Economic impact

of military R&D

J. Paul Dunne and Derek Braddon

Report

June 2008

Economic impact of military R&D

J. Paul Dunne and Derek Braddon

School of Economics

Bristol Business School

University of the West of England

Bristol

Report

June 2008

University of the West of England, Bristol

Disclaimer While all due diligence has been used in the drafting of the present report, the Flemish Peace Institute can in no way be deemed or held liable for any remaining inaccuracies or omissions in it or for any use a reader might make of this report. It is to be noted that the present document is not intended to express or proffer legal advice and consequently must not be interpreted as such. The quoted texts do not carry official authenticity from their sources. Unless explicitly stated otherwise, none of the statements in this report ought to be attributed to one or more of the Flemish institutions. The Flemish Peace Institute is solely responsible for the preparation of this report.

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Tabel of contents

ExEcutivE Summary 4

1 introDuction 7

2 GloBal trEnDS in military r&D 11

3 thE naturE of military r&D anD tEchnoloGy 15

4 r&D anD Economic Growth 21

5 military r&D anD thE Economy 29

6 military ExPEnDiturE anD thE Economy 33

6.1 Theories 34

6.2 Empirical studies 35

6.3 Channels 35

6.4 Effects 36

7 military r&D anD macroEconomic PErformancE 37

7.1 Spin-off 38

7.2 Spin-in 40

7.3 Macroeconomic effects and returns 41

7.4 Crowding-out 43

7.5 Differentiation and asymmetry 44

8 concluSionS 47

BiBlioGraPhy 50

GloSSary 58

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Executive Summary

1 This study started as an initiative of the Sub-committee on Arms Trade of the Flemish

Parliament, which asked the Peace Institute to conduct a study of the macroeconomic

impact of investments in military research and development (R&D).

2 In most countries military R&D plays a relatively minor role, but in countries with high

military R&D expenditure it tends to represent a major component of total government

R&D spending. Marked changes have taken place since the end of the cold war. In the

peak years of defence spending, towards the end of the cold war, global military R&D

expenditure exceeded $120 billion annually, with the USA spending 35% of the global

total. The end of the cold war precipitated a virtual collapse in military spending in

the former Soviet Union and substantial reductions in many other countries, leaving

the United States as the largest spender on military R&D by a significant margin. The

declines did bottom out and have recently started to increase, particularly in the USA.

3 Historically, the development of technology has often been linked with the military

and war. Many major developments on the battlefield have had important impacts not

only on the dominant powers but also on the civil economy. The importance of the role

of the military is, however, not uncontested: simply because innovations were pro-

duced when the military became involved does not necessarily mean that they would

not have occurred anyway.

4 During the cold war the arms industry developed specific characteristics, a number of

which remain. Its size, structure and trade are still all determined by government policy,

as the national government is the main customer and regulates exports. In the cold

war there was a thick veil of secrecy behind which companies could hide inefficiencies.

Emphasis was on performance of high technology weaponry rather than on cost, and

risks were borne by government, which often financed R&D and in some cases provided

investment in capital and infrastructure. Elaborate rules and regulations for contracts

were needed to compensate for the absence of any form of competitive market and to

ensure public accountability.

5 As a result of the structure of the market, there are both barriers to entry and barriers

to exit, which led to the cold war defence industrial base showing remarkable stability

in terms of the composition of its main contractors. These barriers – market, techno-

logical and procedural – meant not only that it has been difficult for new companies

to enter the defence sector to produce weapon systems, or to upgrade from subcon-

tractor status, but also that it is difficult for defence companies to leave the industry.

With the fall in demand following the end of the cold war, the ability of even the major

countries to maintain a domestic defence industrial base was called into question.

Diffusion of military technology into the civil sector was not happening to the extent

that was anticipated. And the superpower conflict no longer provided the stimulus

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for unquestioned military R&D support, and governments sought value for money in

military procurement. Governments thus had to decide whether to allow mergers and

acquisitions, which would reduce competition – in particular whether to allow mergers

and acquisitions that involved foreign partners.

6 Financial and structural factors have combined to reduce the importance of military

R&D relative to civilian R&D over time, at all levels of knowledge and technology pro-

duction. An important change in the relationship between military and civil R&D has

been the rise in the importance of ‘new’ industries and technologies, electronics and

information technology. Evidence also suggests that the defence and aerospace sec-

tor, once the leading R&D sector, is no longer among the most research intensive.

7 There are a number of general theoretical perspectives that consider the role of

general R&D in economic growth, that provide the basis for understanding the

economic effects of military R&D, including endogenous growth theory and national

systems of innovation, but none explicitly focus on military R&D. A number of studies

have attempted to adapt the theories to this end, but there is no theoretical consensus.

8 Military R&D is only one component of military spending, and to evaluate its likely

effect on economic growth it is important to study the findings of empirical work on

the economic effects of military spending at large. Such analyses have identified a

number of channels by which military expenditure can influence growth including

through the impact of military R&D and technology, through externalities and spin-

offs that can benefit the civil sector. The empirical work tends to show an insignificant

or a negative impact of military spending on economic growth in developing countries

and a clearer negative impact in developed economies. However, these general

conclusions conceal a diversity of literature and results.

9 Despite the complexity of the interrelationships between military R&D and the econ-

omy the empirical analyses have tended to be rather straightforward and focus on

a few simple hypotheses. Firstly, military R&D has a positive impact on the economy

through ‘spin-off’ (technology transfer to the commercial sector) and positive exter-

nality effects, improving industrial productivity and a country’s competitive edge.

More recently, the recognition of a change in civil-military technology interactions

has led to a shift in focus towards ‘spin-in’ from civil to military sectors, which appear

to have fundamentally altered the military R&D process and its direct and indirect

impact on economic performance. Secondly, military R&D has a negative ‘distortion

effect’ on the economy as a result of ‘crowding out’ and negative externality effects.

10 Researchers have taken a number of approaches: some have used more qualitative

methods with commentaries, institutional analyses and case studies of the specific

effects of military R&D, especially in terms of ‘spin offs’, others have used compara-

tive analyses to explore civil military relationships in technology and their implications

for economic and industrial development, while some have tried to quantify any

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economic impacts of military R&D through statistical and econometric analysis. More

focused analyses have attempted to make empirical judgement on that impact of mili-

tary R&D through the positive spin-off effects and the negative crowding-out effects.

A number of interpretative studies, literature surveys, qualitative analyses and com-

parative analyses have been undertaken, which have outlined the potential channels

well, but have provided no consensus on the actual economic impacts. This is clearly

an empirical question, yet there is very little empirical work. The statistical work that

does exist considers the economic effects of total government R&D, which is inter-

preted as being dominated by military R&D, with only a few studies focusing on mili-

tary R&D. The huge problems of data, measurement, methodology, identification and

estimation mean that it is not surprising that there are so few studies. Those studies

that have been undertaken provide little support for any significant positive effect

of military R&D on the economy. Caution is advised in interpretation, however, since

we have seen that significant changes have been underway since the end of the cold

war. But these changes are not expected to cause military R&D to have any significant

impact on the economy. A result which is even more apparent if one considers the

context of the smaller economies.

11 Overall, following the review of the literature we feel confident in concluding that

military R&D is not an important factor for economic growth.

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1 Introduction

This study started as an initiative of the Sub-committee on Arms Trade of the Flemish

Parliament, which asked the Peace Institute to conduct a study of the macroeconomic

impact of investments in military research and development (R&D). iii This was a result of a

judgement that a number of recent studies had drawn attention to the fact that different

researchers, depending on their starting premises, models or data, had arrived at diamet-

rically contrasting estimates of the economic impact of military expenditure and of mili-

tary R&D in particular. There is no consensus on whether there is, in fact, any impact at all,

or whether an impact would be positive or negative. This report provides a starting point

for the research project by reviewing the available economics literature and coming to a

general conclusion about the likely macroeconomic effect of military R&D. Future research

will build on this to consider the broader social issues, the context in which the economic

debate unfolds, and the interaction between science and society, allowing ethical, strate-

gic, and security considerations to be introduced into the analysis.

Military R&D is the expenditure on research and development that is absorbed by the mili-

tary as opposed to the civil sector of the economy. The Frascati Manual, which contains

the definitions agreed by the members of the Organisation for Economic Co-operation and

Development (OECD) countries, treats this as an important distinction: most countries’

defence R&D plays a relatively minor role, but in countries with high military R&D expen-

diture it tends to represent a major component of total government R&D spending (OECD,

2002). The Frascati Manual defines R&D in terms of an ‘appreciable element of novelty, a

definition that provides considerable scope for discretion for defence ministries in report-

ing their countries’ spending. iv Further difficulties arise in estimating extramural activi-

ties, and when subcontracting takes place it is not always clear which firms are involved

in defence work. As we will see, the increasing importance of civil technologies in military

equipment has somewhat blurred the distinction between civil and military application,

making the measurement of military R&D by no means straightforward (Hartley, 2006a).

At least the adoption of the Frascati Manual definitions allows for some degree of

comparability across countries, but caution must be exercised in making international

comparisons.

Military R&D is of course an input rather than an output, but the amount of funding

committed by a country to military R&D provides some guidance as to its potential

military capabilities and its commitment to a national defence industrial base. Military

R&D enables a state to enhance its national security through qualitative (technological)

changes rather than through quantitative improvements.

III The authors are grateful to Tomas Baum, Jurgen Brauer, Geert Castryck, Elisabeth Skons, Ron Smith, Keith Hartley and an anonymous reviewer for comments, but the usual disclaimer applies.

IV Setter and Tishler (2006) quote Thee (1990) in defining military R&D as a ‘mission-oriented R&D activity comprising basic and applied research, with the development, testing and experimental production of new weapons and weapons systems. The term also covers the improvement and modernization of existing weapons and weapons systems.’ It is the process of R&D that allows an armed force to increase the quality of its systems.

i n t r o d u c t i o np 8 I

At the same time, however, the pursuit of military R&D can stimulate a technological arms

race, leading in turn to more expensive defence equipment and rising defence budgets

(Hartley, 2006b).

