Advanced Public Procurement as Industrial Policy - The Aircraft Industry as a Technical University

Preface

Contents

About the Author

List of Interviews

IG JAS Group

Saab Group

Ericsson

Volvo Aero Corporation (VAC)

Other

Applied Composites AB (Acab), Linköping

Autoliv

Bodycote (from 2009 Exova), Karlskoga

Combitech AB

Dassault Aviation

FMV

Modig Machine Tool, Virserum

SEB, Stockholm

South Africa (Interviews in 2000 and 2008, Two Visits Each Year)

Avitronics (Pty), Centurion (2000)

CSIR, Pretoria (2000)

Denel Aviation (2000)

Marieholm Industry AB (MIAB), Sandton (2000)

Scania South Africa, Mondeon (2000)

List of Cases

Chapter 1

On the Cloud of Technology that Surrounds Advanced Production: A Summary of Results

1.1 The Spillover Multiplier

1.2 Twelve Conclusions on How to Overcome the Underinvestment in Private R&D AmongAdvanced Industrial Economies

1.3 Joint Production and Joint Customership

1.4 The Questions Raised

1.5 The Nature of Spillovers

1.6 Social Value Creation: The Magnitudes Involved

1.7 Competition Between Alternatives

1.8 Competitive Bidding and Competition Policy

1.9 The Contents of the Spillover Cloud

1.10 The Advanced Industrial Environment

1.11 Policy Implications

1.12 Complete Competence Blocs are Spillover Generators and Advanced Learning Environments

1.13 Macroeconomic Growth

1.14 Notes

Chapter 2

The Art of Defining, Pricing, and Marketing Advanced Multidimensional Products that Spill Technology

2.1 The Pricing of Complex and Multidimensional Systems Products

2.2 The Joint Manufacturing of Products and Intangible Spillovers

2.3 The Economic Nature of Intangible Spillovers

2.3.1 The Existence, Magnitude, and Economic Value of Spillovers

2.3.2 Receiver Competence

2.3.3 Diffusion Channels

2.3.4 Accessing the Global Pool of Technology

2.4 Competence Bloc Theory and the Critical Role of the Advanced Customer

2.4.1 Customer Competence Contributions

2.4.2 Technology Supply

2.4.3 Commercialization

2.4.4 The Allocation of Tacit Knowledge and the Limits of a Firm

2.4.5 Critical Mass

2.4.6 Going from Micro to Macro (Aggregation)

2.5 Aircraft Industry as a Spillover Source: A Preview of the Industry Case

2.6 Boosting Receiver Competence Through Policy

2.6.1 Capturing the Rents from Spillovers: Joint Customership and Industrial Participation Programs as a Joint Policy and Bus

2.6.2 Summarizing on Joint Production and Joint Customership as a Policy Opportunity

2.7 Notes

Chapter 3

Spillovers and Innovative Technology Supply: A Literature Survey

3.1 The Existence and Magnitudes of Spillovers: A Brief Background on Economic Theory

3.1.1 Austrian/Schumpeterian Micro- to Macrodynamics and the Long-Term Sustainability of Spillovers and Growth

3.1.2 Long-Term Sustainable Productivity Growth is a Matter of Resource Reallocation, Not of Raising Employment

3.2 Intangible Spillovers and Economic Growth

3.2.1 Technology Creation and Productivity Growth

3.2.2 The Mysterious Technology Residual

3.3 The Macroeconomic Effects of Spillovers

3.3.1 Salter Curve Analysis

3.3.2 Dynamic Simulation

3.3.3 Commercialization

3.4 Notes

Chapter 4

Capturing the Direct and the Serendipitous Spillovers: The Case of Sweden’s Military Aircraft Industry

