Defense Firms Research Articles

Stock market effects of military conflicts on defence industry

PurposeThis paper aims to examine the short-term market reaction for the world’s 100 largest listed defence firms at and around the three recent largest threats to the global economy – Ukraine–Russia war, Fourth Taiwan Strait Crisis and the Hamas terrorist attack on Israel.Design/methodology/approachThe author examine the impact of the three recent largest threats to the global economy in the largest listed defence firms using an event study methodology.FindingsThe results show a positive and statistically significant short-term reaction around the three geopolitical threats. The results also reveal the existence of higher abnormal returns for defence firms with greater weight of defence sales, in line with the captured regulator theory and for firms with higher research and development and capital expenditure intensity.Originality/valueThe effect of the war on stock markets has been relatively little examined in the financial theory. This study intends to fill this gap in the literature through the analysis of the three recent largest threats to the global economy.

Female political leaders and R&D investment

This study employs a difference-in-differences method to analyse how female political leaders affect corporate R&D investment. Our findings indicate that female political leaders exert a positive influence on R&D investments. Moreover, these positive effects are more pronounced among high-tech firms and those operating in developed economies, although they appear to be less significant for defence firms. Additionally, we demonstrate that the presence of female leaders correlates with a reduced rate of inventor emigration to other economies, suggesting that female leadership may contribute to the retention of skilled inventors. Consistent with these primary results, firms exhibit a decrease in R&D investment following the departure of female political leaders from office. Furthermore, during the tenure of female leaders, firms also tend to reduce their cash holdings. We explore potential channels and observe that female leadership results in less external conflict and thus promote R&D investment.

War! Good news for defense firms? Analysis of the impact of Russia–Ukraine conflict

PurposeThis paper examines the short-term market impact of the beginning of the military conflict between Russia and Ukraine (February 24, 2022) on the world’s largest defense firms.Design/methodology/approachThe authors examine the world’s 100 largest listed defense firms at and around the beginning of the military conflict between Russia and Ukraine using an event-study methodology.FindingsWe observe a positive and statistically significant stock price reaction at and around the beginning of the military conflict. These results are consistent with the asset-pricing perspective/expected cash flow hypothesis. Consistent with the captured regulator theory, we find superior market returns for the two portfolios with a greater weight of defense sales. Superior market returns are also found for defense firms with higher R&D and capital expenditure intensity. Finally, these reactions are reinforced or mitigated by other firm-specific characteristics such as size, profitability and institutional ownership.Originality/valueThe effect of the war on stock markets has been relatively little examined in the financial theory. This study intends to fill this gap in the literature.

Profitability of Defense Companies in the US and Europe

ABSTRACT The profitability (ROA) of US and European defense companies are influenced by past profitability, debt policy, company size, and defense specialization. Taking into account the effect of these variables, individual company characteristics and time specificities, the profitability of US defense companies remains higher than that of European companies. Moreover, US defense firms are more profitable when specialized in defense, while European companies are more dependent on the civilian market and its evolution. The position of a company in the SIPRI ranking has a negative impact on American companies’ profitability, while it positively influences European companies’ profitability. These results could be due to excessive fragmentation (of orders and industries) on the European market and high concentration on the US market.

How does central enterprise reform promote total factor productivity of defense firms in China?

How does central enterprise reform promote total factor productivity of defense firms in China?

Weapon of choice: a neoliberal institutional perspective on Italy’s decision to procure a sixth generation fighter aircraft

ABSTRACT In 2018, Italy decided to join the British-led Team Tempest to develop a sixth generation fighter aircraft. This decision came at the expense of a rival project, the Future Combat Air System (FCAS), led by France and Germany. The Italian decision to join Tempest raises a theoretical question overlooked by the existing literature: when states have different cooperative procurement options, what makes them choose one rather than another? The aim of the article is to provide an analytically informed account of the process that led Italy to join Tempest. In doing so, we adopt a neo-institutionalist perspective, as it allows us to identify the actors and motivations that made this outcome possible. We argue that due to the peculiar Italian bureaucratic-institutional setting, no domestic actor was solely responsible for the final decision. The final decision to join Tempest was the result of a coalition between the Armed Forces and defence firms.

