Conclusions and Policy Implications
As set out in the Final Report to the European Commission, January 2001

National Systems of Innovation

4.4.1 What does our study contribute, at the methodological level, to the NSI mode of analysis? In what ways has it benefited from it? First, we have elaborated the NSI framework through our distinction between policy and production networks, and subsequently through our observation of the scope for divergence (or at least a lack of synchronisation) between the two. We have evidence of such divergence. Hence, the approach offers a way of characterising the multi-layered evolution of the new arms economy.

4.4.2 Second, the emphasis in the framework upon changes in institutions and environment has directed our attention towards certain key sources of dynamism in the defence sector. Going beyond the obvious issue of the end of the Cold War, these also include new ownership relations, in the form of privatisation, and also changes in the sources of new technology, both of which are indicative of changes in the traditional boundary of the defence innovation system. These observations have led us, in turn, to explore how these developments have opened up various 'gaps', such as civil-military, US-Europe, in a way that is less uni-dimensional than, say, the 1960s debate about the transatlantic Technology Gap.

4.4.3 Third, the institutional emphasis of the NSI approach draws attention to the fact that certain 'national' core competences have now shifted to foreign ownership (cf the Swedish case), and this also has implications similar to those identified in the preceding paragraph.

4.4.4 Fourth, the NSI approach enables us to approach from another perspective the issue of the stability of the defence industrial sector over time, alluded to at the end of the preceding sub-section. It is nearly two decades since Kaldor described the evolution of military technology under the title of the 'baroque arsenal', meaning the way in which the types of major weapons platforms (the warship, jet fighter and tank) had remained broadly fixed since the end of the Second World War, and that innovation had taken the form of incremental (rather than revolutionary) change, resulting in embellishment of these basic platforms to baroque proportions. One way to explain this form of technological stability at the level of generic platforms, combined with continuous innovation within the framework thus set, is to observe that NSI theory would expect the military and industrial institutions associated with the generic platforms to feed off each other, and to resist intruders into their network. Thus, when debate surfaced in the late 1970s and early 1980s on the question of whether precision-guided missiles spelled the end of the tank, a natural coalition of interest formed between networks associated with tanks - specifically the relevant sections within armies and their suppliers. In those countries where engagement with the Cold War was a dominant feature of defence policy, with all the consequences that flowed for the relative inviolability of defence budgets, the consequence at an institutional level would be a sealing of the network against the threat to its members, and a channelling of funds to develop answers to the threat. (In the history of technology, this is known as the 'sailing ship effect' - a reference to the way in which sailing ship technology improved under the threat of the faster passage promised by the new technology of steam-powered ships).

4.4.5 On this analysis, the end of the Cold War should result in reduced political legitimation for defence budgets, and therefore increased pressure to seek more radical approaches to defence innovation. The introduction onto the scene of a more diverse set of actors (partly because of civil-military technological integration, discussed above, and partly because of the insertion of institutional investors into defence innovation networks) should also mean that the networks are more open to discordant influences than hitherto. A number of important policy questions arise from this observation.

4.4.6 One of these is that the continuing stability of the networks, in the sense of continued domination by firms or groups of firms with a long history of defence contracting (granting also the exiting of other such firms), and the absence of new entrants at the prime contractor level, requires comment. Several factors may be at work here. One is the relatively small size of the defence sector compared to most global commercial markets. Just as in Britain at the end of the Second World War, ICI turned down a request from the government to take over nuclear reprocessing for the atomic bomb programme because the company saw a brighter future in organic chemicals, so today, companies which may potentially have the capacity to move into the defence sector may not see it as worthwhile. Second, it may be that not enough time has yet passed for the system to change: the strategy of 'survival via consolidation' has dominated the last decade; now that this cannot go much further, other options might start to emerge. Third, in the largest of all defence markets, the United States, it may also be that the budgetary reductions have simply not yet been great enough to create the conditions for more radical change, though the other side of this argument would be that we would expect to have seen more evidence of radical change in smaller countries.

