NS3040 Fall Term 2014

Globalization and Defense Industries

Globalization of Defense Industries I

• Theodore Moran, “The Globalization of America’s Defense Industries,” International Security, 1990

• Written at a time when the U.S. was first becoming aware that key segments of the defense industrial base were becoming foreign sources

• U.S. defense relying increasingly on foreign technologies

• Foreign sourced products or

• Domestic sourced products but purchased from local subsidiaries of foreign operations.

• Dialog between economists and national security experts unproductive

• Economists viewed attempts to preserve certain companies as inefficient protectionism

• National security people viewed economists as naïve especially their not considering where production takes place and who controls the process.

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Globalization and Defense Industries II

• Moran felt at the time, the U.S. could learn quite a bit from Europe

• Continent had been exposed to globalization much longer

• Major countries had adopted neo-mecanilist policies or tried all the options being proposed for the U.S.

• Looks at several cases and develops hypothsis based on this experience

• Hypothesis I: Disregard for nationality of companies and location of critical research and production activates poses unacceptable risks

• Example of the French Nuclear program – even your friends can turn on you

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Globalization of Defense Industries III

• Hypothesis II: Replacing Reliance on Foreign Companies with Reliance on National Companies Relieves Threat from Globalization.

• Not unless company is completely vertically integrated

• European oil companies still dependent on oil from Gulf they did not control

• Arab embargo in 1973 painful lesson

• Hypothesis III Insistence on Production of Key Items and Utilization of Key Technologies on National Soil Helps Alleviate Threat of Foreign Dependence

• Not if home government’s polices run counter to the host country – U.S construction companies in France at time of the Soviet invasion of Afghanistan

• Caught in the middle

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Globalization and Defense Industries IV

• Hypothesis IV Autarkic Self-Reliance in Certain Key Sectors Offers the Ultimate Protection

• Not if come up with inferior technologies or

• Adapt slowly to changing challenges

• Case of British Nimrod and US AWACS systems

• Nimrod pure British, but out of main stream of technology

• Moran’s solution – try to manage situation with some rules of thumb that you can use to monitor developments, changes in trade patterns etc.

• Based on oligopoly theory proposes a 4:50 rule.

• Competition exists if the largest 4 firms have less than 50% of the market

• Vulnerability exists if the largest 4 firms have more than 50% of the market

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Effeciency/Dependence

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Globalization and Defense Industries V

• Questions• Can we assume all foreign firms similar in their relationship

with their own home country ?

• At the time many argued the Japanese firms are much closer to their government and therefore likely to be agents of national policy rather than stockholders

• Should state controlled firms be treated differently?

• Relevant for many Chinese and European firms today

• Is the market easy to define or are there a number of competing products that make market definition inherently arbitrary

• What are alternatives – stockpiling? Encouraging production nearby – Mexico?

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