Industry Structure, Procurement and Innovation in the UK Defence Sector

There is agreement within industrial organisation economics that an inverted U-shaperelationship exists between the level of competition in an industry and the level of innovation inthat industry. Thus, when consolidation changes the level of competition in an industry wemight expect this to have implications for the level of innovation in that industry. The keyquestion for our paper is whether the sort of relationship found to hold, on average, across allof manufacturing industry applies in the specific case of the defence industry. We note that thedefence industry has unusual structural characteristics and in particular a single (monopsony)buyer on the demand side that can determine the number of competitors in the industry byimposing regulatory barriers to entry, use its contract terms to control the profits thatcompanies make, and support industry innovation through funding R&D by industry and in itsown research facilities. We present data on changes to the structure of the UK defenceindustry and patterns of innovation, 1989-2007. We note in particular that industryconsolidation has been accompanied by a steep decline in industry’s own funded defenceR&D (an input measure of innovation)....