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An Analysis of the Structural Change of Defense Industry according to the Change of Defense Expenditure in the New Normal Era

Author Ann Youngsu et al. Date 2020.12.30 Page

This study analyzes the structural changes of the defense industry following post Cold-war in the United States, Great Britain and Germany due to the reduction of defense expenditure. Through this, we present the direction that the Korean defense industry should take in response to the disarmament environment, including the Covid-19 and the Korean peace regime.


According to the results, defense firms from key nations attempted to make an effort for improving its ability to survive from the period where it showed a dramatic decrease on defense expenditure during post cold-war and financial crisis in 2008. There had been emerging new defense-specialized firms based on active M&A, international cooperation, entering the export market, etc. moreover, the concentration for these professional firms deepened. Additionally, the unstable domestic defense expenditure resulted in shifting industrial structure toward advancement through the rapid globalization. 

Furthermore, the structure of the defense industry showed the trend of rapid acceleration from the field of the land system to aircraft, space, reconnaissance and security. It also provokes the importance and emphasis of the defense service market such as Maintenance, Repair and Overhaul (henceforth, MRO). 


As a result of the ripple effect between defense industries in the United States (henceforth, U.S), the U.S. defense industry is well situated in the stage of advancement and sophisticated production. Moreover, it shows an increase in the proportion of export of weapons systems even when it shows a decrease in the defense expenditure. However, it also contains a downgrading of job creation according to the technological progress and domestic value-added due to dependency of global value chains through export. Finally, it also leads to the trend that the industry focuses on the service sector, therefore, it can observe the rapid change toward service sector within industries.


Korean defense industry consistently developed since 1950 due to the increase in the defense expenditure by the state. However, the Korean defense industry takes a share of less than 1 per cent of production within the manufacturing industry. Therefore, the defense industry’s impact on the domestic economy is significantly low which results in downgrading competitiveness in exports. It seems that the Korean defense industry remains domestic-oriented weapon systems based on the limited technology and will not be able to overcome the import dependency of military weapons which are advanced techniques. Most of weapons systems when it comes localization faced the limitation since Korea has a shortage of technologies for high-tech aircraft and guided weapon systems, therefore, the entry of Korean small-medium enterprises (SMEs) is limited inherently. A few firms which are focusing on land-system and shipment are actively involved in Merge and Acquisition market however, their competitiveness is severely limited since firms are immature to deal with international competition. Especially, the peace movement in the Korean peninsula and government expenditure contraction in defense sector due to the Covid-19 will be significantly critical factors for the Korean defense industry that is heavily dependent on the domestic market. 


Recently, the Korean government promotes a defense policy to upgrade defense structure. for example, the establishment of defense policy control tower, improvement of systems for export industrialisation, and increasing in the Research and Development (R&D) expenditure and so on. Besides, the government also created new legislation which promotes defense industry development and defense science technological innovation. 


Along with effort by the government of Korea, to overcome the systemic problems within the defense industry, efficiency as well as marketization and strengthening the competitiveness of the defense industry are the key. To do so, firstly, the new legislation and act need to be preceded. It is highly recommended that there have to be more legal support such as the act for defense industry development and defense science technological innovation, which strongly contain an industrial aspect. Secondly, it needs to induce strategic Merge and Acquisition to strengthen market competitiveness. It is beneficial to produce synergy effect through aggregating firms. As a prerequisite, export and international cooperation need to be considered in advance when it comes to the development of military equipments and R&D policy. Market competitiveness in terms of quality will be met after these reforms are executed. Thirdly, export support by the GtoG contract and export financing system have to be formulated to strengthening export competitiveness for a short-term plan. Fourthly, development strategy for products has to shift toward localization of component. Through the process, it will eventually make domestic SMEs products more competitive and will be able to compete with international market afterward. Finally, outsourcing MRO sector within Korea armed forces need to receive more attention. Since MRO sector has a efficiency issue in terms of budgetary reason within the defense department, it will be better to outsource MRO sector into civil area so that it can nourish private MRO sector as well as recover efficiency defense MRO sector.