4.4.7 Network boundaries have changed, however, and new entrants have emerged, at the level of sub-elements of the defence innovation system. That is to say, we have in the recent past seen cross-sectoral shifts within the defence sector (aircraft manufacturers becoming prime contractors for warship contracts, for example). In this respect, it is widely claimed that the key competence needed by prime contractors is that of systems integration. This raises a further key policy question which we have not been able to address, but which urgently requires further study, namely, how easy it is to acquire such a capacity with reference to defence systems. This is clearly a critical issue for the analysis of barriers to entry to defence networks.

4.4.8 Put differently, how far is a 'systems integration capacity' something that can be transferred from one context to another (in the way that it is sometimes claimed that 'management' is a generic skill, and can be applied regardless of context)? If it is something that cannot be easily transferred, then even if other protective elements of the old networks are weakened (eg, by privatisation, and increased budgetary pressure), we might still expect to see (as indeed we have) the continued domination of the sector by traditional players. If it can be easily transferred, then the question becomes, why is there so little evidence of it happening? And in the light of the growing importance of civil-military technological integration, which arises mainly at sub-contractor level, it also bears asking whether the trend towards technology integration at sub-system level (the supply by sub-contractors of 'black box' technology) may also threaten to destabilise traditional concepts of systems integration, and related control.

4.4.9 A related matter deserving further analysis, within this set of questions, is the role of 'tacit knowledge' in defining a systems integration capability. A considerable body of work in the 'science and technology studies' field emphasises the importance of such knowledge, acquired by experience over many years, and often embodied in whole organisations and not simply individuals. Modern approaches to the capturing of such capabilities (eg, computer-based expert systems) can reduce the barriers to their acquisition. But the concept of tacit knowledge goes wider than this. Moreover, the modern trend to use computer-based systems to integrate the processes of design and production could be argued to require more demanding systems integration skills, rather than their reduction to some sort of expert system. There is scope here for further study, to establish more precisely what a systems integration capability entails, how context dependent they are, and what effect current developments may be having on their transferability across the civil-military divide.

4.4.10 Finally, of particular interest, because so novel in a number of countries, is the question of the potential influence of institutional investors in altering the balance of power within defence innovation networks. We suggest that this influence will not necessarily be the dominant one in any particular decision, but that does not mean that it will have no effect. First, in the case of diverse corporations, with minor interests in defence, it may encourage decisions to exit the defence sector: in such a corporation, shareholder behaviour is likely to be more attuned to general business prospects than to those of the defence sector in particular. In addition, it increasingly weakens the control that governments can exert over defence companies. It may also (as said above) be encouraging, or at least enabling, civil-military integration in the supply chains, below prime contractor level, with consequences for the overall stability of networks that cannot be predicted.

4.4.11 This is a complex matter, however, and one that deserves more extended study in the future. Such study will need to reflect on the fact that the transfer of control over the defence industrial sector to shareholders is proceeding at varying speeds in different countries, and in nationally specific ways. One sense in which this is so concerns the degree of control over key decisions that governments are really allowing to privatised companies. 'Golden shares', and other residual control mechanisms, remain significant forces. Thus, rational economic behaviour might lead shareholders interested in this sector to opt for holdings that gave them access to the most secure defence market in the world, that of the United States, but political controls over foreign investment may impede any such desire.

4.4.12 A second, and more subtle, brake upon radical change arising from shareholder power can be expected to be the attitude of shareholders to future geopolitical prospects, and the degree to which they share these with other key elements of defence policy networks. Looking at this hypothesis from an international perspective, we can observe the varying degree of exposure, by country, to the new geo-political reality. Compare, for instance, the position in Germany, where history and geography provide direct incentives to seek a stable and cooperative security environment, with that in the United States, where a sense of responsibility for containing the decaying military structures of post-Soviet Russia is inevitably mixed with residues of Cold War arguments for maintaining military might. In France, meanwhile, there is a familiar blend of resistance to American domination and concern not to allow Germany a monopoly of contacts and cooperation with Russia, while in Britain, traditional ties with the United States and a relative remoteness from the concept of regarding Russia as part of the new Europe remain important. It is not difficult to see how these different starting points could have consequences for defence equipment decisions.

4.4.13 Against this overall background, how might the new arms economy, and especially its two main transatlantic elements develop in the future? To address this question, we consider, as already explained, three illustrative scenarios.

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