Contracting Practices Hamper Innovation.

• Author: Oyler, James
• Position: Brief Article

Defense Department programs should expand participation by smaller firms

Our nation's defense base is changing. Defense industry consolidation, for example, has affected our technology and innovation base. This is perhaps a good example of the rule of unintended consequences. One result has been a drastic reduction in research and development (R&D) spending, which affects the innovation process.

Many U.S. firms have, in fact, given up. There is, consequently, a concentration of firms in our industrial base. Half of the entire industrial base of the United States is now represented by just three firms and two-thirds of it is represented by five firms. That's concentration.

Venture capitalists, meanwhile, will not fund defense companies or defense industry startups. In the 1960s, the federal government, mostly the Defense Department, funded about one-third of the nation's R&D. Today, it's less than 5 percent. In biotechnology, there is almost no participation by Pentagon research programs.

Many companies have exited defense work either by selling it, by merging it into something else or by some other tactic.

The same thing has been going on in other places. The average reduction in defense spending around the world from the 1980s to the 1990s was about a third, or about 32 percent, with one exception, China. China has increased its spending by more than 60 percent, although from a small base at the starting point.

Few Large Companies

So, what is the overall effect? What we have in the industry is a concentration of a few, very large companies.

Why should we care about this? We need to care. Having a knowledgeable customer who has a knowledgeable set of partners who are sharing the technology and the information, allows these points of innovation to grow and prosper and lead to new technologies.

One of the things we talk about in the industry is COTS. Can we use commercial off-the-shelf technology to substitute for some of the defense innovation, the defense sponsored research? Obviously we can. It's one of the richest contributions of our industrial system--to introduce commercial technology into our industrial base and into defense.

But we also need to be aware that military needs are not necessarily or always the same as commercial needs. And the problem is also, that in many cases, the military market for technology is often small, relative to other applications, such as commercial video games. Entertainment is a much bigger percentage of...