the Obama administration cancelled the project and replaced it with a new system, the European Phased Adaptive Approach (EPAA), which substantially reduced the offsets for Czechia. Czech politicians thus invested enormous political capital amount to support an unpopular project, but ended up being cut off from the benefits, which have apparently failed to materialise for the Czech arms industry (Kiss 2014, p. 217). As one interviewee mentions: “the entire sector was standing ready to benefit from this cooperation and had worked hard in order to establish itself as a credible partner”.⁵ These two examples of unsuccessful industrial cooperation, in turn, further demonstrate the extent to which Czechia has been willing to cooperate with the US industry because of the perception that the alliance with Washington within a NATO framework would provide greater market opportunities.

In comparison, the participation of the Czech arms industry to EU-supported projects is still limited. Three companies will participate in three projects within the European Defence Industry Development program (EDIDP), which is comparatively few, out of a total of 26 projects. The impact of the establishment of the European Defence Fund (EDF) remains to be seen, but it seems that the Czech arms industry is interested in developing partnerships through this instrument. However, in line with the importance of the transatlantic relationship for the Czech arms industry, Prague was one of the countries that opposed a “buy European” principle in the EDF.⁶

The arms industry in Estonia

Estonia became a NATO member in 2004, 13 years after the restoration of independence from the USSR. We first examine causal mechanisms by looking at the development of the arms industry in Estonia before and after the restoration of independence. Based on our analytical framework, we should observe the development of a domestic arms industrial base following 1991. Second, we examine the extent to which policy support and commercial incentives in developing the domestic arms industry are driven by NATO. The post-2004 period should see clear indications that NATO was a motivation in the arms industrial policy and NATO requirements should be seen as a driver for industry development. However, there are only mixed results in this regard, and the EU, although not a military alliance, has created new incentives for its member states which may take precedence over NATO’s.

Estonia’s arms industry development after the fall of the Soviet Union

The Soviet Union occupied Estonia between 1940 and 1991, living under the regime of the Estonian Soviet Socialist Republic (ESSR). The ESSR’s economy was then directed by the central Soviet government, no private enterprise was possible, and all industries were nationalised (Estonia Museum of Occupations and Freedom 2022). Estonian scholars considered that Moscow had employed Estonia’s industrial capacities to the main benefit of the USSR, describing the ESSR economy as a “colonial economy” which underwent “forced over-industrialization” (Klesment 2009).

Under these circumstances, the arms industrial capabilities of the ESSR were limited. Interviewees specified that Estonia hosted some limited capabilities useful to the USSR, including manufacturing black boxes for aircraft fleets, including military aircraft, some space technology enterprises and the assembly plant for the SS20 ballistic missiles.⁷ However, these cannot be considered a “domestic” arms industry, given that the missiles were destined for the Soviet armed forces. An example of a cyber-security company, Cybernetica, illustrates the transformation of the sector between the pre- and post-Soviet era. This company was previously a research institute of cybernetics within the Estonian Academy of Science. Even though it received funding from Moscow, “this period [was] characterized by the subordination of all fields of activity to the control of the central government” (Estonian Academy of Sciences 2022). The research institute of cybernetics then became a company after the end of the USSR, in 1997 (Cybernetica 2022).

After the USSR collapsed, the situation “changed radically”. “It was a new country, a new economy, Estonia wanted to be efficient.”⁸ The new Estonian government’s willingness to develop a modern economy first hit a bump on the road; however, when it came to the arms industry. The new regime inherited some military manufacturing structures dating from before World War II. Even though Soviet facilities had been closed, and companies privatised and reconverted to civilian production, Estonian defence leadership attempted to revive one of the pre-occupation arsenals. This arsenal produced ammunition, gun powder, and small arms and offered maintenance capabilities for small arms and armoured trucks.⁹

The newly formed state-owned firm, E-Arsenal, under the tutelage of the Ministry of Defence, quickly ran into difficulties. By 2003, the Ministry of Defence attempted reorganisation, due to the company’s high indebtedness (Estonia Ministry of Defence 2003). By 2005, Estonia’s National Audit Office recommended the liquidation of the company, on the grounds that it “ha[d] generated loss to the state for years” (National Audit Office of Estonia 2005). Not only was the company losing money, but its products were also expensive and of poor quality.¹⁰ In 2010, the Ministry of Defence “suspended the economic activities” of E-Arsenal (Estonia Ministry of Defence 2010). Finally, in 2012, the company was liquidated (Filippov 2012).

