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Going Global ? U.S. GOVERNMENT POLICY and the DEFENSE AEROSPACE INDUSTRY Mark A.Lorell Julia Lowell Richard M. Moore • • Victoria Greenfield Katia Vlachos • Prepared for the United States Air Force Approved for public release; distribution unlimited R Project AIRFORCE The research reported here was sponsored by the United States Air Force under Contract F49642-01-C-0003. Further information may be obtained from the Strategic Planning Division, Directorate of Plans, Hq USAF. Library of Congress Cataloging-in-Publication Data Lorell, Mark A., 1947– Going global: U.S. government policy and the defense aerospace industry / Mark A. Lorell, Julia Lowell, Richard M. Moore. p. cm. “MR-1537.” Includes bibliographical references. ISBN 0-8330-3193-7 1. Aerospace industries. 2. International division of labor. 3. International trade. I. Lowell, Julia, 1961– II. Moore, Richard M. HD9711.5.A2 L674 2002 338.4'76291—dc21 2002075151 RAND is a nonprofit institution that helps improve policy and decisionmaking through research and analysis. RAND® is a registered trademark.RAND’s publications do not necessarily reflect the opinions or policies of its research sponsors. © Copyright 2002 RAND All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from RAND. Published 2002 by RAND 1700 Main Street, P.O. Box 2138, Santa Monica, CA 90407-2138 1200 South Hayes Street, Arlington, VA 22202-5050 201 North Craig Street, Suite 202, Pittsburgh, PA 15213-1516 RAND URL: http://www.rand.org/ To order RAND documents or to obtain additional information, contact Distribution Services: Telephone: (310) 451-7002; Fax: (310) 451-6915; Email: [email protected] PREFACE This report presents an overview of Phase I research conducted for the RAND Project AIR FORCE research effort entitled “Gaining from Globalization: Enhancing Air Force Management of an Increasingly Globalized Aerospace Industrial Base.” The goal of this research is to develop evidence, information, and analysis so that the Air Force can provide assessments to the Office of the Secretary of Defense and Congress on the effects of industry changes, new procurements, and proposed laws and regulations that affect the industrial base. In ad- dition, it is intended to assist the Air Force in developing new strate- gies and policies that will help the Air Force exploit potential oppor- tunities and mitigate potential problems that may arise from structural changes and increasing globalization of the industrial base. This report provides an introductory survey of issues and trends re- lated to the emergence of a variety of new forms of cross-border business relationships and activities that are increasingly character- istic of the U.S. defense aerospace industrial base. Examining a broad spectrum of case studies of innovative cross-border relation- ships, it establishes a framework for analysis and presents initial findings. Economic data are also analyzed to identify trends in the globalization of the U.S. aerospace industry. A survey of the complex U.S. regulatory environment that influences cross-border business relationships in the defense industry is also presented. The report identifies gaps in the findings and suggests follow-on research ap- proaches to fill those gaps during Phase II of the project. Most of the data and other information on which this analysis is based were col- lected from a wide variety of open published sources, supplemented iii iv U.S. Government Policy and the Defense Aerospace Industry with interviews with U.S. and foreign government and industry offi- cials. The data collection cutoff point for this document was September 2001. This research is sponsored by the Office of the Assistant Secretary of the Air Force (Acquisition). It is conducted in the Resource Management Program of RAND’s Project AIR FORCE. PROJECT AIR FORCE Project AIR FORCE, a division of RAND, is the Air Force federally funded research and development center (FFRDC) for studies and analysis. It provides the Air Force with independent analyses of pol- icy alternatives affecting the development, employment, combat readiness, and support of current and future aerospace forces. Research is performed in four programs: Aerospace Force Development; Manpower, Personnel, and Training; Resource Management; and Strategy and Doctrine. CONTENTS Preface ......................................... iii Figures ......................................... ix Tables. ......................................... xi Summary ....................................... xiii Acknowledgments. ................................ xxv Acronyms ....................................... xxvii Chapter One INTRODUCTION .............................. 1 Overview. .................................... 2 Consolidation and Globalization ................. 2 DoD’s Position on Defense Industry Consolidation .... 5 The Globalization Strategy ...................... 8 Research Goals and Organization of This Report ....... 10 Chapter Two THE U.S. DEFENSE AEROSPACE INDUSTRY: HOW GLOBALIZED IS IT? ......................... 15 Introduction .................................. 15 Defense Aerospace Globalization: Data Sources and Terminology .............................. 17 Defense Aerospace Trade ....................... 17 Defense Aerospace Investment .................. 21 A Typology of Defense Aerospace Activities and Relationships. ............................. 25 v vi U.S. Government Policy and the Defense Aerospace Industry U.S. Trade in Aerospace and Arms: Statistical Evidence .. 31 Trade in Aerospace Products: A Statistical Snapshot ... 31 Trade in Conventional Arms: A Statistical Snapshot ... 35 International Investment Involving U.S. Firms: Statistical Evidence ......................... 39 Broad Trends in International Investment Activity .... 39 International Investment in Defense-Related Industries ................................ 43 Summary of Statistical Evidence ................... 48 Defense Aerospace Globalization: Historical Trends .... 50 Trends in U.S. Defense Aerospace Exports .......... 50 Trends in U.S. Defense Aerospace Imports .......... 55 Conclusion ................................... 58 Chapter Three THE GLOBALIZING AEROSPACE INDUSTRY: OPPORTUNITIES AND CHALLENGES ........... 61 Introduction .................................. 61 Economic Dimensions of Defense Aerospace Globalization .............................. 64 International Trade ........................... 65 International Investment and Business Relationships. ............................. 69 Political-Military Dimensions of Defense Aerospace Globalization .............................. 72 National Security Dimensions of Defense Aerospace Globalization .............................. 77 International Trade ........................... 78 International Investment and Business Relationships .. 80 Conclusion ................................... 82 Chapter Four THE LEGAL, REGULATORY, AND POLICY FRAMEWORK FOR AEROSPACE INDUSTRY GLOBALIZATION .... 85 Introduction .................................. 85 Equipping Air Force Warfighters with Superior, Affordable Weapon Systems ........................... 86 Promoting Competition Within the U.S. Domestic Industrial Base ............................ 87 Competition Policy and the Role of Foreign Industry ... 90 Contents vii Preparing for Coalition Warfare .................... 94 International Armaments Cooperation ............. 95 Security Assistance ........................... 99 Protecting the National Security ................... 102 Overview of Policies Toward Technology Transfer ..... 102 Controls on Defense-Related Trade ............... 104 Restrictions on Foreign Direct Investment in the U.S. Defense Industrial Base ...................... 109 National Security Policies: A Look Ahead ............. 118 Defense Capabilities Initiative ................... 120 Defense Trade Security Initiative ................. 121 Bilateral Discussion with a View Toward Country-Wide ITAR Exemptions ........................... 124 Reauthorization of EAA 1979 .................... 126 Trends in Foreign Direct Investment and Industrial Security Policies ........................... 129 Summary and a Look Ahead ..................... 131 Chapter Five THE NEW CROSS-BORDER BUSINESS RELATIONSHIPS: CASE STUDY FINDINGS AND PROPOSED FUTURE RESEARCH ........................ 135 Introduction .................................. 135 Marketing Agreements .......................... 137 Lockheed/Rafael Popeye and Python .............. 138 Northrop Grumman/Rafael Litening II ............. 143 Boeing/Alenia Marconi Systems JDAM, Hellfire/Brimstone ......................... 146 BAE Systems/Saab Gripen ...................... 147 Teaming for Cross-Border Cooperative Development of New Systems .............................. 149 NATO Airborne Ground Surveillance .............. 151 ASTOR. .................................... 152 Later NATAR Developments ..................... 156 SOSTAR .................................... 157 Northrop Grumman/EADS Strategic Alliance ........ 