THE IMPACT OF DEFENCE INTEGRATORS AND STANDARDS ON VERTICAL AND HORIZONTAL INNOVATION IN THE DEFENCE INDUSTRY

Abstract

This paper analyses the extent and character of product innovation in defence technologies where there are strong network effects, but where there is not a generally accepted system of open standards. Specifically, we examine the implications for innovation from the development of network‐centric defence agencies accompanied by the creation of system integrators in the defence industry. The results show that although these developments are expected to have a number of positive impacts, such as enhanced security and gate‐keeping of the relevant technologies, they are also likely to have an adverse effect on the available variety of new defence products.

Keywords:

• Defence industry
• Innovation
• Integrators
• Network
• Standards

ACKNOWLEDGEMENT

An earlier version of this paper was presented at the 11th Conference on Economics and Security, July 2007, Bristol, UK. The authors are grateful to the editor and two referees for helpful comments on an earlier draft, but the authors alone are responsible for any remaining errors.

Notes

¹ Although it can be acknowledged that early email software packages were not very user‐friendly when compared with today’s software. That fact may have slowed the diffusion of email, and hence slowed the development of network effects, but in itself was, at worst, a minor distraction to those who were already email users.

² The best known example is the pathway and target identification dependence of cruise missiles like Tomahawk; without space‐based services the ownership of the relevant missile technology would be of limited use to any owner for targeting and navigation purposes.

³ This section draws on Swann (2000).

⁴ The work of Lancaster was anticipated by the unpublished work of Gorman and Ironmonger – later published as Ironmonger (1972) and Gorman (1980).

⁵ This section draws on Swann (2000, 2007). Several other papers examine similar questions about product innovation in the presence of network effects and open standards – i.e. Church and Gandal (1992), Economides and Salop (1992), Langlois and Robertson (1992).

⁶ This is consistent with most of the literature on patent breadth and innovative entry (e.g. Waterson, 1990) where broad patents deter entry. Most of these apply to a product space of fixed dimensions. By contrast, Swann (1990) found that when companies compete in a variable dimension product space, patent protection in some dimensions may not deter innovative entrants from exploiting new product dimensions. Indeed, the more patents block entry in a space of given dimension, the greater the incentive for the entrant to use some new (and unoccupied) dimensions of product space.