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Wednesday, July 17, 2019, 19:13 (GMT+7)
On the model of investing state budget in defence industry

For every nation, national defence must be governed by the state, and defence spending must be sourced from state budget. For the sake of high efficiency, it is necessary to work out which models of investing state budget in defence industry should be suitably applied in practice.

For any country, the procurement of cutting-edge materiel has played an increasingly significant role in creating military power and potential amidst the age of swift technological development and uncertainties of today’s global situations. On the one hand, a state needs to make an optimum investment choice in materiel-making factories to meet the requirements of its military; on the other, it purchases military arms from other countries. In a market economy, a state is able to buy any kind of goods on the market at will with its sufficient financial capabilities. Yet, that is not the case for arms markets, where state-of-the-art weapons usually come on the monopolistic markets. The more advanced the weapons are, the more monopolistic the markets are. Political elements come into play when nations are party to an agreement on an embargo on arms sales to another country, the latter is not able to purchase any weapon it wants even with its adequate financial capabilities. Nations also enforce the law that bans the transfer of new-generation weapons and weapon-manufacturing technology; therefore, it is tough to import cutting-edge weapons and weapon-making technology even with ample financial abilities. Yet, the history of world wars reveals that, alongside human factors, the uniqueness and superiority of any kind of weapons also play a decisive role in gaining victories on the battlefield. Hence, state investment in defence industry is urgently required to research new weapon technologies and technological innovation and weapon maintenance, matching militarily pressing requirements.

There are multiple conceptions of defence industry. According to Article 3, the 2002 Vietnamese Ordinance on Defence Industry, defence industry is an important component of defence- security real strength and potential; and a part of national industry aimed at (i) researching, developing, producing, maintaining, servicing, innovating, and modernizing technical weapons and equipment and military materials, and other products for defence purposes; (ii) taking part in socio-economic development, contributing to national industrialization and modernization. The State invests its budget in defence industry through national defence-security programmes and projects. The history of defence industry development in the world has witnessed multiple models of state investment in this field, including some of the following ones:

Model No.1 “The State gives financial supplies and produces goods in the field of defence industry by itself”. This is a traditional investment model with the State’s direct intervention in the manufacturing process of defence industry. Not every state-run enterprise, except for the ones selected by the State, qualifies for investing in defence industry; private enterprises are not allowed to get involved in this area. The main features of this model are as follows: the State is “self-sufficient” in the field of defence industry; it is based on national peculiar military viewpoints and guidelines. Some countries adopting the mechanism of centralized state power or exposing weak state management capability and low intellectual level and being vulnerable to security-defence instability do not allow the participation of the private sector in the supply of goods manufactured in defence industry. Acting in its capacity as a special organization within public power, the State has to shoulder the responsibility for keeping its society safe and healthy through supplying goods in place of other ordinary enterprises.

The model, which had been applied in North Korea and China in the 1961 - 1976 self-sufficient period, exposes its strengths and weaknesses. In terms of strong points, (i) it helps focus state budget on investing in defence industry; (ii) it has high proactiveness since it helps build a system of state-owned defence industry facilities and implement any decision made by state leaders; (iii) it helps ensure secrecy and confidentiality in defence industry investment; (iv) it helps manage domestically produced sources of weapons and matched nations subjected to an embargo on arms sales. In terms of weak points, (i) it does not take advantage of the superiority of the market mechanism in the management and control over optimum investment in defence industry; (ii) it exposes a want of competition amongst enterprises, especially in private sector, affecting investment efficiency and effectiveness; (iii) the State does  not save money on fixed expenses to keep state-run enterprises involved in defence industry going; (iv) Financial, intellectual, and technological resources from civilian sector are not properly employed in defence industry; (v) Due to the fact that related details of the whole investment stages fall under state management, transparency in investing state budget in defence industry is low; (vi) it is tough to control corruption while making an investment.

