The Real Problem With the European Defense Industry
EU firms should be able to satisfy a large share of the increases in defence expenditure that are required immediately to support Ukraine and also those in the medium and longer-term
The EU aerospace & defence industry represents one of the few sectors where EU companies spend almost as much on R&D as those in the US (€8.7 billion versus €9.4 billion).
The main difference is the size of the market, as can be seen from net sales of €260 billion for the US and €140 billion for the EU: defence spending is much higher in the US and most of this spending naturally benefits US companies.
The near equality in R&D efforts (in terms of capital expenditure, the figures would be similar) suggests that EU industry should be competitive in the open market.
That is, EU firms should be able to satisfy a large share of the increases in defence expenditure that are required immediately to support Ukraine and also those in the medium and longer term, as Member States ramp up defence expenditures.
The European Defence Industrial Strategy can therefore count on a strong industrial base. The problem here pertains much more to the market fragmentation within the EU and the limited role of joint procurement.
The recently created European Defence Fund should at least partially address these long-standing problems. But its main focus will be technologies close to commercial application, which carries the risk that it might substitute, rather than complement, existing industrial R&D.
At least some of its budget could be devoted to bold transformative projects, like the Defense Advanced Research Projects Agency (DARPA) in the US.
EU resources should support projects that are initially too risky to be financed by private funds, but offer the potential of attracting business R&D once they reach a sufficiently mature stage to scale them up.
In the US, spurring breakthrough innovation is a key objective of the Advanced Research Projects Agencies – or ‘ARPA model’ of innovation.
There are several ARPA-style programmes in the US, each associated with a respective government agency. Examples include the Defense Advanced Research Projects Agency (DARPA) associated with the Department of Defense, ARPA-E with the Department of Energy and ARPA-H with the Department of Health.A key characteristic of ARPAs is their mission-oriented approach to innovation.
The European Innovation Council devotes roughly half of its budget to predefined thematic calls, or ‘missions’. Some of the literature suggests that mission-oriented R&D funding can be an effective tool to crowd in private R&D.
On the other hand, predefined thematic calls might prevent promising projects in other fields from being financed; relatedly, they might also reflect the preferences of the European Commission rather than the best technological prospects.
This text is an excerpt from the report EU Innovation Policy – How to Escape the Middle Technology Trap? coordinated by the European Policy Analysis Group, a coalition of three major research institutions: CesIfo, the Institute for European Policymaking at Bocconi University, and the Toulouse School of Economics.
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EU resources should support projects that are initially too risky to be financed by private funds, but offer the potential of attracting business R&D once they reach a sufficiently mature stage to scale them up
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