Clearly, military R&D aims to develop and improve military capability for the armed forces

and is not primarily intended to have economic benefits, other than in guaranteeing the

security that allows economic growth to continue. Any spin-off of technologies from mili-

tary research is not a prime motivation but an unintended consequence, unless a dual-use

strategy has been developed. Nevertheless, concerns with the role of military R&D and

military technology in economic development are not new. This role has been the focus of

research by economists over the years, but with no clear consensus.

This report examines the question whether military R&D has an impact on macroeconomic

performance and, if so, the scale and direction of the impact, by presenting a review of the

available literature. As a starting point, to provide context, the next section briefly con-

siders the global trends in military spending, in particular the marked changes that have

taken place since the end of the cold war. This is followed by a review of the nature of mili-

tary R&D and technology, particularly the form it took during the cold war, and the relation

with the civil economy and the changes that have been taking place since then. An under-

standing of the potential role of military R&D in economic growth requires some under-

standing of the way in which economists have analysed the relationship between R&D in

general and economic development. This is not an uncontested field of work. A review of

the approaches is undertaken in section 4. Section 5 considers how the specificities of

military R&D are dealt with by researchers. As military R&D is one component of overall

military spending, it is important to consider the debate over the nature of the relationship

between military spending and the economy that has been central to the defence economic

literature for several decades and this is discussed in section 6. Section 7 then reviews

the empirical literature that has specifically focused on evaluating the impact of military

R&D and technology on the economy. This includes a discussion of the context for smaller

countries. Finally, section 8 presents some conclusions of this study.

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i n t r o d u c t i o np 1 0 I

2 Global trends in military R&D

In the peak years of defence spending, towards the end of the cold war, global military

R&D expenditure exceeded $120 billion annually, with the USA leading the western group

of states with 35% of the global total. USA military R&D was approximately 5 times greater

than the resources devoted to health and 20 times greater than spending on the environ-

ment. The end of the cold war precipitated a virtual collapse in military spending in the

former Soviet Union and substantial reductions in many other countries. This was also

reflected in military R&D expenditure, leaving the United States as the largest spender

on military R&D by a significant margin. The declines did bottom out and have recently

started to increase, particularly in the USA, which has widened the gap with the rest of the

world. At the same time as expenditure on military R&D was declining, it was also becom-

ing less important as a share of the total. Civilian R&D is now about 10 times larger than

military R&D and most is privately funded, although this varies from country to country. iii

In a review and critique of the available data, Hartley (2006a) estimated global military

R&D expenditure to be about $66 billion in 2001, in constant prices (using 2001 purchas-

ing power parity, PPP, rates), and around $90 billion in 2004, using OECD data. iv He also

estimated that by 2001 about 9% of world military expenditure was devoted to military

R&D, with five countries (the USA, the UK, France, China and Germany) accounting for

some 84% of the total (Setter and Tishler, 2006).

As Table 1 shows, the USA remains the world leader in terms of overall commitment

of R&D funds to defence. In 2006, US R&D expenditure devoted to the defence sector

amounted to 0.6% of gross domestic product (GDP), a share nearly twice that of the

Russian Federation and nearly three times that of the UK. The USA accounted for over

80% of the OECD area average for military R&D, which is approximately six times the total

for the 27 EU countries combined, and has by far the highest proportion of defence in

government R&D budgets – 57% – compared to 33% for the UK, 22% for France, and 17%

for Sweden.

III Brzoska (2005) notes that global spending on military R&D amounted to about $85 billion in 2004, 60% of which was spent by the US government. Civilian, commercial global R&D expenditure, however, amounted to about $850 billion in 2003, approximately 10 times the estimate for military R&D. He also states that ‘while the share of military R&D in federal R&D has remained very high by international standards, the decline of the share of public funding in total funding has led to a relative decrease in the importance of military R&D in the United States, at least until very recently. In other OECD member countries, the trend has been even more pronounced. While for the USA the military share in total R&D has declined from 25% to about 16% between 1981 and 2003 according to OECD data, for other OECD member states the decline has been much more pronounced, from 9.3% in 1981 to 3.0% in 2002. These countries experienced even larger increases in privately funded R&D than the USA.’ (Brzoska, 2005, p. 3).

IV He identifies important gaps in the military R&D data and proposes a mechanism that would allow for a compa-rison of the relative efficiency of national defence R&D programmes. In particular, Hartley pointed to the need for research on appropriate exchange rates for military R&D that would allow for international differences in the labour costs of scientists and engineers to be taken into account. He notes, for example, SIPRI’s use of such exchange rate estimates for the period 1967-1970 with the result that the ‘real’ annual levels of military R&D for West European countries compared with the US levels increased sharply (in the case of the UK by some 60%).

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Table 1: Defence and civil R&D budgets

Government budget appropriations or outlays for research and development (GBAORD)

as percentage of GDP, 2006 or latest available year (in brackets).

Defence civil

Mexico 0.00 0.21

Greece 0.00 0.29

Poland (2005) 0.00 0.29

Slovak Republic 0.01 0.29

Luxembourg   0.34

Hungary (2005) 0.00 0.37

Ireland 0.00 0.48

New Zealand (2003) 0.00 0.51

Australia 0.04 0.52

Czech Republic 0.02 0.55

Canada 0.02 0.55

Belgium (2005) 0.00 0.60

Italy 0.01 0.61

Austria 0.00 0.66

Norway 0.04 0.66

Japan 0.04 0.66

Eu27 (2005) 0.09 0.62

Denmark 0.00 0.71

Russian Federation (2003) 0.37 0.34

Portugal 0.00 0.71

United Kingdom (2005) 0.22 0.50

Netherlands 0.02 0.72

Switzerland (2004) 0.00 0.75

Germany 0.05 0.72

oEcD (2005) 0.26 0.54

Spain (2005) 0.14 0.70

Korea 0.14 0.72

Sweden 0.15 0.72

France (2005) 0.21 0.72

Finland 0.03 0.97

United States 0.60 0.43

Iceland (2005) 0.00 1.44

Scource: OECD Science, Technology and Industry: Scoreboard 2007 – OECD © 2007 – ISBN 9789264037885

I p 1 3

This transatlantic military technology gap had actually been evident since the mid-1960s,

when the USA was spending one-third of its much larger defence budget on military R&D

compared with a quarter of a smaller budget in Europe, raising important ‘burden-shar-

ing’ issues in terms of cold war NATO operations. The gap has widened significantly in

recent years. First, under the Bush administration’s expansion of the US defence budget,

US expenditure on military R&D in 2005 reached $75 billion, 75% more than in 2000.

This escalation in US military R&D expenditure since 2000 has now returned the USA to

spending levels last seen during the cold war.

In Europe, military R&D budgets in the so-called Letter of Intent, LOI, countries: the UK,

France, Germany, Spain, Italy and Sweden declined significantly, by some 8%, during the

post-cold war period. Military R&D spending is highly concentrated in Europe with the

six LOI countries accounting for about 99% of total military R&D in the European Union

in 2001.

Considering the low level of resources committed to military R&D in most countries, it

seems unlikely to be large enough to have any economic impact, although it is unlikely that

these figures capture all defence-related R&D. Companies may not realize that they are

involved in arms production if they produce components in an international supply chain.

Military R&D can potentially also have an impact greater than its size would suggest, as

seen below. For the arms-producing countries it clearly is important, often a major compo-

nent of government research spending, with potentially important economic effects.

In order to understand what these effects might be we need to consider the nature of

military R&D and the technologies it creates, as done in the next section.

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3 The Nature of Military R&D and Technology

As pointed out before, military R&D is the funding committed by a country to develop

and improve military capability, through improvements in technology. This can lead

to benefits for the civil economy through spin-off of technologies and can also lead to

indirect effects, such as spillovers. These are really unintended consequences, unless a

dual-use strategy has been developed. Historically, the development of technology has

often been linked with the military and war. Many major developments on the battlefield

have had important impacts not only on the dominant powers but also on the civil econ-

omy (Ruttan, 2006; Parker, 1998). The importance of the role of the military is, however,

not uncontested: simply because innovations were produced when the military became

involved does not necessarily mean that they would not have occurred anyway (Brauer,

2007). In addition, the relationship between civil and military has changed over time as

security, economy and society have also changed.

To understand science in the second half of the 20th century, it is necessary to understand

the cold war, when computers, software and microchips, and thermonuclear capability

transformed the context of weapons development and military support was important for

the early development of the information age (Budd and Gummett, 2002). While it was

recognized that throughout history great empires had exhausted themselves through their

investment in military might (Kennedy, 1987), it was hoped that the huge expenditures

would yield economic as well as security benefits. Indeed, this became a common justifica-

tion for maintaining high military spending.

This should come as no surprise as the arms industry became a very strange creature

during the cold war and was bound to influence present developments. In addition, a

number of the fundamental characteristics of the industry remain. Its size, structure and

trade are still all determined by government policy, as the national government is the main

customer and regulates exports. In the cold war there was a thick veil of secrecy behind

which companies could hide inefficiencies. Emphasis was on performance of high-tech-

nology weaponry rather than on cost, and risks were borne by government, which often

financed R&D and in some cases provided investment in capital and infrastructure.

Elaborate rules and regulations for contracts were needed to compensate for the absence

of any form of competitive market and to ensure public accountability. This led to close

relations between contractors, procurement executives and the military, notably through

the ‘revolving door’ phenomenon, in which military and civil servants move to defence

contractors with whom they had dealings and staff from defence contractors move into

the bureaucracy (Dunne, 1995).

The nature of the market and increasing costs led to the prevalence, outside the USA,

of companies that were national monopolies or close to it. Such characteristics tended

to favour firms that specialized in defence work. Companies knew their way around the

bureaucratic red tape and had influential contacts. These companies became experts

at acquiring government funding, rather than being successful in commercial markets.

Companies sought involvement in the development programmes for technologically

advanced weapon systems as the best means of obtaining subsequent production

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contracts. This led to ‘buy-ins’, where firms understate risk or cost to win initial contracts

with a view to making up the losses later. In addition, past programmes have seen ‘gold

plating’ where the military continually changed specifications or demanded continuous

technological improvements during the contract period. This allowed renegotiation of con-

tracts or additional payments, usually to the advantage of the contractor (Dunne, 1995).