Model No.2 “The State gives financial supplies and the private sector provides goods for defence industry on the former’s order”. This model technically stands in contrast to Model No.1 and has been widely put into practice in nations with thriving market economy and a long history of enterprises’ engagement in arms production. According to this model, defence industry not only meets domestic military requirements, but satisfies exporting needs. In this model, the state only spends its budget on asking private firms to research and produce goods on the former’s order. The orders are placed through bidding mechanisms or appointments of bidders for all private enterprises. The state permits and encourages the private sector to participate in the development of defence industry, and only possesses and controls very few state firms in this field. This model is known as the cooperative one between the state and the private sector through contracts for providing goods with all expenses covered by the former in the field of state-run defence industry. The thing that differentiates this model from Model No. 1 is that key players are not state enterprises, but private ones. The state’s expenditure not only enables defence industry to produce and complete products, but allows enterprises to reap profits to develop supply activities. This model really matches nations with clearly defined roles between the state and the society in the supply of goods of defence industry such as the US, Germany, and England. There are private enterprises in society that are capable of designing and qualitatively producing many kinds of weapons on schedule and request. This model representing a combination of the state’s role and the operation of market mechanisms for the sake of optimum investment effectiveness requires private firms to have scientific, technical, and technological potential for the supply of goods for defence industry.           

The strong points of this model are as follows: (i) it maximizes the superiority of the market mechanisms in managing and controlling investments in defence industry; (ii) it ensures constant competition for bidding and attracting the state’s orders amongst enterprises of the private sector, leading to high efficiency and effectiveness in investments; (iii) the State saves fixed expenses because not having to maintain the operation of domestic state firms in the field of defence industry; (iv) it helps make good use of financial, intellectual and technological resources from civil sector to develop defence industry; (v) it ensures high transparency in investing state budget in defence industry because bidding and ordering stages are controlled by the private sector; (vi) it further controls corruption through investment-making.

The weak points of this model are as follows (i) the State exposes passivity and more or less dependence on the private sector for goods produced in defence industry; (ii) it is difficult to ensure secrecy and confidentiality in defence industry investments; (iii) it exposes difficulties in managing the source of domestically produced weapons and sometimes causes a want of safety and security for people if the weapons fall into the wrong hands.

Model No. 3 “The State gives financial supplies and collaborates with the private sector in manufacturing goods in the field of defence industry”. This model is a combination of the model 1 and model 2. Accordingly, both the state and the private sector can jointly make and supply goods in the field of defence industry in accord with the state’s programmes and plans. Alongside encouraging the private sector to invest in defence industry, the state also wishes to own some key enterprises, which acts as an important tool to regulating the production and supply of some key commodities in this field if necessary. This model is based on the principle of reciprocity and equality amongst investors in the state and private sectors alike. In this regard, the state plays a role as an investor or a shareholder. Those shareholders pool their capital, enjoy mutual benefits, and are responsible for the supply of goods in defence industry in their venture organization or company. The state closely collaborates with private enterprises in researching and making military weapons and materials, leading to an ideal combination of prioritized strategic orientations of public investments and production of public commodities and the optimization of positive impacts of the market mechanisms, thereby controlling the financial effectiveness of defence industry investments. This model has been widely and successfully applied to the production of weapons on the basis of the latest technological achievements of the current Fourth Industrial Revolution. Yet, the execution of this model necessitates enhancing the efficiency and effectiveness of managing state investments in defence industry. The strong points of this model are as follows (i) it makes full use of the superiority of the market mechanisms in managing and controlling investments in defence industry; (ii) it ensures competition amongst enterprises of every economic sector, leading to high efficiency and effectiveness in investments; (iii) it takes advantage of financial, intellectual, and technological resources from every economic sector to develop defence industry; (iv) it ensures transparency in investing state budget in defence industry; (v) it helps control corruption through investment-making in the field of defence industry.

The weak points of this model are as follows: (i) it is difficult to ensure absolute secrecy and confidentiality in defence industry investments; (ii) it is tough to manage sources of domestically manufactured weapons and likely to cause unsafety and insecurity for people because of the involvement of private enterprises.

With some insight into those afore-mentioned models, for the sake of high effectiveness in state investments in defence industry, it is inadvisable to absolutize any of those models since each has its own strengths and weaknesses. Grounded in strategies for defence industry at different stages in each country, states should formulate their strategies, plans, laws, and policies as well as investment models for defence industry in a right, objective, flexible, and effective fashion.   

Phan Thi Hoai Van, MA

The General Department of Defence Industry 

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