In the meantime, in 2009, the Estonian Defence Industry Association (EDIA) was established (EDIA 2022). EDIA’s creation was partly due to E-Arsenal’s failed experience.¹¹ A study of its members revealed some characteristics of Estonia’s contemporary arms industry.¹² At the time, 123 registered members were categorised into specialised groups: clothing and equipment, cyber and communications, (intelligence, surveillance, target acquisition and reconnaissance) and risk management, life support and protection, manoeuvre and maintenance, space technology, and training and simulation. Excluding international firms’ subsidiaries and governmental institutions from the list, EDIA includes 88 Estonia-based firms, mostly SMEs. This total is distributed evenly, one-third each, between dual-use, defence-focused and non-defence companies.¹³ Overall, the subgroups with the largest number of Estonian companies were manoeuvre and maintenance (31 firms) and cyber and communications (29 firms). The following largest groups were ISTAR & Risk management, and life support & protection (24 firms each).¹⁴

This is representative of Estonia’s arms industry evolution. EDIA’s members were originally non-defence companies trying to grow in a new market, for instance commercial companies, who were looking at selling retail goods to the armed forces, such as supermarket chains.¹⁵ However, EDIA newer members are increasingly “new innovative companies”, focusing on “high tech, cyber defence, and robotics”. This was a deliberate strategy: given that the international market was filled by companies focusing on “heavy metal”, “Estonia realised that new technology would be [its] edge”.¹⁶

This evolution is reflected in Estonia’s top 5 arms companies in 2020 (Table 2). Three out of the top 5 companies focus on IT components or unmanned systems.

Table 2. Estonia’s top 5 arms companies, 2020.

Rank	2020	Arms sales €m	Total sales €m	Key sectors
1	Eolane Tallin	14	48	Components
2	Telegrupp	12	17	Computer and IT components;
3	Milrem Robotics	8	9	Unmanned ground vehicles
4	Milworks (Patria)	5	5	Maintenance, Repair and Overhaul (MRO)
5	Defendec	3	3	Communications systems; Computer and IT components

Source: Stockholm International Peace Research Institute. The authors wish to thank Lorenzo Scarazzato, research assistant at SIPRI, for data collection assistance.

NATO and EU as opportunities and the incentive to develop Estonia’s arms industry

We now search for causal mechanisms between NATO membership and Estonia’s arms industrial development, first from a policy perspective and second from an industry perspective.

The Estonian government released its first arms industrial strategy in 2013, for the period 2013–2022 (Estonia Ministry of Defence 2013). It was updated in 2017, for the years 2017–2019 (Estonia Ministry of Defence 2017a). One of the strategy’s pillars is an annual defence research grant, started in 2013 alongside the arms industrial strategy. In the first year, €260,000 was allocated to the winners of the competition. In 2022, approximately €700,000 was budgeted for the competition (Estonia Ministry of Defence 2022). This large increase shows the Estonian government’s commitment to support its domestic arms industry.

Was NATO membership a driver for Estonia’s government to support its arms industrial base? In 2013, Estonia’s leading defence and security research centre, the ICDS, considered that developing arms industrial capabilities in Estonia would be valued by the country’s allies, and be “instrumental in increasing Estonia’s visibility in NATO and in the EU”. Furthermore, developing local defence firms could attract international prime contractors to establish local joint ventures or integrate Estonian firms into their supply chains, which in turn would enhance Estonia’s importance in the eyes of major allies (ICDS 2013). A later ICDS report indicated that defence innovation in Estonia would contribute to showing that the country is not a “free rider” in the Alliance (Raud 2018, p. 12).

Notwithstanding these analyses’ importance in understanding the interpretation made of Estonia’s arms industrial policy choices, the link to NATO is less obvious when studying more closely government documentation. NATO mentions are rare, and the link has not been established directly. The arms industrial policy 2013–2022 notes a reverse link: that investments from international defence firms within Estonia would enhance the deterrent factor. Implicitly, it could be understood that supporting local defence firms can help attract such international investments, however it is not clearly mentioned (Estonia Ministry of Defence 2013, p. 2). The Ministry of Defence’s website dedicated to national defence development does mention that international arms industrial cooperation “helps to strengthen the country’s relations with its allies” (Estonian National Defence Development 2022). This goes in the same line of argument, according to which, if the Estonian arms industry is attractive for international defence OEMs, this strengthens the interest in Estonia’s defence and security from its allies.

This tenuous link with NATO membership on the side, the overall rationale for Estonia’s arms industry support is closer to what can be observed in other arms-producing nations, i.e. the willingness to develop a local independent capability in case of conflict, and to stimulate economic development and highly skilled competences in the country, as evidenced in the 2013 policy and its 2017 update (Estonia Ministry of Defence 2013, p. 2; 2017a, p. 2). Yet another motive for the arms industrial policy of 2013, was the need to “create the conditions for export markets”,¹⁷ and to “develop an internationally competitive industry”.¹⁸ In this regard, the government appears to be more in the backseat, supporting industry. Indeed, the development of the arms industry in Estonia over the past 10–15 years appears to have been driven by the private sector, with government support. Hence, from a policy perspective, NATO does not appear to have been a major incentive to develop local defence firms. But from the industry perspective, has this been the case since Estonia became a member of NATO?