As a result of the structure of the market, there are both barriers to entry and barriers

to exit, which led to the cold war defence industrial base showing remarkable stability in

terms of the composition of its main contractors. These barriers – market, technological

and procedural – meant not only that has it been difficult for new companies to enter

the defence sector to produce weapon systems, or to upgrade from subcontractor

status, but also that it is difficult for defence companies to leave the industry. Unlike

most manufacturing industries, which went multinational, the arms industry remained

essentially national. Smaller countries that could not afford the large fixed costs of

production imported major weapon systems.

With the fall in demand following the end of the cold war, the ability of even the major

countries to maintain a domestic defence industrial base was called into question. In fact,

it was becoming clear by the late 1960s that the diffusion of military technology into the

civil sector was not happening to the extent that was anticipated. There were some new

technologies, such as infrared detectors, liquid crystal displays and carbon fibre, but they

became increasingly rare (Budd and Gummett, 2002). The superpower conflict no longer

provided the stimulus for unquestioned military R&D support, and governments sought

value for money in military procurement.

Governments thus had to decide whether to allow mergers and acquisitions, which would

reduce competition – in particular whether to allow mergers and acquisitions that involved

foreign partners. This led to marked changes in the structure of military industry, but that

evolution of the industry and of military R&D has been markedly influenced by its cold war

form. Maintaining secrecy is still important but is no longer considered the priority it once

was. This reduces the compartmentalization of research and heavy layers of bureaucracy

and hence improves efficiency, transparency and accountability to parliaments. The focus

on performance of the product rather than cost that gave us the popular examples of

defence sector largesse is now much less apparent. Pressures on costs and for transparency

have made this ‘defence research culture’ seem somewhat idiosyncratic, although some

remnants remain. v

In fact, the conditions under which basic military research was conducted were often not

much different from those for civil research, although secrecy requirements did create

barriers. The mix of scientific disciplines in military and civilian research did (and still

does) differ, with physics (including nuclear physics), material sciences, telecommunica-

tion, aerospace and space research, and information sciences dominating in the military

V Brzoska, 2005; Markusen and Costigan, 1999; Dunne, 1995; US OTA, 1993, 1994.

I p 1 7

sector. Moving towards the development stage, there are greater differences in objectives,

organization and methods, and military and civil technologies are increasingly likely to go

in different directions (Brzoska, 2005). vi

While military R&D remains predominantly government-financed it is only partly per-

formed in the government sector, particularly in the development stage. For the OECD

about one-third of all public spending on R&D is for military purposes, with more than

one-half for the USA. vii The 1980s and 1990s saw major waves of privatization, particu-

larly in the UK, but also in Italy, Sweden and France. Large government research establish-

ments were reorganized and downsized. viii Nevertheless, some defence companies remain

state-owned and privatization does not necessarily lead to changes in ‘defence industry

culture’, as private companies can operate at high levels of secrecy, optimize performance

and work with little cost-consciousness. However, private companies tend not to adopt

such a style and to work more like other commercial companies, particularly when they

also have private customers (US OTA, 1997; Gansler, 1995).

One way of dealing with cost concerns was to look for and to support technologies and

applications with dual civilian-military use (Cowan and Foray, 1995; Kulve and Smit, 2003).

While this is an important element of civilian-military interaction, potential differences

remain between the two sectors in what we might call the factors of production, such

as scientists and research infrastructure. The degree of transferability between civilian

and military R&D is influenced by such factors as differences in technologies and secrecy

requirements and can range from almost zero, in for example ballistics, to full substitut-

ability. Differences may also exist in research methods, test procedures, and production

methods, as well as in the means of funding R&D. Civilian technology is not only funded by

civilian R&D spending and military technology is not only funded by military R&D, but mili-

tary R&D funding tends to include a higher proportion of support for risky technologies.

Financial and structural factors have combined to reduce the importance of military R&D

relative to civilian R&D over time, at all levels of knowledge and technology production.

There are some areas where military R&D, with its particular funding and specific ’culture’,

produces innovations, such as stealth technologies, where there is no obvious civil use,

and other rather high-risk technologies. But civilian know-how production and technology

development is dominant and the trend of a decreasing importance of military R&D is like-

ly to continue (Brzoska, 2005).

VI E.g., diesel engines are optimized to be small and light-weight and to produce much power, while for truck engines fuel consumption levels and serviceability are very important.

VII Russia and Israel also have high shares, although funding by national defence companies through the proceeds from arms sales has probably been on a similar scale as, if not higher than, government spending in Russia, with some direct funding from foreign companies and governments. In contrast, the main source for R&D funding in Israel has been external, through US military assistance as well as foreign companies and governments. In other countries very little funding of military R&D comes from private sources, although there are serious data deficiencies in this area (Brzoska, 2005).

VIII The most drastic change occurred in the UK, where the largest single defence research organization in the western world, the UK Defence Evaluation and Research Agency, was split up, leading to the establishment of QinetiQ. QinetiQ offers its services to both commercial and military customers worldwide.

p 1 8 I t h e n a t u r e o f m i l i t a r y r & d a n d t e c h n o l o g y

An important change in the relationship between military and civil R&D has been the rise

in the importance of ‘new’ industries and technologies, electronics and information tech-

nology. The rise of electronics began in the 1970s at all levels, from weapon system to

central command organization. Communications were modernized, command and control

was broadened and centralized, and reconnaissance, surveillance and target acquisition

were enhanced. This meant that funds moved away from traditional weapon platform and

weapon system producers, towards electronics and computer companies. Many of these

companies and R&D establishments had previously had little contact with the military sec-

tor and were not part of the defence industry culture (Misa, 1980). From the early 1990s,

a new trend was discernible (US OTA, 1994; Gansler, 1995). Traditional weapon integra-

tors had acquired sufficient capabilities in electronics and information technology, often

through acquisitions, to be able to satisfy procurement demand. They increasingly became

system integrators, linking various industrial sectors, including electronics and informa-

tion technology. They adopted a range of R&D styles that were generally less rigid than

what had previously been the norm in the defence industry (Dunne and Surry, 2006).

Evidence also suggests that the defence and aerospace sector, once the leading R&D

sector, is no longer among the most research intensive. In the UK, for example, the

Department of Trade and Industry’s data for the top R&D investing companies show

the sector lagging well behind the pharmaceutical, biotechnology, health, IT hardware

and electrical/electronics industry sectors. Some of these industries may well perform

defence-related R&D work but the data seem to clearly reflect the loss of R&D leadership

within the defence sector.

Despite these changes there are still important and stubborn hangovers from the cold

war structures, meaning that military R&D has specific characteristics that differentiate

it from civil R&D. Nevertheless, it is still a component of total R&D and to understand its

likely impact on the economy it is necessary to first understand how total R&D is likely to

affect economic growth. This is considered in the next section.

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4 R&D and Economic Growth

Understanding the relationship between R&D and economic growth is not as straight-

forward as might first appear. R&D is an input rather than an output, so spending money

on R&D does not necessarily lead to technological development and may be extremely

in efficient if it does. Indeed, if R&D produces new technologies, they may be of no value to

the economy; for example, the Soviet Union produced many products from its military and

research laboratories but there were no markets for them. In the global market, another

example is the way in which VHS videotape became the world leader over Betamax, which

was considered to be better technology, and the more recent case of HD DVD vs Blu-ray

DVD format, recently won by the latter. R&D is, obviously, a combination of research

and development but, while the distinction between them is not always clearcut, ‘blue

skies research’ may have little apparent economic effect. Developing new products that

have already been invented may be much more lucrative. In addition, it is important to

recognize the difficulty of defining inventions and innovations (when does a continuous

improvement in a product make it a new product?) and to distinguish between product

innovations that provide new products and process innovations that improve the way they

are made. The latter are changes in the technology of production and may only indirectly

come from R&D – through the introduction of new machines with innovations embedded

in them (Carline and Soskice, 2006).

In fact, there is no consensus among economists on how economic growth is generated or

on the role of technology in economic growth. At this level of theorising, the focus is on

the role and importance of technology per se. The process of how the inputs of R&D lead

to the output of technology is mostly ignored. Two distinct approaches described in the

literature can be identified: the dominant neoclassical paradigm’s growth theory; and a

political economy approach that links with the earlier approaches of the classical econo-

mists and their concern with economic development and structural change.

The neoclassical growth models follow from the Solow-Swann model of the 1950s, which

attempted to provide a systematic theory of the role of factor accumulation in growth but

failed to explain why there had been an observed growth in living standards (Solow, 1957).

This led to the introduction of technological progress, but in a manner that meant it was

exogenous, in the sense that resources were not used to produce it. This approach domi-

nated neoclassical economic analysis for a long period, but such a ‘black box’ approach

was open to considerable criticism. ix One criticism was the very fact that exogenous tech-

nical progress explained little of the dynamics of an economy, while evidence suggested

that it was, in fact, rather important. The latter became apparent when the model was

applied to real data in the form of growth accounting, which disaggregated the growth

rate into capital growth, labour growth and a residual, called total factor productivity,

which included the effects of technological progress and was found to be rather

significant.

IX Growth without technological progress suggests that output and employment grow to the same level, i.e. labour productivity does not grow. However, this was not observed so it was necessary to consider what drove growth productivity and divergent growth rates across countries.

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Solow originally developed the model of looking at the dynamics of individual countries,

but in time it was used in cross-country studies. One of the implications of the model with

exogenous technological progress was that countries with low levels of capital will grow

more quickly than those with high levels, so one would expect poorer countries to catch

up with richer ones over time. This led to a large body of literature on convergence and

‘catch-up’ in order to try to understand the dynamics of long/term relative growth rates.

There is some evidence of convergence among advanced economies, but there are also

examples of developing countries that have failed to catch up. The model tended to sug-

gest rather lower speeds of convergence than those actually observed. This led to an

extension of the framework to allow human capital to be a factor of production. x This

allowed ‘catch-up’ to be the result of education, which can speed up technology transfer

and thus convergence (Romer, 1996).

