Industry structure and innovation in the U.K. defense sector

Abstract

The defense industry in the United Kingdom has experienced significant structural change since the end of the cold war. Consolidation has occurred and overseas suppliers have entered while some domestic prime contractors have exited. The implications of consolidation for innovation have been studied in the U.S. environment but much less so in the case of Britain. In this article we report briefly on the changes to structure and review the theory and empirical evidence that suggests how such change might be related to innovation. Firms' own-financed R&D in the British defense industry is proposed as a useful indicator of innovation activity and is observed to have fallen sharply. Possible explanations are sought in the recently-revived inverted-U hypothesis linking competition to innovation, and in government demand fluctuations and British defense procurement reforms. The authors caution against government taking policy action to influence industry structure until more and better data are available to analyze the potential consequences. Investigating in-contract incentives to encourage industry innovation are recommended as a possible alternative.