Instruments and Institutions of Industrial Policy at the Regional Level in Germany: The Example of Industrial Defense Conversion

Elsner, Wolfram, Journal of Economic Issues

Severe structural change, such as that caused by the contraction of the defense industry since the end of the Cold War, often produces high social costs. These costs include the loss of production and system capacities, skills, and key technologies in individual regions. On the other hand, such capacities and capabilities are very often established in other regions at the same time. Such processes frequently appear to be efficient from the individual company's point of view but seem societally inefficient.

The management of structural change, i.e., active preservation as well as modernization of existing economic structures in a region is a form of conversion. However, management of structural change not only occurs infrequently, it may actually result in sethacks in the process of structural change and, consequently, higher social costs, widespread skepticism, disappointment, frustration, and political lethargy toward structural problems.

Such a turn of events can be observed on a large scale in the defense industry. The conversion process started in Central and Eastern Europe in the 1980s and was accompanied by high expectations. However, today the strategy of change management and the mere word conversion have become discredited. The sectors where conversion originated are also proof of the dangers of such sethacks: widespread disappointment and structural-political lethargy have led to individual and uncoordinated strategies. The danger of a drastic increase of uncontrolled weapons exports to regions of conflict and the sale of weapons in the domestic market have increased. There is also increased pressure on Western defense companies to export their military hardware.

Against this background, questions regarding whether and how the challenge of a severe and often sudden structural change can be overcome in a particular region takes on added importance. In this paper, I will attempt to show that conversion--taking the defense industry as the point of departure--is feasible as a form of successful management of structural change. I also argue that this management process might be transformed from a more-or-less marginal form of industrial change to a general form applicable not only to change in the defense sector, but to severe structural change in general. Sectoral cooperation, regional "networking," as well as carefully balanced structural policy support using financial and nonfinancial instruments, is required. If different elements can be brought together in a carefully balanced overall system, then there is the chance for further development of regional industrial policies and, at the same time, for the generalization of conversion as an answer to the challenges of structural change.

Terminology and Conceptions

As conversion support is not yet a well-defined area of economic analysis or policy and belongs to a field in which practical experience--at least in Europe--has only recently been obtained, further clarification is necessary.

Conversion

Conversion is generally one of several forms of structural change and is actually a special case. Conversion of an industry usually has to compete with seemingly more favorable alternatives such as trying to get a bigger share of a shrinking market, export strategies, concentration by closing down production sites after acquiring or establishing new sites in other regions, or simply the "strategy" of hanging on and muddling through. An appropriate definition of conversion should include not only the serving of new markets--this would simply be diversification, which in the case of defense production is often called "dual use"--but also new markets for new products that are to be manufactured with new forms of production processes.

Industry

There is no particular branch of industry that can be unequivocally classified as a defense industry. On the contrary, the defense industry is a cross section that appears at different places of industry statistics. When such a "cross section" is heavily represented in a region, this is of vital concern for the region. On the other band, it is precisely the high-tech parts of the defense industry that do not often cooperate with regional sub-suppliers and other companies in the region. This may be because of official secrets and regulations and because of specific quality requirements, i.e., the fact that they have to process highly specialized components that can often only be obtained from a few suppliers throughout the world. As a consequence, defense conversion raises interesting problems for regional integration of the economy and for innovative potential.

Industrial Policy

Modern industrial policy must deal with broadly …

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Publication information: Article title: Instruments and Institutions of Industrial Policy at the Regional Level in Germany: The Example of Industrial Defense Conversion. Contributors: Elsner, Wolfram - Author. Journal title: Journal of Economic Issues. Volume: 29. Issue: 2 Publication date: June 1995. Page number: 503+. © 1999 Association for Evolutionary Economics. COPYRIGHT 1995 Gale Group.

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