Six Decades of Consolidation in the European Defence Industry (1960-2022)

In the present security environment, the capabilities of the European defense industry and the impact of restructuring over the years have become issues of concern. Researchers have found considerable consolidation when looking at the overall industry, but have failed to consider that this might understate the loss of national capabilities in subsectors. This article investigates the effect that restructuring has had on twenty subsectors of the defense industry in thirty one European countries from 1960 to 2022. It finds that since the 1960s, the number of major European defense firms has contracted by between 29% and 80% across subsectors, implying the loss of a range of capabilities. It suggests that while Europeanization is inevitable, it is likely be accompanied by further diminishing capabilities at the national level.

Horses, nails, and messages: Three defense industries of the Ukraine war

ABSTRACT Major arms producing states and defense firms have struggled to supply the Ukraine war's massive demand for munitions. Key elements of the war—such as artificial intelligence-enabled analysis of data obtained from commercial surveillance satellites transmitted by the privately-owned Starlink network—have emerged from new providers as well as developed organically on the battlefield. Research failed to anticipate this due largely to the discipline’s focus on the “defense industry” rather than three distinct “defense industries” highlighted in the war: platforms such as tanks, commodities such as artillery shells and loitering munitions, and militarized “tech” such as commercial satellites and artificial intelligence. Understanding each requires a distinct political economic approach. Using these three lenses, the article concludes that the United States retains advantages in all three industries, Europe risks regressing into a commodities producer, and China seeks to disrupt, rather than duplicate, American defense industrial advantages in technology.

ERP System Evaluation in the Defense Industry: A Hybridized Spherical Fuzzy AHP-Codas Approach

Design/methodology/approach: Converting data into information and its diffusion along all organization units has become a vital survival skill. At this point, an ERP system provides an invisible network among a company’s internal and external stakeholders and plays a strategic role. Moreover, ERP systems offer some advantages. For example, integrating financial, customer, and order information, speeding up production processes, and reducing stock level and order lead time. Therefore, we propose an integrated spherical fuzzy-analytical hierarchy process (SF-AHP) and spherical fuzzy-combinative distance-based assessment (SF-CODAS) framework to prioritize the best ERP software provider for the defense industry. Purpose: Despite having the advantages mentioned above, some crucial aspects must be considered while selecting an ERP package. Factors such as high cost, difficulty in installation, and security threats can be very challenging. The latter issue needs special care in the defense industry. This study aims to design an evaluation framework for the ERP selection problem in the sector. Findings: One of the pivoting defense companies in Turkey is chosen as a case study. Seven ERP systems are evaluated with the proposed model. The results show that the proposed model can be successfully implemented in a defense company context. Furthermore, a sensitivity analysis proves the robustness of the approach to varying threshold parameters in CODAS and different fuzzy weighting approaches. Originality/value: The defense professionals prioritize a different set of selection criteria than conventional manufacturing firms. The study provides a rare holistic framework for the defense industry using a hybridized SF-AHP-CODAS technique. Thus, the study may serve as reference work for the researchers and decision-makers during the digitalization journey of defense firms.

The future of the European defense firm

The future European defense firm will be radically different, being determined by future threats, novel technology, and yet to come European defense policy. The immediate threat arises from the war in Ukraine, but longer-term European defense policy based on the Strategic Compass will provide the framework for the future European defense firm. Past developments offer some indication of the future and it is predicted that the defense firm has a future and will survive. The past trend of smaller numbers of larger defense firms will continue with firms being even more technologically-intensive—reflecting Augustine weapons systems, which are characterized by continuously rising unit costs and smaller volumes. There will be more mergers between European defense firms and more joint European projects developing and producing combat air and naval systems, tanks, and cyber systems.

