A Schumpeterian view of the interplay between innovation and concentration in the EU defence industry

ABSTRACT

The relationship between industry structure, aggregate R&D activity, and the pace and quality of the resulting innovation process is currently the subject of a lively debate across NATO in general and even more so among its European members. This paper tackles this issue from a standpoint belonging to the tradition of industrial economics, adapting it to the specific context of the defence sector. This is done with a view to stressing the need of increasing the degree of concentration in order to increase standardization and interoperability of defence systems and facilitate the exploitation of scale economies. In the traditional jargon of industrial organization theory, this amounts to vindicating the Schumpeterian view according to which increasing concentration (eventually all the way up to pure monopoly) monotonically fosters innovation incentives, while mitigating effort duplications affecting large and long-lasting R&D projects. One additional implication, equally relevant, is that the concentration process can indeed be facilitated, in the short to medium term, by systematically resorting to the creation of research joint ventures and/or R&D cartels so as to boost spillover effects and reduce excess investments.

KEYWORDS:

• Innovation
• concentration
• technological spillovers
• industrial policy

Acknowledgments

This paper is part of the theoretical research carried out during the EIB Universities Research Action (EIBURS) “The economic effects of a joint European security and defence policy,” Project 2018/C 60/14 “Joint Effort for the Defence Industry” (JEDI). Financial support from EIB is gratefully acknowledged. The usual disclaimers apply.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. On the making of EDA and the shaping of its objectives, see Oikonomou (2015).

2. The obvious, and perhaps most intuitive example is that in which the innovation at stake is a marginal cost reduction in a competitive sector supplying a hamogeneous good. The firm attaining it may slightly undercut the price of all rivals and expand its market share to 100%.

3. The related stream of research has also found analogous cases delivering a peak of aggregate R&D in models belonging to the early literature, which neglected or explicitly assumed away concave outcomes precisely because the attention systematically focussed on the monotonicity property. On this, see Delbono and Lambertini (2022), inter alia.

4. As convingly stated by van Damme (1991, 24), a strategy combination is a Nash equilibrium if it is a best reply againsta itself, across the entire population of players. See also Lambertini (2011, 24–26).

5. The concavity condition ${\mathrm{\partial }}^2{\pi }_i/\mathrm{\partial }{k}_i^2=-2$ is satisfied by construction.

6. In other words, since the spillover acts as a multiplier, if the the technological esternality is absent then a monopolist may always at least replicate the behaviour of an oligopolistic sector.

7. Additionally, it can be verified through numerical methods that this derivative is negative for all $n\in \left(1,n^N\right)$.

8. These numerical values have been chosen purposedly to deliver an integer. Of course, any peak in correspondence of any $\tilde{n}$ between two integers would imply that the maximum of $K^N\left(n\right)$ is reached for the highest integer lower than $\tilde{n}.$

9. In this Section, I adapt to the present setup a few typical representations of cooperative or quasi-cooperative R&D arrangements commonly used in the related literature in industrial organization. For an exhaustive overview, see Amir (2000).

Additional information

Funding

The work was supported by the European Investment Bank [EIBURS programme, ”The economic effects of a joint European security and defence policy”].

Notes on contributors

Luca Lambertini

Luca Lambertini (DPhil, Oxon) is Full Professor of Economics at the Department of Economics of the University of Bologna. His research activity covers the theory of industrial organization, environmental and resource economics, optimal control theory and differential games.