Another criticism of the Solow model was that the external nature of technological

progress did not explain which processes were actually at work. One response to this was

to incorporate technology-related mechanisms to overcome diminishing returns to capital.

This would also allow changes in policy or preference changes to impact on the long/run

‘steady state’ growth. The hypothesized effects were:

– Knowledge spillovers: knowledge translates into skill and influences labour

productivity

– Human capital accumulation: human capital is seen as an externality that

augments the growth of total factor productivity

– Research and development: the output of innovations and blueprints,

if excludable, in the sense that firms can benefit from their findings, leads

to supernormal profits for a time and allows them to finance more R&D

Induced technological improvement in such models led to increasing returns to scale, even

when there were constant returns to scale for the direct measures of labour and capital

(Romer, 1996). Such ‘endogenous’ growth models have shown considerable development

with attempts to introduce features of advanced economies, considering the efficiency of

use of factors and persistent failure of markets and governments to eliminate inefficiency,

rent seeking, policy distortions and inefficiency, and the role of institutions and interest

groups (Temple, 1999). Indeed, much of this is an attempt to take into account some of

the factors that have been highlighted as important by the political economy approach,

discussed below. Critics of new growth theory have found it rich in theoretical detail but

limited in empirical support and often conceptually flawed (Fine, 2000). xi

X See for example Nonneman and Vanhoudt (1996).

XI The Cambridge capital controversy shows the theoretical inconsistencies in neoclassical production functions and distribution (Arestis and McCombie, 2006). Orthodox critics argue for more use of ‘special cases’ rather than the technocratic approach, i.e. to ‘justify by parables’ (see Temple, 2005). Other criticisms suggest the existence of external economies of scale, which means that the whole may be greater than the sum of its parts, that firms/industries can have widely different outputs and techniques of production. Increases in output will be greater if the increase in labour is in a labour-intensive industry, but where it goes depends on factor prices and these may vary in non-competitive industries. It cannot be a purely technical relationship.

I p 2 3

There are also serious practical problems with this approach. xii

An alternative is provided by the political economy approach, which moved back to the

classical economists and considered the role of technology in the dynamics of capital

accumulation. Marx’s theory of crisis provided the basis for understanding capitalist

development not as some smooth growth process but as having a crisis-ridden process of

boom and slump, with technology (for Marx specifically in production) playing an impor-

tant role. This theory found an empirical form in the 1920s, when Kondratieff identified

a number of cycles in the development of the major capitalist economies, measured by

eliminating the trend and showing the deviation from it, smoothed with a nine-year mov-

ing average. xiii This led him to identify three types of cycle: long cycles of over 50 years

(25 up, 25 down), middle cycles of 7-10 years, and short cycles of 3-4 years. On this basis

he predicted the crisis of the 1930s, arguing that capitalism synchronized expansion

through international trade. xiv While the periodization may be reasonable, to call the pat-

terns waves and cycles really required the definition of some mechanisms and the use

of more than price data. Kuznets worked on ‘secondary secular’ movements later in the

1930s, including some physical data (one criticism of Kondtratieff). He found waves, but of

shorter periodicity and questioned whether they were major cycles or ‘specific historical

occurrences’.

The most influential and supportive work was that of Schumpeter, who popularized

Kondratieff’s work in the English language and assigned a central role to technological

progress. Supporting the basic Kondratieff long waves over 50 years, he tied this into the

emergence and rapid growth of new industrial activities, which were initiated by radical

innovations. Downswings were then due to exhaustion (Solomou,1990). This implied that

radical innovations and entrepreneurial dynamism, visible in the macro data, must be

clustered rather than randomly distributed.

Interest in long cycles has a tendency to be higher in the downturns and so interest in this

type of analysis declined with the post-World War II boom. The crisis of the 1970s saw

interest again turn to explaining the fundamental changes that had taken place, beyond

the orthodox economists’ focus on the impact of exogenous oil price shocks.

XII In aggregating labour inputs, person hours can be used, but it is not clear how skills and quality of labour can be dealt with. In practice, either labour is approximated by the aggregate monetary value of inputs, deflated by a labour input price index, or unweighted measures of flows (total person hours) or stock (total number of employees) are used. There is also the issue of whether to use gross output or value- added measures. Aggregating capital inputs causes the greatest problems. The value of the capital stock (replacement cost in some base year gross or net of depreciation) is often used in practice, but there are many problems (variations in quality, scrapping, using stock rather than flow). Sometimes it is assumed that all revenues go to labour and capital (no profits), but this can lead to serious problems of interpretation. There are also problems in getting a price of capital when it is needed.

XIII Van Gelderen independently came up with a similar analysis.

XIV Maddison (1991) provides a detailed criticism dealing with problems with the data and methods used and the lack of a causal explanation of why capitalist development should involve long waves. Stalin is reputed to have had even more concerns with this last point, and Kondratieff was sent to Siberia for predicting upturns rather than simply the ultimate downfall of capitalism.

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Researchers concerned with technology looked for a more complex understanding of the

end of what was termed the ‘Golden Age’.

Orthodox Marxist scholars, accepted the long-wave analysis, but saw the post-war period

as creating a ‘permanent arms’ economy with US hegemony and the Cold War stand-off

supporting international capitalism. Kidron (1970) seeing military spending as depriving

capitalism of resources that would otherwise be used productively and so slowing the

growth of the the organic composition, in other words the capital-to-labour ratio in value

terms, and retarding the fall in the value rate of profit. In contrast, Mandel (1987) argued

the high organic composition of capital in military production did affect the rest of the

economy and accelerated the decline in the (value) rate of profit. The reasons for the wave

of post-war prosperity then have to be sought in the countervailing tendencies that Marx

identified. xv

In France, the Regulation School developed Marx’s theory of crisis from its focus on the

changing forces and relations of production to consideration of the superstructure – i.e.

state, culture and consumption. Together these combine to define a mode of ‘regulation’

of a particular regime of accumulation that allowed movement out of a crisis and renewed

accumulation. Aglietta (1976) argued that the boom after the Second World War was based

not only on mass production ‘Fordism’, extensive production methods, but also on mass

consumption and the technologies engendered by them. The mode of regulation coordi-

nated production and consumption and thus dealt with the contradictions between the

forces of production and the social relations. The post-war boom was a combination of

‘Fordism’ methods of production and consumption (i.e. mass production and consumption)

and the technologies engendered by them, from competition to monopoly regulation and

with changes in the nature of governance. In a dialectical process similar to that of Marx,

the development of a particular regime of accumulation is not harmonious and contains

the seed of its own destruction. The end of the post-war boom led to ‘post-Fordism’, a

shift to more intensive methods of production (Boyer and Saillard, 2002).

In the USA, the social structures of accumulation (SSA) school provided a similar analysis,

but more of a structural model of crisis, with more emphasis on institutions allowing pros-

perity. Bowles et al. (1984) saw an accord between capital and labour, with an industrial

structure and technology that allowed prosperity in the USA, although one that was coun-

try- and historically specific. The rise and demise of SSA led to long waves and they used

the framework to explain the development and breakdown of the US economic boom.

Critics of this approach see it as ‘essentialist’ (Norton, 1988) and others argued the need

to focus on national capitals and be more cautious in distinguishing concrete and abstract

analysis (Fine & Harris, 1985). An alternative route taken by Glyn et al. (1990) was to move

beyond the focus on national capital and consider the end of the ‘Golden Age’ in the inter-

national economy – focusing in detail on specific aspects.

XV See Howard and King (1992)

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Even if one rejects the specifics of Marxist analyses, it is still possible to see Marx’s

method as providing valuable contributions to an understanding of the economics of

international security: to see the processes as historically specific, contingent rather than

deterministic, and as contradictory/dialectical processes that reflect the balance of power

between groups within society. In such an understanding technology plays an important

role in the development and demise of boom and crisis (Smith, 1977; Dunne and Coulomb,

2008).

In contrast to those who see the existence of ‘technology systems’, the national sys-

tems theorists consider that specific factors shape the innovation process within states.

Freeman and Louca (2001) argue that, unlike Schumpeter’s analysis, there is no bunch-

ing or clustering of innovations, but basic innovations are interrelated, with new technol-

ogy systems developing within countries that reflect their interlinkages, science, politics,

institutions, cultures and patterns of consumption. The focus of this approach is the tech-

nological drivers of economic development and moving on from the general theory of the

long waves to argue that national factors play a crucial role, as do institutional character-

istics of education, public support for innovation, defence technology schemes, history,

culture, language and institutional interaction. Thus, technological change needs to be

researched in the light of the social relationships within which innovations are developed

and used. There are strong forces at work rather than isolated events shaped by inven-

tors and entrepreneurs and dynamic companies. There is a complex web of market and

non-market interactions that are relevant, with tangible and intangible assets and public

institutions as well as businesses (Archibugi & Michie, 1997; Freeman and Louca, 2001).

For other researchers, increasing international interdependence has meant a reduction in

the relevance of states and increasing globalization. Analysing the globalization of tech-

nology has meant considering how globalization affects – and is affected by – the pro-

duction, distribution and transfer of technology. The international exploitation of nation-

al capabilities, collaboration, and generation of innovations across companies are clearly

becoming increasingly important with the growth of transport and communication, but

there are a range of views of the extent of social and economic globalization. This is evi-

dent in the various definitions of globalization, from the vague to the specific, and in the

debate over the true extent of globalization. Globalization in its most general form is the

global integration of the economic, social, political, environmental, cultural and religious

spheres. Held et al. (1999) provide a comprehensive analysis of globalization, defining

the hyper-globalists, those who see a new epoch of human history; the sceptics, who see

things as much the same as before; and the transformationalists, who see globalization

as the central driving force behind the social, political and economic changes that are

reshaping societies and the world order. Their analysis fits in the final category and we

discuss their analysis of the role of security below.

In contrast, Hirst and Thompson (1996) present a sceptical position. They see rapid

internationalisation (a term they prefer to globalisation) as not new, arguing that the

arrival of the telegraph had a more profound effect than the internet and that the

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world was actually more internationalised before the First World War than it is now.

