Defence industrial policy – a sound security strategy or an economic fallacy?

Abstract

This article explores whether it makes sense for national governments to employ defence industrial policies – such as offsets and discriminatory procurement practices – to support their domestic defence industries. This question has so far primarily been discussed by economists, who have argued strongly against the use of defence industrial policies. This article maintains that these economists fail to address the often complex motivation behind the introduction of these policies. It illustrates these shortcomings by contrasting their arguments against a case study of Norway, which accounts for the country’s use of defence industrial polices from the early post-Second World War era up until today. The article concludes that, depending on their objectives, defence industrial policies can be seen as either a sound security strategy or an economic fallacy.

Keywords:

• Defence industry
• industrial policy
• offset
• discriminatory procurement
• Norway
• national security

Notes

1. Exactly how much more expensive a product becomes by demanding offsets is difficult to say, since studies on this issue are limited and results are likely to vary greatly between different offset schemes. To our knowledge, no estimates of the costs of demanding offsets have been made for Norway, in part because the defence authorities have prohibited defence contractors from delivering tenders that explicitly state the cost of the offset component.

2. Today, the Norwegian defence industrial base comprises about 120–140 companies, which have a combined operating revenue of 10.9 billion NOK and employ almost 5000 people in defence-related activities (data for 2014, see Pedersen 2015).

3. “Other beneficial aspects” is a vague expression that the government used intentionally to create some room for political manoeuvring.

4. Through a revision of “Forskrift om Forsvars- og sikkerhetsanskaffelser (FOSA)” and “Anskaffelsesregelverk for Forsvarssektoren (ARF)”.

5. It is still uncertain how the member states will make the case that specific technology areas are essential for national security and whether this approach will be successful. The current Norwegian technology areas are: (command, control, information, decision-making support, and combat systems; system integration; missile technology (particularly for use in demanding topographic and coastal areas) and related sensor and fire control systems; underwater sensors and autonomous underwater systems; ammunition, aiming devices, remotely controlled weapon stations, rocket and missile engine technology and military explosives; material technology (including composites) specifically developed and/or adapted for military use; and, life cycle support for military air and sea vessels.