This report explores the long term growth strategies of domestic defense industry in Korea.

The primary goal of this report is to collect over 260 domestic defense firms’dataset and to accurately analyze them with appropriate statistical methods for objectivity of defense industry DB in Korea. This sample size is three times bigger than the DAPA’s sample, which includes less than 90 defense firms. Secondly, for determining whether domestic defense firms have competitiveness in export market, current competitiveness of each weapon system is demonstrated. Through these efforts, it could set up the basis of the promotion strategy and its alternatives for enhancing national defense export competitiveness, growth strategies and export-led industrialization in the long term perspective. Finally, the research contributes to establishment of effective policy for improving the competitiveness and efficient allocation of resources, with the identification of key factors to improve defense industry competitiveness.

As the key contents of the research for accomplishing our goals, firstly, current status and changes in global defense industry are explained. Secondly, we analyze characteristics of domestic defense industry from the economical viewpoint addressing both basic theory and appropriate model. To revise methods of analysis and gain more precise and objective results from the statistical studies on industrial data, 260 domestic defense firms were engaged in the survey. Third, ‘5P+1G’model for the competitive analysis is founded through survey on competitiveness level of each factors based on the responses of 306 persons consisting of experts and industry professionals. Lastly, export competitiveness is evaluated through RCA and IIT. With that, factors determining competitiveness is explored by structural equation modeling.

An important contribution of the report is increased sample size of the dataset from 90 to 260, which is remarkably improved in terms of objectivity and accuracy. And also, results of a fact-finding survey conducted by experts are used for measuring price, technology, and quality of goods and services in defense industry; and firms & government competitiveness level. Then, both RCA and IIT indexes are evaluated with the use of KITA Net which is applied for appreciating global competitiveness of each products made by domestic defense firms. Lastly, factors determining competitiveness and performance of domestic defense industry are obtained through the structural equation modeling method. By using those results, it could contribute to establishment of alternative plans for enhancing defense industry competitiveness. Especially, based on unique characteristics of defense industry, concepts of defense industry and evaluation criteria are defined.

The major results suggest the following. From theoretical perspective, policy for domestic defense industry should turn more protection-oriented policy into more competition-oriented one in making competitive industrial environment. Secondly, competitiveness is assessed by two factors divided into product competitiveness and export competitiveness. From these results, it is proved that the relative competitiveness of domestic defense firms is generally lower than that of other advanced foreign firms. In detail, the study shows the following dynamics: government competitiveness < firm competitiveness < price competitiveness < technology competitiveness < quality competitiveness. Lastly, regarding the factors influencing performance of domestic defense industry, adopting competition-oriented environment has negative effect on direct growth, but consequently have positive effect by improving price competitiveness.

To establish policy for effective growth in domestic defense industry and its export, there are some policy issues to be considered in the near future. First, domestic defense firms should enhance their ability so as to compete with leading defense firms, because many advanced countries have their defense budget diminished in global market. Secondly, since defense industry is technology-intensive and equipment intensive, it is necessary to establish relevant industrial growth policy. Third, economies of scale should be achieved through exploiting export market, in order to enhance and improve domestic industry. For driving export-oriented policy, 5P+1G strategy which includes extra systemic support from the government, more extensive attention should be paid to consider political situation in other countries and existing 4P, Such effort is crucial factor given the fact that in most cases, demanders of defense goods and services are the governments of other countries. Fourth, to raise price competitiveness in global market, subsidy system reform is urgent if Korean defense industry is to move into competition-oriented environment. Fifth, by engaging and expanding the role of private sector in R&D, the government may minimize the unnecessary wasting of national resources while maximizing synergy effect of cooperation between public defense needs and private sectors. In the End, in order to support proper decision making for defense industry policy, statistical defense industry database should be established and maintained.