March 22, 2005 | WebMemo on National Security and Defense

Options for Maintaining a Robust, Adequate and Efficient Military Industrial Base: The Advantages and Disadvantages of the Free Market and Controlled Competition Models

One of the most important national security issues today is the state of America's military industrial base. The Heritage Foundation invited several experts to examine the existing military industrial base, compare free market and controlled competition models, and provide recommendations to strengthen the base and assure its continued capacity to support national defense.  Here is a summary.

 

Existing Military Industrial Base

There is a false perception that the industrial base is being left unattended. It is true that prior to 9/11, decisions and actions involving the military industrial base were mainly reactive. After 9/11 with the focus on critical infrastructure protection, there was an increasing realization that a terror attack could severely affect the military industrial base, and a proactive stance was adopted.  There are a variety of methods by which the military industrial base is extensively and intensively monitored and studied in strategic, tactical, and contingency frameworks.

  • Defense Acquisition Board involvement in military industrial base studies
  • Extensive consultation with program managers to reduce conflict with acquisition strategies
  • Fine-tuning and analysis of CFIUS (Committee on Foreign Investment in the U.S.) and HSR (Hart-Scott-Rodino) transactions[1]
  • Defense Industrial Base Capability Studies - forward-looking studies undertaken to identify what capabilities are most suitable to materiel solutions, and to identify the following:
  • Where must the U.S. military have at least a "1-generation" lead?
  • How can war-fighting capabilities be matched with technology?
  • How can military industrial base capability support the "1-generation lead?"

Understanding a Systems Approach

In order to fully understand the military industrial base, it must be recognized as integral to a process of interlocking nested systems. It cannot be separated from the domestic and international systems of which it is a part. Furthermore, the military industrial base cannot be entirely managed or controlled by any federal agency, department or Congress; however, it can be influenced, by both the actions of domestic actors and international forces, actions, and policies.

 

  • The U.S. military industrial base is a subsystem of the overall industrial base system; which is a subsystem of the overall U.S. economy, which is a subsystem of the global economy.
  • The U.S. military industrial base is also a component of the overall National Military Strategy; which is a component of the National Security Strategy; which is a subsystem of overall national strategy, including all elements of national power.

This complex adaptive and interlocking system of relationships can be referred to as "globalocalization."

 

Free Market and Controlled Competition Models

As analysis of the military industrial base reveals its increasing complexity, the Department of Defense is interested in having the global industrial base participate in competitive bidding on a "best value"[2] basis and encourage the continued importance of small companies. There is some movement away from the offset program.[3] This is beneficial for companies, and better for the Department of Defense, increasing options and minimizing entanglement in offset programs "gone bad."

 

This approach to acquisition and procurement most closely approximates the free-market model. There are benefits to be gained in both directions by the free-market economic model, especially as applied to U.S. national defense interest. As an example given by one speaker, foreign investment is growing in the U.S. aerospace industries, and far outpaces other investment in the U.S. With this investment, jobs and tax revenues are created, and new facilities are built. In general, the free market:

  • Benefits consumers by giving greater choices at lower prices. It is in the best interest of the Department of Defense to have access to the widest range of products and services necessary and to be able to obtain them at the most competitive price.
  • Benefits producers by encouraging more competitive access to less expensive components.   This allows producers to be competitive, productive, and efficient, and provide quality products at reasonable price.
  • Encourages innovation through global competition. The Department of Defense's transformation vision largely depends on acquiring innovative new technology and using it in innovative ways.
  • Advances America's interests abroad.  By increasing the opportunities for people in other countries to become more productive, raising their quality of life and increasing the incentive to peace.

In general participants were not in favor of the controlled competition model. Controlled competition does not contribute to the global competitiveness of U.S. companies, and may not guarantee the best product and value for the U.S. military. However, examining this alternate model illuminates that the free market model is not a panacea.

 

A truly free market does not exist at this time with all trading partners that the U.S. military industrial base might need to engage. On certain levels, embracing an entirely free market approach remains theoretical, not practical. Some military items have specific and sensitive national security considerations, for which an entirely free market approach might not be suitable or appropriate. One outcome of a free market approach - outsourcing - has lead to significant impact in certain localities, creating political reverberations that are difficult for members of Congress to ignore.

