Volume 3, Number 1 - International Development - Special Edition 1999

Title: From Endgame to N-Game: Competition vs. Economies of Scale in the Military Aircraft Industry

Author: Kenneth Flamm

Abstract: Given the dominant role of economies of scale in the production of modern weaponry, global defense downscaling has put pressure on nations to close off national markets to foreign competition and dramatically increase exports. This has implications for U.S. relations with its allies and for the stability of contentious regions around the world. This article addresses the natural tension between government goals to increase competition and innovation among defense contractors and the desire to achieve cost-savings due to economies of scale. The author first describes U.S. trends in defense industry consolidation since 1982 and posits that the role of economies of scale in defense industries has increased due to the massive increase in research and design investment required to design leading edge military equipment. Next, through a stylized model of the U.S. fighter aircraft industry, the author shows how effort to support more than just a few firms can make the aircraft product virtually unaffordable. This may in turn decrease the peace dividend that could accrue from overall defense downscaling. The author concludes by discussing design houses and innovative international cooperation as options for reducing the incentives for defense companies in other nations to consolidate and increase defense product sales to marginal nations.

About the Author: Kenneth Flamm is the Dean Rusk Chair at the Lyndon B. Johnson School of Public Affairs at the University of Texas. Professor Flamm served as Senior Fellow in the Foreign Policy Studies program of the Brookings Institute before taking a position at the LBJ School. In 1995 he was awarded the Defense DepartmentÕs Distinguished Public Service Medal for his work as Principal Deputy Assistant Secretary of Defense for Economic Security. Flamm, who received his Ph.D. in economics from the Massachusetts Institute of Technology, has been a professor of economics at the Instituto Tecnologico Autonomo de Mexico, the University of Massachusetts-Amherst, and George Washington University.

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