ABSTRACT
The international trade in defence equipment and military hardware is a highly complex market due to the procurement procedures and the longevity of the equipment life cycle (Gummett and Stein 1997). Domestic and global defence manufacturers create the supply of arms, whereas the demand from the armed forces is derived from national and alliance security requirements (Sandler and Hartley 1999). However, both supply and demand conditions are constrained by the size of national and international defence budgets, which are allocated by a state-controlled defence procurement agency.1 In order to make the security requirements operational, the defence procurement agency has to decide upon a budget allocation that is an efficient use of resources. However, the lowest cost source of equipment (relative to the world price) may not guarantee long-term supply or quality and if imported from overseas could result in domestic job losses (Lovering 1995). Therefore, the decision to make weapons within a country or buy from international suppliers is crucial in terms of cost, quality and the reliability of suppliers. In the United Kingdom, this dilemma affects the Ministry of Defence (MoD), the domestic Defence Industrial Base (DIB) and Her Majesty’s Armed Forces as identified above by Hartley et al. (1987) and can be assessed in terms of a make-or-buy decision under the transaction costs paradigm (Williamson and Masten 1995). However, if there is a gap between the end of one defence equipment programme and the start of the next, then military exports can be used to supplement declining domestic demand and preserve defence employment. This forms the supply-side of the arms trade and is vital in periods of declining demand, as witnessed during the end of the Cold War (Hartley and Sandler 1995).