They consider current developments to be neither inexorable nor inevitable. The last

phase of rapid internationalisation ended with the First World War and economic depres-

sion, with trade falling to a third of its previous level. They also point out that genuinely

transnational corporations remain rare and that capital mobility has not led to a shift of

capital to the developing countries; it has remained concentrated in the advanced coun-

tries. The world economy is far from global, with trade, investment and financial flows

concentrated in Europe, Japan and North America, and they expect this to continue.

Markets are not beyond regulation and the major economic powers together have the

capacity to exert powerful governance pressures over financial markets and other

economic tendencies to maintain their hegemony.

Understanding the role that R&D and the resultant technologies play in economic develop-

ment is clearly an area of considerable debate across a range of theoretical perspectives.

This suggests that understanding the likely impact of military R&D on the economy is

likely to be an even more difficult task. Some of the approaches outlined above have been

used by researchers to analyze the specific interrelation between military R&D and the

economy, discussed in the next section.

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p 2 8 I r & d a n d e c o n o m i c g r o w t h

5 Military R&D and the Economy

In terms of these general theoretical perspectives, none of the approaches considered in

the previous section explicitly focused on military spending. For the Marxist/Regulation

approach, it is just one facet of US hegemony which was a factor in the post-war ’Golden

Age‘. One can integrate military spending into the analysis but it is very different from

the story told, particularly when one considers the evolution of the defence industry.

It was also argued that, while the benefits of international hegemony outweighed the

direct costs, there were indirect costs and it was these negative effects on the economy

that showed up in the long run. For Europe these indirect effects were less clear. The ‘per-

manent arms economy’ arguments certainly find a role for military spending and implicitly

for military R&D and the technology it produces. The nature of the production of arms and

the pursuit of non-productive technologies leads to the diversion of capital from accumu-

lation, accelerating the decline in the rate of profit. Post-war prosperity is then the result

of other countervailing tendencies, as discussed above.

Serfati (2007) developed the regulation approach to consider the military-industrial com-

plex within the globalized world economy, particularly in the context of recent rises in mili-

tary spending, with industrial concentration and refocusing of the prime military contrac-

tors on defence basics. At the same time there has been a globalization of security, with an

overlapping of civil and military threats. The effect on technological trajectories has been

dramatic but the type of proximity between the military and civil is quite different from

what was expected. The national systems of innovation approach is applied to France as

a heuristic device, showing the state as the locus of innovation in defence, a meso-system

rather than a network, with the chains of production and linkages reacting to the environ-

ment of cuts and globalization, but the system remaining.

In addition, Held et al., in their analysis of globalization, considered ‘the expanding reach

of organised violence’ (Held et al., 1999, p. 87) as an important factor and provided a his-

torical overview of the evolution of the present arms trade, technology and production

system, seeing the combination of industrialized warfare and geopolitical competition

fuelling an unprecedented globalization of military conflict and rivalry in the 20th cen-

tury. This ties the development of military technology into a story of continuous globali-

zation. Military technological innovation is seen as central to the global arms dynamic,

with standards set by the advanced states and other states facing the dilemma of having

to acquire arms or erode their security. This has led to a proliferation of capabilities and

technologies and a hierarchical arms transfer and production system. They follow Krause’s

(1992) comprehensive analysis of the technology and the development of arms production

and trade – the location of centres of innovation and production, patterns of arms trans-

fers and the diffusion of military technology – in a global structure in four tiers:

– First-tier suppliers: innovators

– Second-tier suppliers: producers and adapters

– Third-tier suppliers: reproduce and copy

– Fourth-tier recipients: purchasers

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This structure is large and self-reproducing, although the occupants of the tiers change.

The modern arms trade system accounts for the geopolitical conditions, process of state

expansion, and changing nature of national military production and military technology.

The cold war provided an anomalous situation, huge expenditures and bipolarity, on the

one hand, but an increase in the number of countries involved in the system on the other.

Arms transfers peaked in the mid-1980s and declined by the early 1990s with the end of

the cold war, but the decline was cyclical rather than secular and arms spending remains

high by historical standards. With the decline in military spending came increased indus-

trial concentration, aggressive policies adopted by second-tier producers, and a pattern

of diffusion of modern weapon systems that was much more lumpy than a simple progres-

sive militarization argument would suggest. The post-war system developed a truly global

reach, evidenced by the extent of direct and indirect involvement, the inter-connected

military order and the diffusion and proliferation of powerful advanced weapon systems.

The structure of production, while dominated by the superpowers, also had a historically

high number of states in the second and third tiers (almost a return to the pre-war situa-

tion), the latter being predominantly the newly industrializing economies. There has been

a rapid diffusion of technological productive capacity, with growth in licensing, new forms

of internationalization, collaboration, cross-share ownership, subsidiaries etc., with signif-

icant transnationalization providing an alternative to a ‘national’ defence industrial base.

There is also an increasing role for civil R&D, technologies and innovation, which facilitates

the global spread, with key technologies argued to be dual use. The general analysis is fine

but some of the recent trends seem to be misrepresented and the extent of transnational-

ization overstated. This is similar to their contribution to the general globalization debate.

A very clear product of the cold war, the institutionalist perspectives that focus on the

military-industrial complex, particularly in the USA (e.g. Melman, 1985), see the nature of

arms production as producing vested interests and leading to inefficiencies in production,

with arms producing as having negative externalities on the civil sector, through crowding

out and creating bad habits. Melman (1985) underlines the harmful effects of militarism

on the US economy such as the loss of competitiveness, development of the bureaucracy

and the decline in productive investment. Evoking the development of a military-industrial

complex, he uses the concept of a ‘permanent war economy’, with limited spillover effects

from the military to the civil sector. Similarly, Dumas (1986) presents military production

as an economically non-contributory activity that channels valuable productive resources

and their outputs. The opportunity cost of military activity is measured by the economic

value that could have been created by using the same labour and capital for consumption

or investment (Dunne and Coloumb, 2008).

Further broad-sweep historical perspectives debate the role of the military and military

technology in the evolution of the advanced economies. Military R&D plays an important

part in a number of historical analyses of economic development. The broad-sweep

analysis of Kennedy (1987) sees the rise and fall of the great powers tied in with military

I p 3 1

spending, and an important component is military technology and innovation. In the UK

there is considerable debate over whether it was simply a declining economic power that

had too high a military burden or was a technologically advanced country that had pro-

duced a liberal militarism through its efforts (Edgerton, 2008).

Clearly, military R&D is only one component of military spending, and to evaluate its likely

effect on economic growth it is important to study the findings of empirical work on the

economic effects of military spending at large. This is addressed in the next section.

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6 Military Expenditure and the Economy

Since 1973, when Benoit first suggested that military expenditure had a positive impact

on economic development (Benoit, 1973), a large body of empirical literature has devel-

oped, both cross-country studies and time series case studies of individual economies, but

without showing any clear consensus. The results seem to suggest that military expendi-

ture has a negative impact on growth in advanced economies, where it may occur at the

expense of private-sector commercial investment, but there is no evidence of a significant

effect for developing economies. The difficulties of generalising across large groups of

economies led to the growth of case studies, which – while helping to gain an understand-

ing of the dynamics of the relationship for individual countries – still make generalization

difficult (Dunne, 1995). The end of the cold war and the shrinkage of defence budgets gen-

erally had clear, important implications for the military expenditure growth relationship

as military expenditure adjustments around the world have added to data variance and

increased the potential for any effect of military expenditure on growth to be picked up.

Sufficient time has now elapsed since the end of the cold war to provide enough post-war

observations to make re-estimating the defence growth relationship worthwhile.

6.1Theories

Theoretically, any evaluation of the impact of military spending on growth is contingent

on the theoretical perspective used. Neoclassical models generally focus on the supply

side, on the trade-off between ‘guns and butter’. Keynesian models see military spending

as simply one component of public expenditure and thus of aggregate demand and focus

on the demand side, although any effects of military expenditure on investment, employ-

ment or technology will have supply-side implications through the production function.

A group of institutional economists focus on the damaging impact of the military-indus-

trial complex on the economy, and Marxists vary from the positive effects of the under-

consumptionists through preventing realization crises to its possible negative impact on

the profit rate (Dunne, 1991). When moving to empirical analyses, it is necessary to deter-

mine the level of abstraction at which the analysis is to be presented and to operational-

ize the theory to form an applied model. This has led to a variety of empirical work from

applied econometrics to more focused institutional case study approaches. When statisti-

cal analysis is undertaken, it is generally the neoclassical/Keynesian models that are used

since they are most amenable to the creation of formal models, although some studies

have adopted a more ad hoc approach. Studies also differ in terms of the country cover-

age, whether they use time series or cross-section data, the time period covered and the

empirical methods used (Dunne, 1996).

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6.2Empirical studies

Following the ad hoc approach of Benoit’s original study, which found a positive effect of

military spending on growth in developing countries, an impressive literature has been

built up using econometric analyses of single-equation reduced-form models and simul-

taneous equation models, which model both direct and indirect effects (Smith, 2000).

In addition, macroeconometric models have been used to simulate the likely impact of

changes in military spending at country and international level (Gleditsch et al., 1996).

Overall, the empirical results tend to show an insignificant or a negative impact of military

spending on economic growth in developing countries and a clearer negative impact in

developed economies, where, it can be argued, military expenditure occurs at the expense

of investment rather than consumption. However, these general conclusions conceal a

diversity of literature and results. Many of the earlier cross-section analyses have found

sample selection to be important and this led to calls for more case studies. Time series

analyses of individual economies and groups of economies have improved understanding,

but also produced a variety of results (Dunne, 1996).

6.3Channels

In general, the empirical analyses have identified a number of channels by which military

spending can influence the economy, and they can have both positive and negative

effects. An important underlying consideration is military R&D and technology and its

effects on the civil economy. It can:

– take skilled labour away from civil production but, on the other hand, can train

workers, particularly in developing economies where the military may provide

valuable skills.

– take the best capital equipment from civil industry to produce a high-technology

enclave; on the other hand, there may be positive externalities of the development

of the military sector on the civil sector.

– lead to damaging wars but may maintain peace and lead to economic benefits from more

prosperous allies. Indeed, wars may spur technological development (Ruttan, 2006).