The Spectrum of Strategic Autonomy in EU Defence Supply Chains

ABSTRACT The Strategic Compass aims to strengthen the resilience of defence-industrial supply chains and complements the long-term strategic ambition of enhancing the EDTIB. Impetus for restructuring the EU’s supply chains may be provided by the 2022 Russian invasion of Ukraine, the associated increase in defence budgets, and the promotion of joint projects and cross-border M&A. Since the prospect of achieving strategic autonomy also depends on how ‘local’ current supply chains are, we offer an in-depth investigation of three dimensions related to foreign dependency (company ownership, tender success, supply chain participation). Despite mean scores of non-EU ownership in the range of 25-30% for the EU’s largest defence firms, foreign ownership does not necessarily threaten the EU’s security of supply. Nevertheless, the participation of non-EU firms concerning M&A with high relevance for the EU defence industry increases, as does the share of defence-related EU tenders that are won by non-EU firms. An assessment of four multinational military aircraft programmes further exemplifies that the EU’s defence R&D and production capabilities may critically depend on outside suppliers. We thus find that the importance of non-EU actors for the EU’s defence industry is large and may not easily be mitigated, particularly if commodity imports are considered.

Weaponising Europe? Rule-makers and rule-takers in the EU regulatory security state

ABSTRACT In contrast to the conventional wisdom that security is governed exclusively by nation states exercising political authority to generate public security goods, the European Union can also be considered a security state: it governs security indirectly by making rules incentivising and steering the provision of public security goods. To what degree, however, does the EU govern defence markets, shape the trajectory of national defence capabilities, and direct efforts towards European strategic autonomy? This paper traces the EU’s attempts to regulate arms production and identifies critical junctures in EU authority as a market rule-maker over the means of force. It finds that market rule-takers—non-state defence firms—are shaped by EU epistemic authority and regulation. Specifically, EU rule-making shapes firm perceptions of relative defence market uncertainty. Firms perceiving future home defense markets as less risky due to regulatory oversight are incentivised to reduce their own current profits by self-funding innovation towards future defence requirements and procurement sales to their home states. By incentivising the non-state production of public security goods with its rule-making and relational market power, the EU is a modern regulatory security state, even in the defence domain where it has little political authority.

Indo-Israel Defence Relationship: Implications on Pakistan’s Security Policies

The strategic partnership between India and Israel is well established and improving over time. This defence-based cooperation is escalating the already existing arms competition in the South Asian region resulting in action-reaction dynamics owing to the security competition between India and Pakistan. India-Israel increasing defence collaboration in hi-tech weapon systems including the Air and Ballistic Missile Defence system and serious facelift of the Indian military courtesy of Israeli defence firms is creating a security dilemma leading to greater security concerns for Pakistan in particular and other neighbouring nations in general. The deep-rooted mode of cooperation between India and Israel in the space programme would give the Indian military dominance in information warfare. The counterterrorism and intelligence sharing between the two would help India add network-centric and electronic warfare capabilities and learn modern techniques for the contemporary combat environment. This defence partnership is likely to create a strategic imbalance in the region, compelling neighbouring Pakistan (and others) to look for countermeasures. Resultantly, Pakistan’s counter-effort to secure itself is enhancing arms competition. This paper will highlight the areas of defence cooperation between India and Israel and will signify it’s implication over Pakistan and counter measures required.

Transnational industry and national security: China and American industrial security

ABSTRACT Concern over the national security implications of transnational industrial integration is growing in the United States. Direct and indirect Sino-American integration in high-technology industrial sectors is regarded as a threat to American industrial security in terms of the National Technology and Industrial Base and technological primacy. The American government has launched a number of national and international initiatives to strengthen the resilience of American defence supply chains and limit China’s capacity to derive defence-industrial benefits from industrial ties. The emerging industrial security framework supports the functional requirements of American defence firms, but threatens American arms programmes through its potential impact on the affordability of arms, the flexibility of arms production arrangements, the scale and time frame of arms production, and the development of arms over the long-term, as restrictions on offshore collaboration threaten industrial processes that are central to high-technology production and development.

