Cross-Country Evidence on the Impact of Shifting Economic and Strategic Landscapes on the Global Defense Industrial Base

Abstract

Over the past twenty years, following the end of the Cold War, the defense industrial base in the US has witnessed many changes and continues to face new challenges. The purpose of this study is to evaluate the evolution of the US and global defense industrial base in response to the shifting economic and strategic landscape. Specifically, it examines the impact of macroeconomic factors on the defense industrial bases in the US and overseas, and discusses the trends in fiscal debts and deficits and their potential impact on military spending. Second, it discusses the impact of the shift in defense priorities toward irregular warfare and away from conventional warfare on the defense industrial base, and discusses areas of growth, as well as potential shrinkage. Third, it evaluates the ability of large defense contractors to compete with smaller firms in growing market spaces due to rising legacy overhead costs, as well as the financial impact of the strategic business base shift of large defense contractors. The analysis then assesses the development of the global defense industrial base and the role of foreign contractors in the US defense industrial base. In examining global supply chain arrangements, which promote interlinkages between domestic industrial bases, the study looks at the role of exchange rate volatility and declining military spending on defense products. Finally, the analysis examines the greater overseas orientation of elements of the US defense industrial base which are focused on traditional military equipment, as well as the growth of overseas defense industrial bases.