I p 3 5

– stimulate demand in a stagnant economy and lead to growth, but may create

bottlenecks in a constrained economy.

– slow down economic development through the fostering of a militaristic ideology

but, on the other hand, nationalist attitudes may increase effort and output and the

military and militaristic ideology may be used to control the workforce.

6. 4Effects

Whether the net effects are positive or negative is an empirical question and is likely to

differ across countries (Ram, 2003). In a review of the crowding-out debate Sandler and

Hartley (1995) found that of eight studies of developed countries, including the USA, only

three showed a negative impact of defence expenditure on economic growth, which does

not provide strong underpinning for the crowding-out hypothesis. They concluded that,

while individual studies differed, models that included demand-side influences found

a negative effect, while almost every supply-side model either found a small positive

defence impact or no impact at all. Suspecting that the supply-side models were exclud-

ing some negative influences of defence on growth, they concluded that the net impact of

defence on growth is negative, but small.

In the literature, a major concern with military R&D and technology is the externalities and

spin-offs that can benefit the civil sector. There are some examples of spin-offs and of

training and other externality effects, but there are also concerns about the opportunity

cost of such benefits. Others argue that there are disbenefits. The next section evaluates

the results of this work.

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7 Military R&D and Macroeconomic Performance

It is worth reiterating that military R&D is about providing the armed forces with equip-

ment, not about improving macroeconomic performance, so it would not be surprising if

there was no effect. Nevertheless, the economic benefits have commonly been used to

justify maintaining or not decreasing military R&D, just as it has for military spending in

detail, and this has led to considerable debate.

Despite the complexity of the interrelationships between military R&D and the economy,

discussed above, the empirical analyses have tended to be rather straightforward and

focus on a few simple hypotheses. Firstly, military R&D has a positive impact on the econ-

omy through ‘spin-off’ (technology transfer to the commercial sector) and positive exter-

nality effects, improving industrial productivity and a country’s competitive edge. More

recently, the recognition of a change in civil-military technology interactions have led to a

shift in focus towards ‘spin-in’ from civil to military sectors, which appear to have funda-

mentally altered the military R&D process and its direct and indirect impact on economic

performance. Secondly, military R&D has a negative ‘distortion effect’ on the economy

as a result of ‘crowding out’ and negative externality effects. Researchers have taken a

number of approaches: some have used more qualitative methods with commentaries,

institutional analyses and case studies of the specific effects of military R&D, especially

in terms of ‘spin offs’, others have used comparative analyses to explore civil military

relationships in technology and their implications for economic and industrial develop-

ment, while some have tried to quantify any economic impacts of military R&D through

statistical and econometric analysis.

7.1Spin-off

As regards the first approach and the issue of ‘spin-off’, Nathanson (1969) produced an

extensive list of new commercial products derived from military R&D contracts. This, he

concluded, showed that militarization had substantially eliminated the major risk area of

capitalism: the development of new processes of production and new products. He also

commented that many major firms owed their post-war survival to the cold war and had

by then become almost totally trapped in the military sector. xvi Stromberg (1977) then

suggested that military R&D contracts solve part of the problem of innovation under

corporatism. New products developed as by-products of military R&D funds provided

XVI It was in this context that Baran and Sweezy (1968) suggested that the ‘systematic wastage’ of production on military build-up can, however, provide the necessary ‘outside impulse’ to the economy of monopoly capitalism and help prevent economic depression.

p 3 8 I m i l i t a r y r & d a n d m a c r o e c o n o m i c p e r f o r m a n c e

a major outlet for investment and expansion in a dynamically stagnating semi- market

economy. In contrast, Melman (1970) provided detailed analyses of what he termed

‘Pentagon Capitalism’, the control of US industrial enterprises by defence interests,

manipulating security concerns to increase its share of national product. This military-

industrial complex was seen as having a major negative impact on the civil sector and

thus on economic growth (Melman, 1985).

State-promoted technological innovation for military purposes was institutionalized in

all the major developed countries, meaning that the priorities shaping military R&D were

unrelated to market mechanisms and introduced a substantial distortion into the develop-

ment of civil economies. Buzan and Sen (1989) argue that the sunk costs of military R&D

did provide initial support for new industrial sectors, advancing the introduction of indus-

tries by years, even decades. Mass air transport, space satellites and civil nuclear power

are clear examples. In addition, there are continuing claims for the benefits that the civil

sector obtains from spin-off products. While there is no shortage of examples, including

jet engines, transistors, radar, composite materials, polythene, antibiotics, computers,

the internet and so on, these are not uncontested and there is now growing evidence of

a reversal in the flow of technological innovation from the military to the civil sector. xvii

Gold (2005) argues that while superficially the technological resurgence and faster, sus-

tained economic growth of the USA in the 1990s might appear to strengthen the case of

those who see a negative effect of military R&D spending (since it coincided with the post-

cold war ‘peace dividend’), these crucial technologies actually originated in the late 1970s

and 1980s, when military use of technological resources was increasing sharply. At that

time, he notes, there was a strong two-way flow of scientists and engineers between the

defence and civilian sectors, contradicting the view that the military depletes the stock of

the best and the brightest scientists and engineers (Lerner, 1992).

XVII For example, penicillin could be considered a freak discovery; mass air transport was provided by regularly scheduled Zeppelin flights by commercial Zeppelin-flying airlines; space satellites were at first non-military; the internet had military (from the Defense Advanced Research Projects Agency, DARPA) influence but came from civilian research at the Massachusetts Institute of Technology and the world wide web came from the European Organization for Nuclear Research (CERN), not the US Department of Defense, etc. (Brauer, 2007).

I p 3 9

7.2Spin-in

Commercial technologies developed within civil projects are now ‘spinning-in’ to the mili-

tary sector and the rapid growth in non-military commercial technologies has now made

the civil sector the technology leader in all but a few niche areas (POST, 1991; Brzoska,

2001). As a result, producers of military equipment are increasingly turning to civilian

technology that they can then adapt for military applications. The boundaries between

civilian and military technology are less obvious. Commercial R&D and associated tech-

nology transfer from the civil to the military sector globally is now a major force in weap-

on system development and will continue to transform both the defence industry itself

and, especially, the defence electronics market (Braddon et al., 2003). xviii The enhanced

flow of cost-effective commercial R&D technologies into military procurement is, however,

not unproblematic since many commercial R&D projects focus on the enhancement of

known technologies with short-term pay-offs (such as winning the next contract) whereas

the military sector requires longer-term technology development designed to ensure that

military capabilities remain leading-edge in nature. Furthermore, the rapid technology

turnover of the civil sector actually creates a specific problem for the military sector. The

extraordinary pace of change in electronics technology today means that many recent

innovations in parts and components will have a shelf-life of about 18 months, completely

in contrast to the long life-cycle of most military hardware. As a result, military equipment

is likely to be plagued by technologically obsolete parts which, at present, original ven-

dors have no obligation or incentive to continue to produce or stock. In this context, the

US Industrial College of the Armed Forces (ICAF) notes that: ‘currently, the US does not

address the problem efficiently and wastes large amounts of time and resources overcom-

ing the problem’ (ICAF, 2001; Bellais and Guichard, 2006). Indeed, it is possible to go fur-

ther and see that much military equipment is obsolete. The only reason it continues to be

used at all is that it is often an amalgam of many integrated technologies and it is not pos-

sible to take just one part and upgrade it without disturbing the functioning of the whole.

XVIII As Ruecker (2000) noted: ‘the trendsetters of electronic development are in the civil market where ever shorter innovation cycles are setting the pace: the two companies Intel and Microsoft alone allocate higher R&D funds than DARPA [the Defense Advanced Research Projects Agency], responsible for applied defence projects in the Pentagon. Today, information and communication technologies that are commercially available offer advanced systems, products and processes that are proven in practice, providing substantial savings potential. Given their pacemaker function, these technologies could therefore deliver the key to answering the question of how to secure the administrative efficiency as well as the qualitative superiority of the armed forces in spite of budgetary restraints.’

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7.3Macroeconomic effects and returns

These developments make it even more difficult than before to see investments in military

R&D as particularly beneficial to the macroeconomy. Both the direct results of military

research and any of its possible civil applications are negligible in proportion to the

resources that were invested in order to achieve them. As noted above, some even claim

that military R&D does not (any longer) drive civil technological innovation but that, rath-

er, the opposite is true (spin-ins); that investments in the military R&D exert an adverse

effect on the civil sector (crowding-out); that the eventual military results are very slow in

their public release (secrecy for reasons of security considerations); and that any possible

contribution is due only to the expenditure of taxpayers’ money (for both the R&D and

the acquisition of the end-product). In addition, trying to focus efforts on more commer-

cially viable technologies is difficult because of the inherent uncertainties. For example,

cryptography was developed by security services over many years without obvious civil

benefits but has become central to the financial system.

A limited number of studies have attempted to quantify the impacts through statistical

and econometric analysis. The lack of research is explicable to a considerable degree by

the lack of data and measurement and conceptual problems. Those who measured spill-

overs from general R&D found that the social returns to R&D exceed the private returns. xix

An early study by Leonard (1971) found that US research intensity in the 1960s, measured

by company R&D spending, was positively correlated with the growth of sales, assets, net

income, and other variables for the 16 industries that made up nearly all of manufacturing

output. When federal R&D funds were included the correlations were insignificant, but

eliminating the two industries that received five-sixths of federal funds (aircraft, missiles

and electrical equipment) restored the significant relation. This suggested that industrial

growth was slowed by the excessive allocation of R&D resources to defence or space uses.

After criticizing earlier studies of the impact of US government R&D (mainly defence) on

industrial output for misspecification and measurement error, Lichtenberg (1984) estimat-

ed industry-level regressions and found that the evidence of a positive effect of military

R&D disappeared. Lichtenberg and Siegel (1991) then found a positive effect of company

-funded R&D on total factor productivity in the USA, but no effect of federally funded

R&D using firm-level data. This result was also apparent in Lichtenberg (1992) in a cross-

section country-level study. While he argues that this does not imply that government

R&D makes no contribution to social welfare, it does suggest that there is an opportunity

cost to government and hence defence R&D (Lichtenberg, 1995). Some studies tried to

XIX Social in the sense that the benefits do not simply accrue to the individual firm (inventor), but pass on to society as a whole.