Politically influenced counterterrorism policy and welfare efficiency

The paper examines how two targeted countries strategically deploy their counterterror forces when lobbying defense firms influence counterterror provision. For proactive measures, lobbying activities in a single targeted country lessen underprovision, raise overall counterterrorism, and reduce terrorism. Welfare decreases in the lobbied country but increases in the other targeted country owing to enhanced free riding. Lobbying influence on the targeted countries' welfare is tied to terrorists' targeting preferences and how the lobbied government weighs citizens’ welfare. Lobbying in both targeted countries may result in the first-best equilibrium. International policy coordination may lead to less efficient outcomes than the noncooperative equilibrium.

Structuring Servitization-Related Capabilities: A Data-Driven Analysis

The existing literature investigates organizational capabilities for servitization in exploratory studies based predominantly on interviews with managers. This has led to classification frameworks that tend to reflect managerial perceptions regarding key capabilities (rather than actual firm capabilities) and in which associations and connections between capabilities remain anecdotal. This study examines the servitization-related capabilities existing in manufacturing firms that have taken strategic service initiatives and adopts a data-driven approach to explore their underlying structure. A quantitative study based on secondary data from annual report narratives is used to assess the servitization-related capabilities of 79 firms from the aerospace and defense sector and to identify the underlying factors through exploratory factor analysis. The study identifies seventeen capabilities structured into five factors: (i) management of production/delivery operations; (ii) development of valuable and sustainable offerings; (iii) identification of incentives; (iv) planning for uncertainty and change; and (v) relationship management. The study provides evidence of servitization-related capabilities in practice. By examining gaps between existing (current) capabilities and the capabilities identified in our five-factor model, business managers of aerospace and defense firms can assess the status of servitization-related capabilities at their firms and set objectives to develop such capabilities further. The study contributes to the systematic development of a reasonable and parsimonious representation of organizational capabilities for servitization, which is statistically supported and validated through empirical data.

Consolidation of the U.S. Defense Industrial Base

The U.S. Government has promoted defense industry consolidation in the past decade as part of its acquisition reform policies, to help control costs and promote efficiency. But when the Department of Defense (DoD) reversed its pro-consolidation policy, defense firms were left financially less secure from the acquisitions and mergers—and the hoped-for reductions in tangible assets have been marginal. What is the best way forward?

Corporate lobbying and the value of firms: The case of defense firms and the 9/11 terrorist attacks

AbstractWe examine the stock prices of defense firms surrounding the reopening of markets after the September 11, 2001 terrorist attacks. The cumulative abnormal returns for defense firms increased dramatically in response to the attacks, which is arguably explained by the expectation of impending military conflict and the possibility of new defense spending. Perhaps more interestingly, a substantial amount of the variation in the price response across defense firms is driven by whether or not the firm had established political connections through lobbying activities or political action committee contributions before the attacks. These findings seem to support the notion that market participants perceived that defense firms with political connections were more likely to secure future military contracts.

North Korea targets defence firms and Pfizer

It has been claimed that North Korea is behind an attack on pharmaceutical firm Pfizer and that it has launched a malware campaign against defence companies.

Research Paper #3 - Class Actions and Litigation Funding Reform: The Views of Class Action Practitioners

In this paper, we provide qualitative data on the class actions regime and commercial litigation funding in Australia, based on interviews with experienced legal practitioners from the Federal Court Class Action Users’ Committee and the Law Council Class Actions Sub-Committee. Participants discussed their views on the current operation of the class actions regime; the way in which commercial litigation funding is working; transaction costs and delays associated with class actions; the merits of claims and defences; and ethical issues arising out of the conduct of plaintiff and defence firms, funders and counsel. Practitioners identified various problems associated with class actions and litigation funding and outlined their thoughts on possible solutions to those problems.