The key strength of the Estonian arms industry lies in the innovative emerging military technologies, such as artificial intelligence, military robotics, cyber defence. The ICDS argued that the success of companies like Milrem (UGVs) or Threod (UAVs) would not have emerged without the financial support of the Ministry of Defence at the R&D stage (Raud 2018, p. 8). Such emerging military technologies are a priority for NATO and its member states, but this can be said of any leading military power today. In this regard, the direction of Estonia’s arms industry cannot be directly connected to its NATO membership.

Also from the industry’s perspective, the link appears tenuous. Estonian companies need to export to survive, given the small domestic defence market. In 2020 (latest data available), the annual turnover of the arms industry was €200 m of which exports accounted for 42% (Estonian National Defence Development 2022). While there is no breakdown of who the main international customers are, none of the interviewees mentioned that NATO countries were specifically a priority market.

A company CEO said that its company considered Europe to be its home market.¹⁹ But another representative stated that his company had an international outlook, beyond just Europe.²⁰ This was also the point of view of the two key stakeholders interviewed jointly, who also highlighted that their markets were not just in Europe. The ambitions for Estonian defence firms were to sell also to the Gulf and South Asia, as primary targets.²¹ The interviewees also recognised that, although the United States is Estonia’s most important ally, the relationship was not that smooth in terms of defence markets. The “Buy American Act” in US defence markets made it more difficult to supply the US Department of Defense.²² Another important motive for Estonian companies to look towards the American market is that, for Estonian start-ups, the venture capital needed for growth is not in continental Europe, but primarily in the Silicon Valley (and London).²³

Even though NATO or its member states are not seen particularly as the priority market for Estonian defence firms, NATO is perceived as where the military – as a customer – think about technologies. Therefore, it is increasingly important for leading Estonian defence companies to establish regular contact with NATO to inform and possibly shape policy decisions from the end-user perspective.²⁴

The area where the interconnection between Estonia’s membership in NATO and the development of its arms industry may be more evident is in the cyber domain. In 2008, NATO established the Cooperative Cyber Defence Centre of Excellence (CCDCOE) in Tallin. Since then, Estonian companies such as CybExer Technologies and Cybernetica have been selected for NATO-supported procurements (EDIA 2020a). The MoD established the Cyber Security Exercises and Training Centre CR14, which brings together parts of the Estonian defence establishment, NATO’s CCDCOE, as well as local firms (Jermalavičius and Hurt 2021, p. 9–10, Estonia Ministry of Defence 2019). This could provide further opportunities for Estonia’s cyber-industry to obtain NATO-sponsored contracts. However, in this case of cyber-defence, it seems that NATO rather sought to build on pre-existing Estonian capabilities, rather than the Estonian arms industry developing cyber products to meet NATO requirements.

Our analytical framework puts less emphasis on the EU, given that it is not a military alliance. It emerged however from the empirical research that the EU also seems to have an important role in shaping the direction of the Estonian arms industry. Indeed, after the establishment of the Preparatory Action for Defence Research (PADR, 2017–2019, €85 m), the following European Defence Industrial Development Programme (EDIDP, 2019–2020, €500 m) (EC 2022a), all preludes to the European Defence Fund (EDF, 2021–2026, €8b., incl. €2.7b. for defence research) (EC 2022b), EU calls for arms industry cooperation appear as significant opportunities for Estonia’s arms industry. This opportunity was clear to the Estonian government, who, in 2017, took over the presidency of the EU Council, making the adoption of the EDF one of their priorities (Estonia Ministry of Defence 2017b). From the MoD’s standpoint, “the EDF is seen as a main fund for companies to develop; it is important from an Estonian perspective” (Estonia Ministry of Defence 2021). The industry also sees the EDIDP and the EDF as positive measures, not only because of the additional source of funding, but also because from the start, the projects are cooperative, and because they focus on new technologies, it is easier for EU member states’ armed forces to agree on joint requirements. Another aspect is that EU financing instruments aim to promote SMEs, and Estonia’s arms industry is mostly composed of such small firms.²⁵

Estonian defence companies received approximately €6 m. from the 2020 EDIDP call for proposals (Estonia Ministry of Defence 2021), and €10 m. from the 2019 call (EDIA 2020b). The EU further supports Estonia’s arms industry in another way by financing the Defence Industry Cluster (part of the EDIA) with €600,000 (Estonia Employers Central Union 2021).

The importance of the EU’s arms industrial support tools for shaping the direction of Estonia’s arms industry thus appears more directly relevant than NATO membership. As this result also emerged in the Czechia case study, this finding complements our analytical framework on the impact of alliances on arms industry development.

