The Defense Industry: Tradeoffs between Fiscal Constraints and National Security Challenges

By Hensel, Nayantara | Business Economics, April 2016 | Go to article overview

The Defense Industry: Tradeoffs between Fiscal Constraints and National Security Challenges


Hensel, Nayantara, Business Economics


The global defense sector is faced with uncertainty and volatility in government demand, which is driven by fiscal constraints, as well as shifting defense priorities in various nations. This paper discusses the challenges facing the U.S. government and defense contractors, and provides perspectives on potential strategies for these groups which are designed to mitigate risks and to sustain the defense sector. It emphasizes the importance of the continued growth of the defense sector through greater stability in funding, which would, in turn, assist in sustaining defense demand in response to national security challenges. The paper discusses the trends and composition in U.S. defense spending, the strategies used by the armed services to handle national security concerns and fiscal constraints, the impact on the defense industry of closure or development of key programs, and the strategies used by defense firms to handle the volatility in demand. Collaboration between nations may be a key strategy for sustaining global stability, since combining equipment and forces in various regions helps to alleviate fiscal constraints in various countries.

Business Economics (2016) 51, 111-122. doi: 10.1057/be.2016.16

Keywords: defense industry, regional economics, fiscal constraints, department of defense, national security

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The global defense sector is faced with a variety of challenges as it strives to help maintain security and stability. The most significant challenge is the uncertainty and volatility in government demand, driven by fiscal constraints, as well as by shifting defense priorities. Slow economic growth in many nations has contributed to rising debts and deficits. The resulting fiscal constraints have limited defense spending, while shifts in defense priorities have altered the composition of the demand for defense equipment. Consequently, uncertainty and volatility in government demand has affected the profitability and productivity of defense contractors and the defense industrial base. The changes in defense manufacturing and the defense industrial base, in turn, impact the economies of the regions where manufacturing facilities and employees are located, affecting wage growth, consumer spending, savings, and so on, in those areas. As a result, shifts in defense spending can further impact trends in government deficits and debt, adding to fiscal constraints, which could, in turn, put further downward pressure on defense spending.

This paper discusses the defense spending challenges faced by the U.S. government, as well as by defense contractors, and provides perspectives on potential strategies to mitigate risks and to sustain the defense industrial base. It emphasizes the importance of maintaining a robust defense sector through greater stability in funding, which, in turn, would assist in supporting defense demand as national security challenges evolve. Section 1 discusses the impact of fiscal constraints and national security challenges on the U.S. Department of Defense (DoD) and the various armed services, and highlights the strategies they use to mitigate those constraints. Section 2 addresses how defense contractors are dealing with those same challenges. Section 3 provides some concluding thoughts.

1. The Impact of Fiscal Constraints and National Security Challenges on the U.S. DoD and the Services

The DoD budget is shaped by general fiscal constraints and national security issues, including concerns regarding ISIS, Persian Gulf tensions stemming from Iran's relations with other states in the region, potential challenges from North Korea, as well as the territorial ambitions of Russia and China [Mehta 2016]. To meet these concerns, DoD requires equipment, including new technologies to confront near peer countries, such as Russia and China, as well as equipment designed to support counterinsurgency operations [Mufson 2016]. Over the past decade and a half, the United States has focused on counterinsurgency operations in the Middle East, however, this emphasis could change in the future with the possibility of engagements with countries, such as Russia and China, with more developed economies and armed forces [Seligman 2016b]. …

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