Assessing the Impact of Military and Civilian R&D on Performance

ABSTRACT

The aim of this paper is to evaluate the effects of civilian, military and dual (both military and civilian) R&D investments on the profitability of firms. In particular, this paper analyses the role of different types of R&D investment in a sample of firms that collaborate with the Spanish Ministry of Defence. This database contains detailed information about the R&D activities taking place and accounting and financial information. Our final sample consists of 935 observations from 158 firms during the period 2011-2018. The methodology used is the Generalised Method of Moments. The results show that military R&D is more significant than civilian R&D in explaining the financial firm performance in the Spanish defence industry. Moreover, they reveal differences between military and dual R&D and suggest the increasing importance of duality technologies. Finally, taking on board market segment idiosyncrasies does not eliminate, but reinforces, the differences observed. These results help to better understand the effects of R&D expenditure in the Spanish defence sector and are relevant in the current debate about reinforcing European defence capabilities.

KEYWORDS:

• Civilian
• military
• R&D
• defence industry
• profitability of firms

JEL CLASSIFICATION:

• O3

Acknowledgments

The useful comments and constructive suggestions of two anonymous referees are gratefully acknowledged. The usual disclaimer applies.

Disclosure Statement

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

Notes

1. The Spanish defence industry is made up by a set of heterogeneous firms that can provide the Ministry of Defence with anything from commodities to munitions and are prepared to technologically collaborate to develop tailor-made products which consume the largest part of the acquisition budget (Duch-Brown and Fonfría 2014).

2. Evidence associated with science, technologies, products and the adoption of military strategies as management tools.

3. In this paper, we follow Molas-Gallart (1997a), who understands dual use technology as technology that has exceeded its initial civilian or military goals, allowing for wider exploitation of research and manufacturing efforts.

4. There are 31 different economic sectors in the sample. Around 25% of the firms belong to the architecture and engineering services sectors. The second activity in importance is related to software products and services. Transport, heavy industry and textile firms (around 4% of the firms) are also present in the sample.

5. Permanent Structured Cooperation (PESCO) together with the European Defence Fund and the Coordinated Annual Review on Defence (CARD) seek to identify opportunities for new collaborative initiatives.

6. 60 projects have been developed since the launch of the initiative. Projects are classified into seven different areas: training, land, maritime, air, cyber, joint enablers and space. Spain has participated in projects in all seven areas.

7. The benefits and the social value added associated with R&D can exceed investors’ profits, provided the new developments can be used in other sectors, especially in the case of defence R&D (Martí-Sempere 2018). Unfortunately, information on whether R&D expenditures are spinning in from other sectors or associated spillover effects is not available in the database and we limit the analysis to the potential effects on the performance of firms.

8. This disaggregation level is the main strength of the database. Unfortunately, there are no further explanations about the object of the investment which would allow alternative variable definitions. There is no information on dual technology adaptation to extend original goals either, which would allow for an analysis of the different effects associated with ‘the level of duality’.

9. These segments were established in 2010 to define industrial capabilities.

10. According to the OECD (2011), high-technology industries include aircraft and spacecraft, pharmaceuticals, office, accounting and computing machinery, radio, TV and communications equipment, medical, precision and optical instruments. Medium-high-technology industries include electrical machinery and apparatus, motor vehicles, trailers and semi-trailers, chemicals excluding pharmaceuticals, railroad equipment and transport equipment, machinery and equipment.

11. A different question is about the cost effects for the procurement agency. See Molas-Gallart (2012) for a discussion on the matter.

12. https://ec.europa.eu/defence-industry-space/eu-defence-industry/european-defence-fund-edf_en Accessed 10 January 2023.

13. Borrel, J. ‘We need to increase European defence capabilities, working better together’ https://www.eeas.europa.eu/eeas/we-need-increase-european-defence-capabilities-working-better-together_en Accessed 22 May 2022.

Additional information

Funding

This work was supported by the grant PID2021-123154NB-I00 funded by MCIN/AEI/10.13039/501100011033 and “ERDF A way of making Europe”, by the UZCUD2020-SOC-01 Project and by the COMPETE (S52_20R) research group funded by Government of Aragón (Spain) and ERDF. Francisco José Callado-Muñoz acknowledges financial support from ”Fundación Cajamurcia”.