 

Strengthening the Military Industrial Base

The participants suggested the following recommendations as possible means to assure a strong military industrial base:

 

  1. To the extent possible, the U.S. military industrial base must distance itself from government industrial policy, and let the free market prevail
  2. The current lack of focus on mobilization of the industrial base must rectified
  3. The government needs to pay attention to harbingers of change - Who is building what? How advanced is it? Where is it being sold?
  4. Encourage education in useful sciences and technology, and provide incentives to young people to become scientists and engineers
  5. Ensure a level economic playing field, so our industries are not driven to bankruptcy with illegal procedures
  6. Increase knowledge and understanding of the supply chain
  7. Maintain the capability to be globally competitive in product and process innovation; make industry compete, understand better, and learn faster than the competition
  8. Be world leaders in investment in research and development
  9. Invest in manufacturing across government-owned operations
  10. Prioritize technologies that are critical to gaining and maintaining leadership and competitive advantage in weapons systems
  11. Develop system-wide military industrial base metrics

For more information on defense issues, see Executive Memorandum No. 953 Defense Priorities for the Next Four Years, and Mandate for Leadership,   Transforming the U.S. Armed Forces.

 

Jack Spencer is Senior Policy Analyst for Defense and National Security in the Kathryn and Shelby Cullom Davis Institute for International Studies at the Heritage Foundation. Kathy Gudgel, Research Assistant in Defense and National Security, contributed to this piece. This paper is based on presentations given at "Options for Maintaining a Robust, Adequate, and Efficient Military Industrial Base: Advantages and Disadvantages of the Free Market and Controlled Competition Models," the first of two events, held on February 23, 2005 at The Heritage Foundation. This project is made possible by a grant from the Tawani Foundation, and its founder Colonel (IL) James N. Pritzker ILARNG (Ret.), which is dedicated to promoting awareness and understanding of the role of the Citizen Soldier in America's military heritage. Panelists' PowerPoint presentations can be accessed via Events Archive at http://www.heritage.org/Press/Events/ev022305a.cfm.



[1]CFIUS (Committee on Foreign Investment in the U.S.) is an inter-agency committee chaired by the Secretary of Treasury. CFIUS seeks to serve U.S. investment policy through thorough reviews that protect national security while maintaining the credibility of an open investment policy, and preserving the confidence of foreign investors here and of U.S. investors abroad so that they will not be subject to retaliatory discrimination. See U.S. Department of Treasury, Office of International Investment, "Exon-Florio Provision," at www.treas.gov/offices/international-affairs/exon-florio/ (March 14, 2005). Hart-Scott-Rodino transactions refer to the Hart-Scott-Rodino (HSR) Antitrust Improvements Act of 1976 (15 U.S.C. §18a), which requires certain companies and others to notify the Federal Trade Commission and the U.S. Department of Justice (DOJ) before completing transactions such as mergers and acquisitions. See Federal Trade Commission, "Major Changes to Hart-Scott-Rodino Premerger Notification Requirements to Take Effect February 1, 2001," January 25, 2001, atwww.ftc.gov/opa/2001/01/hsrreform.htm (March 14, 2005).

[2]As defined by the Defense Acquisition University, best value is "the most advantageous trade-off between price and performance for the government. Best value is determined through a process that compares strengths, weaknesses, risk, price, and performance, in accordance with selection criteria, to select the most advantageous value to the government." See Defense Acquisition University, Glossary of Defense Acquisition Acronyms and Terms, 11th Edition, September 2003, p. B-14, at www.dau.mil/pubs/glossary/11th%20Glossary%202003.pdf (March 14, 2005).

[3]As defined by the Defense Acquisition University, offset agreements are "one of various industrial and commercial compensation practices required of defense contractors by foreign governments as a condition for the purchase of defense articles/services in either government-government or direct commercial sales." See Defense Acquisition University, Glossary of Defense Acquisition Acronyms and Terms, p. B-96.

About the Author

Jack Spencer Vice President, the Institute for Economic Freedom and Opportunity

Kathy Gudgel Program Manager
Asian Studies Center