I p 4 1

estimate the spillovers from R&D, with Bernstein and Nadiri (1991) finding that the social

returns to R&D in six industries exceeded private returns by 20 - 200%.Nadiri (1993) con-

cluded that the magnitudes of the social rates of return on R&D capital in industries with

relatively large R&D spending were greater than the net private rate of return.

A survey of studies of spillovers by the UK Department of Trade and Industry (DTI, 2003)

found that the social returns to R&D were considerably greater than the private returns.

However, most of these studies were dated, published over the period 1974 to 1993.

A more recent study using US data confirmed that social returns to R&D are about

3.5 times larger than private returns (Bloom et al., 2005). However, all these studies

were for R&D in general. It might be argued that defence R&D is no different and thus is

likely to offer substantial social returns; but a contrary view is that defence R&D will offer

lower social returns because of its requirements for secrecy and associated restrictions

on dissemination and knowledge transfer (Hartley, 2006).

Focusing on military innovations, Poole and Bernard (1992) also found evidence suggesting

that the defence-related stock of innovations had a significant negative effect on the total

factor productivity growth of four industries in Canada between 1961 and 1985. Using

the number of patents granted to US organizations and individuals to capture the effect

of military R&D through technological change, Chakrabarti and Anyanwu (1993) found no

evidence of any direct effect for the period 1955-1988. In addition, they found the non-

R&D aspect of defence spending to have no significant effect on the major components

of civilian economic performance, technical skills formation or technological change.

The implications here are that technical spillovers may be limited to a particular kind of

defence spending, not to defence spending per se. xx

In a more general study, Guellec and Potterie (2001) examined the relationship between

government R&D funding and economic outcomes. They found that the share of govern-

ment funding had a small negative effect on business R&D, but only the defence-related

part of public funding had a significant negative effect on factor productivity growth.

As only four or five of the OECD countries they studied have a substantial military R&D

budget, they suggested that relatively few national economies would be affected

adversely by this problem.

XX They found similar results when they considered space and defence expenditures (Chakrabarti et al., 1992)

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7. 4Crowding-out

Empirical studies have also focused on whether military R&D crowds out civil R&D.

In addressing this issue, a fundamental problem is defining what is meant by crowding-out.

Then there is the problem of defining what the adverse economic impacts are ( economic

growth, physical capital investment, numbers of qualified scientists, engineers (human

capital), technical progress, international competitiveness, or exports). Next arise ques-

tions about causal relationships between military spending and military R&D expenditure

on the one hand and the various ‘adverse economic impacts’ on the other. xxi These prob-

lems are clear in the few empirical studies available. Buck et al. (1993) found no evidence

of a simple long-term relationship between defence and civil R&D spending, so no simple

crowding-out. For manpower, they found that in 1989 defence R&D staff were paid less

than their civilian counterparts in absolute and relative terms, suggesting that the defence

sector was not attracting skilled personnel through higher salaries. Civil industry might

have to offer higher pay rates to compensate for the possible non-monetary benefits of

defence work, such as job security, status and high-technology work. In a detailed analy-

sis of the UK and a cross-country study Morales-Ramos (2002) found that the effect of

military R&D expenditure varies across countries (France, Germany, the UK, the USA and

Japan), making it difficult to draw general conclusions. The indirect negative crowding-

out impacts do not appear to outweigh the positive direct spin-off impacts, suggesting

that defence R&D might, therefore, be associated with a net positive effect on growth in

the context of the UK. There are, however, some issues that make these results less than

definitive.

XXI Hartley cites the 1987 UK Statement on the Defence Estimates in which the UK Ministry of Defence itself drew attention to the crowding-out phenomenon. The ministry commented that: ‘the government shares the under-lying concern of those who fear that necessary investment in defence R&D may crowd out valuable investment in the civil sector… Britain’s resources of qualified scientists and engineers and the skilled manpower support-ing them, are not inexhaustible… defence and civil work are in competition for the same skills and it would be regrettable if defence work became such an irresistible magnet for the manpower available that industry’s ability to compete in the international market for civil high technology products became seriously impaired.’ (MoD, 1987, p. 48, para. 522). Hartley notes that this is the labour market dimension of the crowding-out phenomenon and that there are other, more direct crowding-out notions, particularly encompassing the effects of military R&D expenditure itself.

I p 4 3

7.5Differentiation and asymmetry

A few researchers have undertaken comparative analyses. Väyrynen (1992) explored the

relationships between civil and military technologies and their impacts on the pace of

economic development, using case studies of Japan, the UK, the USA and Brazil, although,

given the year of publication, much of his analysis is coloured by the cold war. Not surpris-

ingly, he found the relationship between military industrialization and economic develop-

ment to be complex, historically variable and dependent on the international context.

An arms industry requires civil industry but, once established, is not neutral and can affect

the whole of society, not just producing innovations but also influencing the organization

of production. State intervention is found to be important for developing an arms industry,

although this may differ in style across countries. He argued that initial positive effects

can become negative as a result of the isolation of the arms industry from the competitive

forces of civil industry and the dominance of the bureaucratic structures of the military.

The final impact often depends on whether the country is growing or stagnating. In an

analysis of military production and innovation in Spain, Molas-Gallart (1992) argued that

the fact that military production was a relatively minor activity in Spain and its diversity

of producers should warn against across-the-board expectations regarding the effects

of military technology. In addition, the outcomes of policy depend on the sector and the

products that are targeted. He suggested that it would be better to focus on components

and subsystems within the global supply chain, where more integration would be possible

between military and civil production. Such findings resonate with other case studies of

the smaller arms producers, such as South Africa (Dunne, 2006a; Batchelor and Dunne,

1998). In addition to South Africa, Goldstein (2002) examined the evolution of the aero-

space industry in Brazil and India, considering the interplay between economic and politi-

cal factors at national and international levels. The successes and failures that depend on

technological capabilities and government-company relations, as well as Brazil’s success,

show what can be done when concentration opens up niches for specialized firms.

While these studies provide valuable information, it is also important to take into account

the changes that have taken place since the end of the cold war. Two concepts became

central in the development of military discourse: the revolution in military affairs (RMA),

the term used for the way that changes in technology have transformed war-fighting; and

‘asymmetric warfare’, the term used for the way opponents respond to a dominant mili-

tary power by fighting in ways that the dominant power did not expect or had not prepared

against. While current fighting power is very significantly affected by a hangover from cold

war technologies, the changes taking place are significant. During the 1991 Gulf War, 9%

of the ordinance dropped consisted of ‘smart’ (precision-guided) munitions, while in the

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2003 Iraq War the share was over 90%. xxii The increase in sophistication and cost of the

most advanced military equipment means that it is becoming impossible even for the USA

to maintain a comprehensive defence industry. The nature of confrontations and conflict

has changed. It is unlikely that two sets of allies will in future face each other with similar

weapons and tactics, as in the two world wars (Dunne et al., 2006; Dunne and Coulomb,

2008).

As Trajtenberg (2006) argues, the new threats require a new type of military R&D for

development of the use of computerized sensory interfaces to emulate human sensory

perception and provide a dramatic improvement in the ability to rapidly analyse vast

amounts of information. xxiii Such a reallocation of military R&D resources has clear eco-

nomic implications: it will increase the direct civilian applications, rendering the required

R&D effectively dual-use in nature and encouraging into military R&D large numbers of

companies and organizations that would not normally appear in the military supply chain.

This could lead to improved industrial performance but might also lead dynamic compa-

nies to have to rely on government orders.

In a recent case study of Australia, Wylie et al. (2006) note that the ‘locus of military

advantage’ seems to be moving away from ‘distributed, platform-centric technologies

toward network-centric, knowledge-intensive capabilities that require massive invest-

ments in network-enabling technologies’. The RMA basically means that Australia must

rely on allies for access to key network-enabled technologies while also investing in ‘niche

import-substitution capabilities to preserve a measure of discretion in using such tech-

nologies’. xxiv This is also likely to be the case for all small countries that aspire to arms pro-

duction. They are unlikely to be building major weapon systems, but may continue with

niche R&D and small and light arms technology. It is also likely that major domestic players

will be increasingly foreign owned. Indeed, this is already the case in Belgium (Castryck,

Depauw and Duquet, 2006; Dumas and Mampaey, 2007).

XXII Both the strap-on kits, JDAM (the GPS-guided Joint Direct Attack Munition) and WCMD (Wind Corrected Munitions Dispenser) were cheap in military terms because they used more commercial development programmes and commercial components.

XXIII He argues that the ‘war on terror’ calls into question the justification for vast expenditure on R&D for large, expensive weapon systems and suggests that it requires two strategies: fighting terrorists at their source, which is primarily a public good and should be financed by the government; and the protection of potential terrorist targets, essentially a private or local public good that may well carry with it negative externalities. Governments should devote sufficient resources to the first strategy in order to dissuade potential targets from spending on their own security. A different kind of military R&D is required, focused on enhancing intel-ligence capabilities through advanced technology developments: e.g. monitoring and interception of global communications from terrorist cells and targeted disruption of their logistical and financial base. Government will need to assist in potential target protection as it is a mixed public-private good and may be under-provided by the private sector alone.

XXIV They also set out a list of key features that a smaller country’s military innovation system should incorporate, including openness to international R&D and new technologies; technological awareness (perhaps through dedicated defence research establishments); absorptive capacity (in the form of institutions, incentives and processes for effective technology learning); transactional capacity (in the form of a trusted transactional environment with protection against unauthorised third-party access); and a technology management capa-city (which would include procedures for risk identification and re-assignment over the product life cycle and along the product supply chain).

I p 4 5

Overall, the research implies that military R&D has no significant beneficial effect on

macroeconomic performance. Future developments are likely to reinforce this conclusion.

