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Study on the Effects of Offsets on the Development of a European Defence Industry and Market

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Study on the Effects of Offsets on the Development of a European Defence Industry and Market Final Report of 06-DIM-022 Study on the effects of offsets on the Development of a European Defence Industry and Market By E. Anders Eriksson with contributions by Mattias Axelson, Keith Hartley, Mike Mason, Ann-Sofie Stenérus and Martin Trybus 12 July 2007 2007-07-12 Final report of 06-DIM-022 LIST OF CONTENTS Executive summary............................................................................................................................... 3 1 Introduction................................................................................................................................... 9 1.1 Understanding the assignment: our working hypotheses ................................................................ 9 1.2 Delimitation of study..................................................................................................................... 10 1.3 Protection of respondents and data................................................................................................ 11 1.4 Outline of report............................................................................................................................ 11 1.5 The FOI/SCS team ........................................................................................................................ 11 2 Offset conceptual framework .................................................................................................... 13 2.1 Offset taxonomy used in the study................................................................................................ 13 2.2 A caveat on taxonomy................................................................................................................... 15 3 Mapping European offset........................................................................................................... 17 3.1 European defence equipment export and import........................................................................... 17 3.2 Quantitative analysis of offset....................................................................................................... 18 3.3 Summary and conclusions............................................................................................................. 21 4 Policy and legal context of offset.............................................................................................. 23 4.1 International law............................................................................................................................ 23 4.2 European policy and legal context ................................................................................................ 24 4.3 pMS policy and legal context........................................................................................................ 28 4.4 Business sector perspectives on offset policy ............................................................................... 30 4.5 Summary and conclusions............................................................................................................. 31 5 Data and methodology for assessing the effects of offset .................................................... 33 5.1 Outline of the effect study............................................................................................................. 33 5.2 Data collection .............................................................................................................................. 33 5.3 Questionnaires and general interviews.......................................................................................... 34 5.4 The case studies............................................................................................................................. 34 5.5 Effect study methodology ............................................................................................................. 35 6 Research overview ..................................................................................................................... 37 6.1 An economics conceptualisation................................................................................................... 37 6.2 Offset in the economics literature ................................................................................................. 38 7 Effects of offsets on defence equipment markets and DTIB:s: prime contract level.......... 43 7.1 Structuring the problem................................................................................................................. 43 7.2 Competitiveness of EU vs. non-EU players.................................................................................. 43 7.3 pMS ‘guns or butter’ and ‘make or buy’ decisions ....................................................................... 44 7.4 Openness and transparency of defence equipment markets .......................................................... 45 1 2007-07-12 Final report of 06-DIM-022 7.5 Direct costs and time delays of offset ........................................................................................... 46 7.6 Conclusions................................................................................................................................... 47 8 Effects of offsets on defence equipment markets and DTIB:s: supply chain level............. 49 8.1 Structuring the problem................................................................................................................. 49 8.2 Offset for accessing international defence industry supply chains? .............................................. 50 8.3 Offset for building new players for international defence industry supply chains? Existing niches 53 8.4 Offset for building new players for international defence industry supply chains? Emerging niches 58 8.5 Duplication and sustaining existing capabilities ........................................................................... 59 8.6 Alleged and real wider benefits of offset ...................................................................................... 60 8.7 Conclusions: Costs and benefits of offset from a European perspective....................................... 61 9 Impact of offset on the future development of EDEM and EDTIB ......................................... 63 9.1 The development of EDEM and EDTIB....................................................................................... 63 9.2 Offset as an effective and legitimate tool for the development of EDEM and EDTIB? ............... 65 9.3 Offset for promoting CoE:s........................................................................................................... 70 9.4 Information needs and availability for EDEM and EDTIB policy analysis .................................. 71 9.5 Conclusion: the conduciveness of types of offset to EDTIB......................................................... 72 10 Summary and conclusions ........................................................................................................ 75 10.1 Mapping European offset (Chapter 3)........................................................................................... 75 10.2 Policy and legal context of offset (Chapter 4)............................................................................... 76 10.3 Effects of offsets on defence equipment markets and DTIB:s: prime contract level (Chapter 7) . 76 10.4 Effects of offsets on defence equipment markets and DTIB:s: supply chain level (Chapter 8) .... 77 10.5 Impact of offset on the future development of EDEM and EDTIB (Chapter 9) ........................... 78 References ........................................................................................................................................... 83 Annex 1: The terms of reference............................................................................................ 1 Annex 2: Overview of background data ................................................................................ 1 Annex 3: Statistical analyses.................................................................................................. 1 Annex 4: Information collection status .................................................................................. 1 Annex 5: Questionnaires and Interview Guides..................................................................... 1 Annex 6: Overview of offset policies and practices .............................................................. 1 Annex 7: Summary of questionnaire responses ..................................................................... 1 Annex 8: Summary of case study interviews......................................................................... 1 Annex 9: Historical context of offset in Europe .................................................................... 1 2 2007-07-12 Final report of 06-DIM-022 Executive summary This study is motivated by ongoing developments in European defence industry and market policies aiming at a European Defence Equipment Market (EDEM) and European Defence Technology and Industrial Base (EDTIB). The main mission of the study is to analyse the impact of offset in this regard. To be able to do that we have also done a mapping of Euro- pean offset and an evaluation of the effects of offset today. Offset conceptualisation and practices Offsets are compensations offered by a seller to a buyer. It is applied for so called off-the- shelf procurement, i.e. for already developed systems. In Europe,
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