Arms production, national defense spending and arms trade: Examining supply and demand

• Published in: European Journal of Political Economy 2019-12, Vol.60, p.101814, Article 101814
• Main Author: Blum, Johannes
• Format: Article
• Language: English
• Subjects: Arms industry; Arms trade; Central government; Defense spending; Estimation; Exports; Geopolitics; Imports; International relations; International trade; Military sales; Military weapons; National security; Panel data; Political economy; Production; Sales; Supply & demand; Weapons
• ISSN: 0176-2680; 1873-5703
• DOI: 10.1016/j.ejpoleco.2019.101814

Scholars have estimated demand functions for national defense spending and investigated international arms trade for a long time. The relationship between supply and demand for military goods has, however, only been examined on aggregate level or in formal models yet. I investigate how the supply of military goods by arms-producing companies and the demand for military goods by both the national government and foreign governments are related by using a panel of up to 195 arms-producing companies in 21 countries for the period 2002–2016. The results show that if the demand for national defense spending increases by 1%, the arms sales by a country’s largest arms-producing companies increase by up to 1.2%. If exports of major conventional weapons increase by 1%, sales increase by up to 0.2%. Arms imports do not affect domestic arms sales because imported and domestically produced arms are complements, and countries mainly import those arms they do not produce themselves. Country-specific estimation results suggest that differences among countries in geopolitical conditions and international relations determine whether a country’s arms industry serves economic rather than security purposes.