158 Israel Aircraft Industries/EADS UAVs .............. 159 NATO Theater Missile Defense ................... 160 BVRAAM/Meteor ............................. 161 Boeing/Alenia Marconi Systems .................. 163 Joint Strike Fighter ............................ 164 viii U.S. Government Policy and the Defense Aerospace Industry XM777 Ultralightweight Field Howitzer ............ 166 FSCS/TRACER ............................... 167 Joint Ventures ................................. 168 Medium Extended Air Defense System ............. 169 Thales Raytheon Systems ....................... 170 Parent/Subsidiary .............................. 172 Thomson-CSF/LTV Missiles (1992) ................ 173 Rolls-Royce/Allison (1995) ...................... 174 BAE Systems/LMAES (Sanders), LMCS (2000) ........ 175 Raytheon/Kollsman ........................... 177 ASM Lithography Holding/Silicon Valley Group Inc. ..................................... 178 U.S. Firms and Foreign Subsidiaries ................. 178 United Defense/Bofors ........................ 179 TRW/Lucas Verity ............................ 180 Summary Overview and Future Research ............. 181 Chapter Six CONCLUSIONS AND PROPOSED FUTURE RESEARCH .. 185 The Response of U.S. Industry to Globalization ........ 185 Implications of European Consolidation and Increased Aerospace Globalization ..................... 187 Directions for Future Research .................... 190 Appendix A. AIR FORCE GUIDANCE: A STATUTORY AND REGULATORY FRAMEWORK ..................... 193 B. SEVENTEEN AGREED PROPOSALS OF THE DEFENSE TRADE SECURITY INITIATIVE .................... 197 References ...................................... 201 FIGURES 2.1. Trade Shares of U.S. Consumption and Shipments for Selected Manufacturing Industries (1997–1999 averages) ................................. 32 2.2. Trade Shares of U.S. Consumption and Shipments for Six Aerospace Industry Subcategories (1997–1999 averages) ................................. 33 2.3. Trade Shares of U.S. Military and Civil Aircraft Consumption and Shipments (1997–1999 averages) .. 34 2.4. U.S. Domestic and Cross-Border Mergers and Acquisitions, 1990–2000 ...................... 41 2.5. Domestic and Cross-Border Mergers and Acquisitions, Selected U.S. Manufacturing Industries (1995–1999 averages) ........................ 42 2.6. Total and Defense-Related CFIUS Reviews, 1996–2000 ................................. 44 2.7. Shares of Defense-Related CFIUS Transactions for Top Three Countries, 1996–2000 ................ 44 2.8. Country Shares of 75 FOCI Negation Measures ...... 45 2.9. Cross-Border Collaborative Activities of U.S. Firms in Military Aircraft and Missiles ................... 46 2.10. Government-Initiated Versus Industry-Initiated U.S. Participation in Cross-Border Aircraft and Missile Programs ........................... 47 ix TABLES S.1. Case Studies of Cross-Border Strategic Market Sector Collaboration .............................. xxi 1.1. Global Ranking of Aerospace and Defense Companies, 1999 ........................... 6 2.1. Common Types of Activities Carried Out by U.S. Aerospace Firms Involved in Cross-Border Business Relationships .............................. 26 2.2. Common Types of Cross-Border Business Relationships Within the Defense Aerospace Industry .................................. 29 2.3. U.S. Trade Patterns in Aerospace, 1998 ........... 35 2.4. Leading Exporters of Conventional Arms According to Three Data Sources ......................... 36 2.5. Leading Exporters and Importers of Selected Manufactures, 1999 .......................... 37 2.6. Examples of Recent U.S. Military Aerospace System Exports ............................. 53 2.7. Examples of Recent U.S. Military Aerospace System Imports ............................. 57 4.1. Summary of Statutes, Regulations, and Other Authoritative Guidance Affecting Defense-Related Trade .................................... 106 4.2. Summary of Statutes, Regulations, and Other Authoritative Guidance Affecting Foreign Acquisition of U.S. Firms ............................... 110 5.1. Examples of International Marketing Agreements ... 139 5.2. Examples of Innovative Cross-Border Codevelopment Teaming Arrangements ....................... 153 xi

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iv. U.S. Government Policy and the Defense Aerospace Industry with interviews with U.S. and foreign government and industry offi- cials. The data
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