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8 The Defense-Industry Strategies of Other Nations U.S. security for the twenty-first century (both militarily and industrially) requires a global strategy. In the future, virtually all security scenarios that affect the nation will involve other nations, and technology and industry will themselves be global. Moreover, we can learn a great deal by looking at the strengths and weaknesses of alternative industrial models that have been tried for the defense industries of other nations. The United States cannot by itself counter global terrorism, weapons proliferation , and regional instability. It also cannot depend solely on its traditional allies (like Europe, Japan, and Australia) but must develop strong alliances with countries such as Russia and China in addressing these issues (to which they are equally vulnerable). The approach to defense industrial strategy that is taken by essentially all other nations in the world is much more planned than the U.S. approach. Even though the U.S. government is the sole buyer and its defense industry is almost totally regulated , the industry is supposedly laissez-faire. Other countries—whether capitalistic or socialistic—recognize the dominant role played by the government in its security industry. They may have different degrees of ownership and management participation by the government in the industry, but they all recognize the non-free-market conditions that exist. A few countries encourage internal competition, but most view the competition to be primarily with other countries (for foreign sales). Other nations are involved (in detail) in the planning of the structure, conduct, and performance of their defense industry—including its research and development, production capacity, and financing. They treat their defense industry as a valued national resource, and most have created financial incentives to lure high-tech defense firms (particularly from the United States) to their countries. For example, the United States has an R&D tax credit of approximately 3 percent, but Singapore’s is approximately 24 percent.1 Similarly, overall foreign tax policies are a magnet, pulling U.S. capability offshore. The United States has a 35 percent corporate tax rate, but Ireland has a 12.5 percent rate, Israel a 10 percent 308 Chapter 8 rate with a two-year tax holiday, and China has a five-year tax holiday and then a half-normal rate for the next five years.2 When such incentives are combined with a high-quality, low-cost supply of scientists and engineers (eleven qualified engineers can be hired in India for the cost of one in the United States),3 U.S. firms find it extremely attractive to move much of their R&D offshore. When this work can be dual-use, it has benefits—(both militarily and economically)—for the sponsoring nation. This also can benefit U.S. security. Equipment that is designed and built offshore can be used in joint, multinational military operations if appropriate attention is paid to each country’s security considerations and to appropriate controls on third-country transfers (of products or technologies); and if the United States still maintains a domestic capability in that technology area. Historically, the industrial structure was thought of largely in terms of manufacturing jobs, for which labor location was the primary driver. Today a large share of the work is in the services area, and the labor force is only a “mouse click” away in India, China, Ireland, Australia, Singapore, or Brazil. Corporations around the world are taking advantage of the globalized workforce, which presents both an opportunity and a challenge for developing a nation’s defense industrial strategy. The question is whether—from both military and economic perspectives—the nation gains more or runs higher risks by cooperating and sharing industrially in the national security area. Because of the importance of advanced technology (in both commercial and military spheres), most nations are increasingly viewing research as well as science and engineering education as areas that are essential for their own economic and military development. But nations vary widely in terms of the share of government R&D spent on defense versus other objectives. For example, of total government R&D spending in 2003 to 2004, the United States spent 52 percent on defense, the United Kingdom 57 percent on defense, and France 43 percent on defense. Japan however, spent 47 percent on energy, and Germany spent 38 percent on industrial productivity. Similarly, there were wide differences in the share of government R&D spending devoted to mission-oriented efforts. The United States spent only 6 percent on non-mission-oriented R&D, but Germany and France devoted...

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