Military Defense Spending - Research Paper Example

?Military Defence Spending Task: The American administration spends extensively on defence related projects. The total defence budgetary outlay is about five percent of the gross domestic product (GDP). This is a significant amount since there are minimal returns from this industry. However, the defence expenditure creates employment through the entities contracted by the administration and the military personnel. The reduction of defence expenditure will affect the defence industry significantly. Reduced military spending will culminate in diminished defence contracts. As such, firms that operate in the industry will face tougher financial times that will demand prudence and certain industrial measures to guarantee that they maintain profitability. (Bitzinger 46). Evidently, it is imperative to reduce the defence expenditure since it has minimal contribution to the economy. The decline in defence allocations will result in lower incomes for firms that operate in this industry. The reduction in defence budgets will lead to reduction of operations in the defence-contracting firms. Consequently, such entities will retrench employees to an extent that suit their income levels since they are profit oriented. The reduction in budgetary allocations will result in merging of firms as they attempt to consolidate their operations to reduce their overheads. The reduction in defence spending will result in contraction of the defence industry. Additionally, the reduction in defence spending will result in reduced foreign earning form this industry. The defence industry has few players. As such, the industry has few buyers and contractors. The main contractors include Lockheed, General Dynamic and Boeing. This implies that the industry is monopolistic and inelastic. This state is due to the nature of their merchandise. Additionally, the above contracts are shrouded in secrecy due their sensitive nature. Thus, customers in this industry prefer certain contractors (Burns). Evidently, the market forces that characterize other industries are absent. Thus, the cost of products in this industry is dependent on other factors rather than market forces (Dwivedi 54). Such factors include duration of executing the contract, the sensitivity of the technology and global alliances. The factors that drive prices in this industry are different since arms trade is a sensitive industry monitored globally. As such, governments do not licence many firms in this industry. The state of the current industry has benefits and disadvantages. First, the industry deals in sensitive merchandise hence, most governments prefer to keep the deals confidential. Additionally, proliferation of some of the weapons would lead to destabilization of global peace. Therefore, having few firms in this industry helps deal with black-market dealers. Having few firms in this industry implies that the present corporations will always get contracts. This means that there is minimal competition among the firms involved. The American government has made efforts to maintain competition among players in this industry by barring any merger of large defence firms since this would turn the industry into a monopoly. As such, the American government barred proposed unification between Boeing and Lockheed (Krieg). This would have resulted in the unification of the two principal aerospace contractors. The intervention of the American government was timely since these are the two leading firms in the industry. Therefore, allowing such a merger would have eliminated competition in totality (Krieg). Evidently, this sector ought to have additional players to make it more competitive. This applies to the large contracts that require massive capital outlay. However, this does not apply to smaller contracts since numerous firms have the capability to bid for such contracts making it competitive. However, competition does not vary cost of contracts. This is a key feature of this industry that will not change since defence-contracting firms use specialized technology that is expensive. Entry of a few firms into this industry will boost competition and innovation since most firms will seek to remain profitable through cost reduction. However, this has certain risks. With a stagnating economy, most governments will shift their expenditure from defence to other social or economic programmes. As such, the new entrants may face numerous challenges since the industry is receding. However, the only way for such entry to succeed is innovation. Therefore, such entities should develop fresh technology or develop superior products (Medeiros et al. 8). The defence contracting firms suffer a decrease in income whenever there is a reduction in defence monetary allocations. Resolving this hitch will require transformation of this industry. Governments should make it compulsory for defence contracting firms to expand their production into the civilian sector. This would make defence firms’ profits less vulnerable to reduction in defence expenditure since they have numerous sources of revenues. Boeing is a top aerospace entity normally contracted by the American government to make fighter jets. However, the entity also meets civilian demand for planes. Thus, the entity supplies countless planes to airlines globally. This has made the entity income relatively stable despite the reduction in defence spending globally. Diversification provides an opportunity to make changes in this industry. Additionally, contracts issued in this industry should be long-term. This would reduce the chances of collapse of the firms in this industry. Defence contracts are exceedingly secretive especially to the leading nations. Therefore, governments should undertake stringent auditing to ensure that there is no misappropriation of resources (Boone and Kurtz 73). Currently, most defence firms have not diversified their product portfolios. This has made their incomes vulnerable to contraction of defence budgets. However, according to this proposed changes the above firms should diversify their output to reduce the fluctuation of their incomes. The entry of other firms would make the defence sector more competitive. Nonetheless, the enormous capital required has discouraged investors. Furthermore, receding military spending will also discourage any investment (Dwivedi 54). The above details elaborate the changes that can help the defence sector weather the stagnating economy. The defence firms will be the key beneficiary of the above changes since there will have stable revenue levels. Nonetheless, entry of new organizations to this sector will reduce the incomes of the existing firms. Defence contracting firms should have long-term ambitions to expand into the civilian sector. The diversification should draw funding from the profit reserves, issuance of shares and plough back of revenues (Medeiros et al. 8). Instituting the above change would strain the finances of firms in this industry due to few contracts and the proposed diversification. Works cited Bitzinger, Richard. The Modern Defence Industry: Political, Economic, and Technological Issues. California, CA: Greenwood publishing, 2009.Print. Boone, Louis and Kurtz, David. Contemporary Business.USA: Wiley publishers, 2011.Print Burns, Roberts. Leon Panetta: Defence Spending Cuts Would 'Weaken' U.S. National Security. August 17, 2011. Web. April 18, 2012. Dwivedi, Microeconomics. New Delhi:  Pearson Education India, 2007.Print. Krieg, Kenneth. POGO opposes the proposed joint venture between Boeing and Lockheed Martin to form the United Launch Alliance. March 16, 2006. Web. April 18, 2012. Medeiros, Evans et al. A New Direction for China's Defence Industry. Santa Monica, CA: Rand Corporation, 2005.Print. Read More