4.1 A Brief History of Saab

4.2 The Saab Group Strategically Reorganizing for a Different Future

4.2.1 A Business Organization in Constant Transition

4.2.2 Military Aircraft Technology is the Platform for Future Industrial Development of Saab

4.3 The Cloud of Spillovers

4.3.1 Core Technologies (Aircraft and Engines)

4.3.1.1 The Aircraft/The Core Product

4.3.1.2 Case 1: Civilian Aircraft

4.3.1.3 Case 2: Aircraft Engines and Commercial Gas Turbines: Core Technologies

4.3.2 Related Technologies

4.3.2.1 Case 3: The Early Innovation Market Around Saab

4.3.2.2 Case 4: Secondary-Related Industrial Spillovers from the Development and Modification of Aircraft Engines

Engine Services

4.3.3 Engineering General

4.3.3.1 Case 5: Secondary Spillovers: Hydraulic Engines

Automotive Heaters

Diesel Engines

Turbo Chargers and Other Civilian Spillovers

4.3.3.2 Case 6: Integrated Production, Lifelong Product Support and Maintenance-Free Products

4.3.4 Industry General and Serendipitous Discovery

4.3.5 Creating a Critical Mass Aircraft Industry Competence Bloc Rich in Spillovers (Case 7)

4.4 Digital Mobile Telephony: A Swedish World Success with a Military Origin18 (Case 8)

4.4.1 The Origin of Nordic Mobile Telephony: How the Advanced Public Customer Initiates a New Swedish Industry

4.4.2 The Emergence of Digital Mobile Telephony as a Swedish World Success

4.4.3 The Critical Technology Elements of the Early Digital Mobile Telephone System

4.4.4 Advanced Consumer Electronics

4.4.5 One Technology Wave After Another: Nobody Is Safe

4.4.6 A Number of Civilian Opportunities and Challenges

4.4.7 Summing Up

4.5 Secondary Spillovers: Ericsson HP Telecom and Telecom Monitoring and Control Systems (Industry General, Case 9)

4.6 The Emergence and Disappearance of a Swedish Computer Industry (Industry General, Case 10)

4.7 The Business Information Systems Venture of Ericsson (EIS, Case 11)

4.8 Medical Technology Spillovers (Sectra): A Creative Entrepreneurial Environment (Case 12)

4.9 Notes

Chapter 5

Looking into the Future on JAS Gripen Spillovers

5.1 Spillover Areas: A Brief Survey

5.2 The Erieye Surveillance System, Electrically Directed Antennae and the Minilink: The Development of an Early Networked De

5.2.1 Erieye Surveillance Technology

5.2.2 Antennae

5.2.3 The MiniLink

5.2.4 A Networked Defense Enhances Spillover Intensity

5.3 Distributed and Integrated Production as a Generic Engineering Organizational Technology: The Art of Systems Integration

