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.