Conclusion

This paper has explored the role of alliance management in shaping the development of arms industries in small states. We considered that the type of alliance management creates specific incentives which structurally influence the development of arms industries. In a coercive asymmetric alliance, small states have little to no say about their arms industry. Czechoslovakia was primarily used by the USSR as an arms manufacturer with an eye towards exportation to foster Moscow’s diplomatic interests, while Estonia had little to no arms industry per se, apart from some limited and specialised manufacturing capabilities. However, the influence of liberal asymmetric alliance membership on arms industry development is not clear cut. Potential incentives are interwoven with other mechanisms which came into play to explain the trajectories of the Czechian and Estonian arms industry after the end of the Cold War. Czechia could benefit from an already established arms industry that has developed skills in specific high-technology sectors, including aeronautics and electronics. Combined with the political objective of “Atlanticization”, the prospect (and later realisation) of NATO membership created incentives for Czechian companies to cooperate with US and European firms to gain market access. This strategy was successful to various degrees depending on the sectors and the companies, but overall, the shift towards a liberal asymmetric alliance led Prague to capitalise on existing assets to integrate its companies within established industrial networks. Contrary to Czechia, Estonia had to develop an arms industry almost from scratch, and the traditional factors explaining the development of arms industries (self-reliance, profits) go a long way to explain the initial development of the Estonian arms industry. NATO membership plays a more indirect role, primarily to gain information about potential customers’ needs and requirements. The EU, rather than NATO, may have a greater influence on the development of Estonia’s arms industry, thanks to the new funding sources it has adopted in recent years. NATO’s launch of the Defence Innovation Accelerator for the North Atlantic (DIANA) in October 2021 could change this perspective. However, it remains to be seen how it will be implemented in the coming years and how it articulates with the EU’s already existing financial instruments (NATO 2021).

Overall, we show a differentiated effect of alliance membership, but an effect nevertheless which adds to the understanding of the drivers and shapers of small and middle states’ arms industries. This opens prospects for more fine-grained investigation on the causal mechanisms linking alliance membership and the development of arms industries. By exploring the role of alliances in arms industry development, this paper adds a further dimension to the economic versus strategic dilemma at play in most countries’ national arms industrial policies. This paper breaks ground by combining the literature in alliance management and defence economics. It thus opened a new research avenue, notably on the effects of liberal asymmetric alliances. The mechanisms within the liberal alliance which steer arms industrial policy decisions in allied member states can be explored further in future research.

Furthermore, the analytical framework presented here will have a renewed contemporary relevance as both NATO and the EU are in the process of enlargement to new member states. Finland in 2023 and likely Sweden in 2023 or 2024 joined NATO, after having benefited from the EU’s arms industrial policies. The respective role and influence of each organisation on their members’ arms industries could therefore be further tested with these two case studies. Ukraine’s prospective NATO and EU membership would provide yet another ground for exploring the incentives each membership provides, for another country which inherited arms industrial structures from the Soviet Union era. Considering that there is no coercive asymmetric alliance in the world today, the study is mainly applicable to NATO. However, the research could extend to other US alliances. For instance, the AUKUS agreement between the United States, the United Kingdom and Australia is already influencing Australia’s arms industrial policy. This could be another case study for future exploration.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 In 2016, the Czech government approved the term “Czechia” as the English official short name, and the country is listed as such by the United Nations and the European Union. This article uses the term “Czechia” instead of “Czech Republic” accordingly.

2 See Appendix for interview coding. All interviews are anonymised.

3 CZH2

4 CZH1

5 CZH3

6 CZH1, CZH3

7 EST5

8 EST3

9 EST5

10 EST5

11 EST5

12 Estonian Defence and Aerospace Industry Association, Cluster and Members. Available at: https://defence.ee/cluster-and-members/ [accessed 30 Aug. 2021].

13 Assessment based on the definition of the EU military list, which considers defence products as those specially designed or modified for military use (Council of the European Union 2020).

14 Firms can be involved in multiple categories.

15 EST1

16 EST4

17 EST4

18 EST5

19 EST2

20 EST3

21 EST4

22 EST2

23 EST1

24 EST2

25 EST2

Appendix

List of interviews

Table

Interview Code	Date of the Interview	Interviewee position
CZH1	Nov 2022	Senior military officer
CZH2	Nov 2022	MoD official
CZH3	Dec 2022	Industry representative
EST1	Nov. 2021	Think tank expert
EST2	Nov. 2021	Company CEO
EST3	Nov. 2021	Company Board Chairman
EST4	Dec. 2021	Defence Industry Association representative; 1 MoD official
EST5	Dec. 2021	Defence Industry Association representative; 2 MoD officials

(EST4 and EST5 were conducted with two same interviewees, however a second MoD representative joined the second meeting).