Defense Firms Adapting to Major Changes in the French R&D Funding System

Abstract

The structural changes inside the French innovation system have impacted the role of defense firms since the late 1980s. Major changes have affected the defense budget and public R&D funding system in particular. The aim of this article is to understand French defense firms’ repositioning within the National Innovation System (NIS) based on an analysis of their R&D behavior over a long period of time (1987–2010). We show that French defense firms remain major players in the NIS and faced up to these major changes by adapting the funding of their R&D and their research priorities and rolling out new innovation capabilities. Additionally, they developed new innovation models to take advantage of new collaborative partnerships developed for civil and military markets.

Keywords:

• Defense firms
• system of innovation
• R&D

JEL Classification:

• G32
• 032

Acknowledgment

We thank Keith Hartley, Julien Malizard, and two anonymous referees for helpful comments.

Notes

1. The NIS includes, in the strict sense, ‘the organisations and the institutions implicated in research and exploration like R&D departments and university technological institutes’ and in the broad sense, ‘the economic structure and the institutional organisation affecting learning as well as research and exploration – the production system, the commercial system and the financial system are presented as subsystems in which learning takes place’ (Lundvall 1992, 12).

2. After a decade of increases, the French defense budget, which was approximately 36 billion euros in the early 1990s, declined gradually during the peace dividend period (in constant 2000 euros) to reach less than 30 billion euros in 2002. Despite an increasing trend since 2003, it was only in 2010 equivalent to that of 1981 (32 billion euros).

3. Domestic Business Expenditure on R&D (BERD) stood at €24.7 billion in 2011, for a total in public financing of €7.4 billion, including €2.3 billion in direct financing and €5.2 billion in CIR tax credits (Giraud et al. 2014).

4. Between the first reform aimed at increasing the tax credit system (CIR) in 2004 and 2011, the number of beneficiaries companies more than doubled. Furthermore, these beneficiaries are mainly SMEs from a wide range of sectors. Thus, among the 15,000 CIR beneficiaries in 2011, only 12% were large companies, and they received about a quarter of this indirect funding. By contrast, that same year, large firms received 91% of defense public funding (Giraud et al. 2014).

5. Dual technologies have many potential interests and applications for both civilian and military markets. For example, the military and commercial applications for nanotechnologies and cybersecurity technologies are important and share numerous knowledge components and similar functions.

6. See Hartley (2013) for consequences on defense firms’ definition.

7. These changes can be more marginally explained by the changes made to the R&D survey; in particular, the survey coverage has been expanded by incorporating a greater number of companies, mainly small- and medium-sized enterprises (SMEs).

8. Direct public R&D financing in defense firms includes not only funds coming from the Ministry of Defense but all public funding received by these companies, regardless of the source (Ministry of Defense, Economy, Research …).

9. ‘Own’ financing is calculated by the balance of the total R&D budget from which public and other financing are deducted.

10. Non-defense firms increased their R&D over the same period, but the funding structure of their R&D remained almost unchanged.