A Study of the Network Effect on Exports in the Defense Industry

Abstract

The main purpose of this study is to contribute to the investigation of explanatory variables and networks effect on exports in the defense industry. In particular, it attempts to examine the role of two channels of economic and non-economic networks in the gravity equation of exports; economic networks are trade, FDI and FTA, non-economic networks are military expenditure and military alliance. The basic and the augmented gravity models are estimated with an annual cross-section data set of year 2020 for 44 countries. The estimation results demonstrate that military expenditures explain the bilateral export in the defense industry better than GDP does as an economic scale variable in the equation. Also the evidence of the effect of FDI is statistically significant in the estimation, whereas no evidence for effects of trade and FTA have been found. In addition, there is no further evidence for the role of military alliance between trade partners for exports in defense industry. The results imply that military expenditure of import country and FDI relation has a strong relationship with export in the defense industry. Thus, it also emphasizes the policy implication for taking into account of the linkage between export and FDI activity in promoting export of defense industry.