Measuring performance in defense‐sector companies in a small NATO member country

Abstract

In all European national defense‐sector industries, organizational efficiency forms a vital component of the operations that improves competitiveness in the market. The Portuguese government subsidizes companies that are active in this sector in its mission for the companies to achieve improved operational competitiveness, thereby increasing exports and, consequently, become profitable. The policy of subsidization is intended to provide incentives for increasing productive efficiency, which, in the long run, would contribute to the defense industry sharing in the social gains in the form of greater employment and local development. The issue considered in this paper is whether government subsidies have, in fact, resulted in an increase in the technical efficiency and allocative efficiency of the Portuguese defense‐sector companies. The results are, at best, mixed, leading to the conclusion that the incentive regulation carried out by the Ministry of Defense is not achieving its aims. Therefore, a policy revision to enforce efficiency is proposed, based on a governance environment framework.