Firms, Innovation, Export and the Policy Regime: An Agent-based model of the Defence Industry

Abstract

The defence industry has traditionally been a heavily regulated and protected market. A new EU Directive being implemented in Norway, January 2012, intends to reform the European defence market towards a higher degree of openness and liberalization. It is therefore vital for the Norwegian Government and national defence authorities to explore the impacts this new EU Directive will have in the near future. This thesis presents a computational agent-based model of the Norwegian defence industry. The purpose is to study how defence firms‟ innovative activities affect their export performance, and to investigate the extent to which public policies, and specifically the implementation of the new EU Directive, will shape conditions for firms innovation and export activities. It provides a novel theoretical framework drawing insights from innovation systems theory, evolutionary economics and mainstream international economic models. The framework is used to construct an agent-based model, for the first time applied in the context of the defence industry, in which knowledge and innovation are the driving force of companies‟ international and export activities. In order to investigate the possible effects of the implementation of the new EU Directive in Norway, the simulation analysis presents five future policy scenarios and outlines the effect of different public policy strategies on the Norwegian defence industry measured by the future export performance of firms. The main findings are that a change towards more openness, competition and liberalization of the Norwegian defence market will have a positive impact on firms‟ innovative capabilities and will increase their export performance.