The Arms Industry, Procurement and Industrial Policies

Weapons programs are criticized for cost overruns, delays in delivery and failure to meet their operational requirements. Critics focus on the power and influence of the military-industrial-political complex. This chapter addresses these controversial areas involving arms industries, alternative procurement policies and industrial policy. Arms industries are defined and statistics are presented on the world's arms industries. They can be analyzed as economically strategic industries where both R&D and production quantities are important and lead to decreasing cost industries reflecting economies of scale and learning. A structure-conduct-performance approach is applied. Market conduct is assessed including defense R&D and the role of the military-industrial-political complex. Market performance is reviewed by assessing contract performance, firm productivity and profitability and exports. Governments are central to understanding arms markets and weapons procurement raises both theory and policy issues. There are principal-agent problems and issues of adverse selection, moral hazard, risk sharing and bilateral monopoly. Various types of contract are available, each with different efficiency incentives. Governments can also use their buying power to determine the size, structure and performance of a nation's defense industrial base (DIB). The benefits and costs of a national DIB are assessed and three policy issues and challenges are reviewed. These are the role of competition in arms procurement, its extension to military outsourcing and the profitability of non-competitive contracts. Alternative industrial policies are a further aspect of procurement policy. Guidelines for a defense industrial policy in a military alliance are outlined together with an assessment of European collaborative programs. The Chapter concludes by speculating on the future of the defense firm and proposing an agenda for future research in the field.