The days of a comprehensive national defence technological and industrial base are long

gone, with major arms producers increasingly using joint venture and international supply

and governments focusing more on capability than production. The arms industry is

becoming less clearly identifiable, as the RMA and asymmetric warfare change the nature

of the means of violence and weapon performance is increasingly influenced by the output

of civilian-based rather than military R&D. Smaller producers are likely to be less flexibile

and more dependent on international partners, with increased foreign ownership and

further concentration in the international arms industry (Dunne & Surry, 2006; Dunne,

2006b).

p 4 6 I m i l i t a r y r & d a n d m a c r o e c o n o m i c p e r f o r m a n c e

8 Conclusions

This paper provides an overview of the literature on the economic effects of military

R&D. It considers the wider context of the role of technology in economic development,

providing some historical background and an analysis of the trends in R&D, and the mili-

tary-related component. This suggested that the importance of military R&D has declined

since the end of the cold war, although this could be seen as an even longer-term trend.

More recently the declines seem to have bottomed out, but it is clear both that civil R&D is

increasing and that there is a considerable transatlantic spending gap.

It is also clear that the nature of defence technology has changed from the specificities

of the cold war, with increased spin-in of non-defence technology to defence, replacing

the old trend of spin-off from defence to civil technology. There has been a reduction of

cold war barriers between civil and military technologies and an increase in attempts to

develop dual-use technologies, while financial and structural factors have reduced the

importance of military R&D relative to civil. There has been a rise in new industries, such

as information technology and communications, that are less rigid in their civil-military

distinctions than the old industry. The defence and aerospace industry is no longer the

most innovative.

R&D certainly plays an important role in the economy, but it is not clear how well under-

stood the process is and there are quite different theoretical understandings. Neoclassical

economists have developed their growth models from initially assuming exogenous tech-

nological change to allowing for endogenous growth in which technology can lead to

increasing returns to scale. However, they still lack the historical and institutional depth

of the group of theories we have termed the political economy approach. This comprises

long-wave theory and others that see the dynamics of economic development as driven

by technological change, a process of growth and periodic crisis. Innovation is seen to

result from national and international systems of innovation. Globalization has also had

an impact on the production, distribution and transfer of technology, although this can be

overstated. For the arms industry large companies have increased their use of global sup-

ply chains – taking over smaller countries’ production capability but also providing them

with opportunities to provide for niche markets. Such theories do not focus on military

R&D but do have a role for it: its impact is likely to be historically specific, contingent and

dynamic and to reflect the balance of power between groups within society.

Most of the theoretical perspectives regarding R&D do not assign a particular role for

military R&D. It can play a ‘walk on’ part in the neoclassical perspectives and a support-

ing role in the political economy models, but it gets to take centre stage in some of the

institutional analyses. Indeed, some broad historical perspectives, such as that in Kennedy

(1987), assign it a major role in the rise and fall of great powers. Serfati’s analysis (2006) is

focused more on post-cold war France and provides a regulation, national systems of inno-

vation perspective. The globalization theorists (Held et al., 1999) concern themselves with

military technology. But most of the analysis is carried out in the context of the cold war

military-industrial complex, with a tendency to dwell on the negative effects of military

R&D (Melman, 1985).

p 4 8 I c o n c l u s i o n s

Since military R&D is a component of overall military expenditure, it is important to look

at debates on the economic effects of military expenditure at the general level. There

is no consensus theoretically, with a role for military R&D identified through the effects

of crowding-out, spin-off and other externality effects. Its impact is clearly an empirical

question. The empirical analyses of the economic effects of military spending suggest

that it has at best no effect on growth but is likely to have a negative impact. At least,

there was little evidence of a positive effect. This suggests that we are unlikely to find any

significant macroeconomic effect of military R&D, and the empirical literature, although it

is not unanimous, tends to bear this out.

More focused analyses have attempted to make empirical judgement on that impact of

military R&D through the positive spin-off effects and the negative crowding-out effects.

A number of interpretative studies, literature surveys, qualitative analyses and compara-

tive analyses have been undertaken. As we have seen, they have outlined the potential

channels well, but have provided no consensus on the actual economic impacts. This is

clearly an empirical question, yet there is very little empirical work. The statistical work

that does exist considers the economic effects of total government R&D, which is inter-

preted as being dominated by military R&D, with only a few studies focusing on military

R&D. As Hartley (2006) notes, the debate over crowding-out is ‘dominated by myth, emo-

tion and special pleading’ and the huge problems of data, measurement, methodology,

identification and estimation mean that it is not surprising that there are so few studies.

As expected, those studies that have been undertaken provide little support for any

significant positive effect of military R&D on the economy. Caution is advised in interpre-

tation, however, since we have seen that significant changes have been underway since the

end of the cold war. But these changes are not expected to cause military R&D to have any

significant impact on the economy.

This is even more apparent if one considers the context of the smaller economies.

Even the USA can no longer afford the comprehensive domestic defence industrial base

it aspired to during the Cold War, and the internationalization of the industry suggests

that many countries will at best manage to maintain niche producers in a global supply

chain, with joint venture involvement in major weapon systems rather than full domestic

development and production.

We do need to interpret the results of the econometric studies cautiously. Developments

in econometrics indicate that there are problems with earlier work as well as problems of

measurement and specification. Simple summaries fail to adequately present the degree

of uncertainty signalled by the researchers, and changes that have taken place particularly

since the end of the cold war mean that older studies may not be a good guide for the

present day. Overall, however, we can feel confident in concluding that military R&D is not

an important factor for economic growth in the modern world.

I p 4 9

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I p 5 7

Glossary

– Asymmetric warfare: the way that opponents would respond to a dominant military power by fighting

in ways that the dominant power did not expect or prepare against.

– Crowding-out: when expenditures by government in one economic sector prevent resources being

used in other sectors.

– Corporatism: the control of a state by large interest groups.

– Frascati Manual: a document stipulating the methodology for collecting and using statistics

about research and development in countries that are members of the Organisation for Economic

Co-operation and Development (OECD).

– DARPA: the Defence Applied Research Projects Agency (DARPA) is responsible for applied defence

projects in the Pentagon.

– Demand –side model: a model that emphasises the effect of demand, private and government on the

economy.

– Domestic DIB (Defence Industrial Base): companies that produce arms and support the military and are

based in the home economy.

– Fordism: methods of mass production (using conveyor belts) introduced by Henry Ford, together with

mass consumption as workers pay also increased.

– GBAORD: government budget appropriation or outlays for R&D.

– GDP (Gross Domestic Product): the total market value of all final goods and services produced in a

country in a given year.

– Golden Age: the period of high growth and prosperity in the advanced economies in the post second

world war period. It came to an end in the early 1970’s.

– ICAF: the Industrial College of the Armed Forces (ICAF) is an USA institution preparing military officers

and civilian government officials for leadership and executive positions in the field of national security.

– Keynesian models: models based on Keynes’ economic analysis that rejected the idea that unem-

ployment reflected wages being too high as an explanation of the depression and emphasised that

demand in the form of government spending could be used to achieve full employment.

– LOI countries: the Letter of Intent (LOI) countries are the major European arms-producing coun-

tries: France, Germany, Great Britain, Italy, Spain, Sweden. In July 2000, these six partners signed

LOI Framework Agreement covering Security of Supply, Transfer and Export Procedures, Security

of Classified Information, Research and Technology, Treatment of Technical Information and

Harmonization of Military Requirements. In these six areas, the partners committed themselves

to create a more homogenous regulatory framework in order to improve market conditions for an

increasingly transnational industry.

– Macroeconomic effect: effect on the economy as a whole.

p 5 8 I g l o s s a r y

– Military Industrial Complex: network of individuals and institutions involved in the development,

production and acquisition military technologies.

– Military R&D: the expenditure by government on research and development that is absorbed by the

military as opposed to the civil sector of the economy.

– Neoclassical models: models based on the assumption of individual rational economic agents and

market equilibrium. The dominant school of thought in contemporary economics.

– Peace dividend: the economic benefit of a decrease in defense spending.

– Permanent arms economy: term refering to the Marxist theory that argued that capitalism required

high military spending for its survival.

– Political economy approach: an approach that emphasises the concerns of the Classical economists

and focuses on growth and accumulation and the role of the state, rather than focusing upon markets.

– Private returns: return to the individual agent rather than to society as a whole.

– Regulation School: school of French Marxists who developed a theory of crisis that considered

consumption as well as production and argued that periods of growth represented a particular form

of relations between capital and labour (regulation).

– RMA (Revolution in Military Affairs): term used for the way that changes in technology were

transforming fighting.

– Single equation reduced form models: models that have a single equation that is an approximation to

an underlying theoretical model.

– Simultaneous equation models: model that consists of a series of equation that are interrelated such that

estimation has to be undertaken simultaneously rather than being able to treat each equation separately.

– SIPRI: Stockholm International Peace Research Institute.

– Social returns: returns to society rather than the individual.

– Solow-Swann model: an early model of economic growth based on neoclassical economic theory.

– Spill-overs: the effects that spill over from one sector to another. For example when military spending

leads to demand for civil goods as well as military.

– Spin-in: when civil R&D produces inventions that are used in arms production by the military sector.

– Spin-off: when military R&D produces inventions that have civil applications.

– SSA School (Social structures of accumulation School): school of marxist economists in the US who

emphasised that the period of growth after second world war represented a particular set of relations

between industry, workers and the state. The crisis of the 1970s was caused by this set of social

structures unfolding.

– Supply-side model: a model that emphasises the supply or production side of the economy, rather than

the demand side.

– UK DTI: Department of Trade and Industry in the United Kingdom.

I p 5 9

colofon

Authors:

J. Paul Dunne

Derek Braddon

Editorial Board:

Tomas Baum

Geert Castryck

Wies De Graeve

Lay-out:

Wendy Guns, Gramma nv

Printing:

Drukkerij Sleurs

With thanks to:

Lodewijk Berlage

Jurgen Brauer

Keith Hartley

Elisabeth Skons

Ron Smith

Tom Truyts

Connie Wall

Brussels, 3 June 2008

ISBN 9789078864189

p 6 0 I c o l o f o n

Flemish Peace Institute

Leuvenseweg 86

1000 Brussels

tel. +32 2 552 45 91

vredesinstituut@vlaamsparlement.be

www.flemishpeaceinstitute.eu