5.3.1 The Nature of Complex Products

5.3.2 Integrated Production

5.3.3 Systems Effects in Integrated Production

5.3.4 Systems Integration: An Illustration

5.4 Safety-Critical Software Engineering (Case 15)

5.5 Manufacturing Lightweight Technology (Case 16)

5.5.1 Lightweight Aircraft Structures: Saab and Gripen

5.5.1.1 Case: Modig Machine Tools in Virserum

5.5.2 Lightweight Engine Designs: Volvo Aero Corporation

5.5.3 Welding Simulation

5.5.3.1 Case: Applied Composites AB (ACAB)

5.6 Automobile Safety Systems as a Swedish Export Product

5.6.1 Case 17: The Swedish Automotive Safety Industry and Autoliv

5.7 Maximizing Functional Flexibility and Minimum Life Cycle Maintenance and Service Costs (Case 18)

5.7.1 Product Design and Functional Flexibility

5.7.2 Maintenance-Free Products

5.7.3 Real Options Pricing of Flexibility

5.7.4 Lifetime Product Support

5.7.5 Product Life Management

5.8 Additional Product and Technology Areas the Origin of Which Can Be Traced to JAS 39 Gripen

5.8.1 Space Research and Exploration (Case 19)

5.8.2 Virtual and Secure Online Design: Encryption/Security (Case 20)

5.8.3 Civil Security (Case 21)

5.8.4 Unmanned Aircraft and Future Air Transport (Case 22)

5.9 The Development of a Specialist Consulting and Subcontracting Industry: Competence Bloc Formation

5.9.1 Advanced Subcontractors as a National Competitive Advantage

5.9.2 Engineering Consulting Bridges the Gap Between Technology Creation and Technology Adoption

5.9.2.1 Case 23: Engineering Consultancy (Combitech AB)

5.9.3 Industrial Competence Bloc Formation in Linköping(Case 24)

5.9.4 The Subcontracting Contract

5.9.5 Risk Sharing Among Contractors

5.10 What Did Not Happen

5.10.1 Spillover Opportunities Missed (Case 25)

5.10.1.1 Example 1: Landing Gear

5.10.1.2 Example 2: Rescue System

5.10.1.3 Example 3: Environment Control System

5.10.1.4 Example 4: The Auxiliary Power Unit

5.10.2 The Large Part of Gripen Spillovers Has Been Captured by the Large Partners in the IG JAS Industry Group

5.11 Notes

Chapter 6

Saab in South Africa: Technology Transfer to an Industrializing Economy

6.1 The South African Opportunity

6.2 The Downsizing of the South African Arms Industry

6.2.1 Armscor

6.2.2 Denel

6.2.3 Saab Denel Aerostructures

6.3 The Nature of the Product and of Spillovers7

6.4 Gripen in South Africa: Facts

6.4.1 The Gripen Purchase: Technical Background

6.4.2 Volvo Aero Corporation in South Africa

6.4.3 The Organization of Technology Transfers

6.4.4 Subcontracting in South Africa

6.5 South African Receiver Industry

6.5.1 A Dual Economy Isolated from Industrial Neighbors

6.5.2 Participating in Global Production and Marketing Networks

6.5.3 Management Competence

6.5.4 Attractive Technologies

6.6 New Firm Formation

6.7 Competence Blocs, Lack of Commercial Attitudes, and Venture Capital Insufficiency

6.7.1 Case 26: TMI Dynamatics

6.8 Labor Quality Supply

6.8.1 Case 27: The Saab Industrial School project in South Africa

6.9 Political Uncertainty High

6.10 Conclusions

6.11 Notes

Chapter 7

The European Policy Perspective

7.1 The Future Dependence of Western Industrial Economies on their Engineering Industries

7.2 The European Concerns

7.3 Facilitation Rather Than Directed Procurement Becomes Important

7.4 Dassault Aviation, France

7.5 What Should Europe Do?

7.6 Notes

Chapter 8

Private and Social Spillover Benefits from Advanced Procurement: Defining and Estimating the Spillover Multiplier

8.1 How to Capture Spillover Rents Privately and for Society

8.1.1 Innovative Pricing

8.1.2 On the Principles and Practices of Offset Trade Requirements

8.2 Estimating the Spillover Multiplier

8.2.1 Beware of Calculation Biases Based on Oversimplification

8.2.2 Defining the Spillover Multiplier of the JAS 39 Gripen Development Investment

8.2.3 Estimating (Approximating) the Spillover Multiplier from the Microlevel and Up

8.2.3.1 Procedure

Size of R&D Investment

Magnitude of Social Value Creation (Identifying Spillover-Receiving Firms)

Opportunity Costs

8.2.3.2 Comments

8.3 How to Turn Potential Rates of Return into Actual Rates of Return

8.3.1 The Policy Issue

8.3.2 The Art of Rent Seeking

8.3.3 The Art of Innovation Policy

8.4 Incentive Contracts

8.5 Notes

Chapter 9

Advanced Purchasing as Industrial Policy: On the Advanced Firm as a Technical University

9.1 Public Goods as Infrastructure

9.1.1 Market or Public Failure to Satisfy a Private Demand?

9.1.2 R&D Investment as Infrastructure: The Underinvestment Proposition

9.1.3 Technology Policy

9.1.4 Public Procurement as Industrial Policy: The Role of the Competent Customer

9.1.5 Are There Any Other Advanced Public Procurement Objects?

9.2 The Public Purchasing Contract: A New Demand Policy

9.3 Aircraft Industry Already Today Uses the Technologies of Future Engineering Industry

9.3.1 The Large Firms Dominate as Spillover Receivers

9.3.2 The Opportunity Cost May Be Negative

9.3.3 Marketing the Cloud: Saab as an Agent of Democracy

9.4 The Advanced Firm as a Technical University

9.5 Notes

Technical Supplements

S1 The IG JAS Investment

S1.1 The Procurement of the JAS 39 Gripen Aircraft with Swing-Role Capabilities

S1.2 Swedish Military Aircraft Procurement History

S1.3 The JAS 39 Gripen Concept

S1.4 The Industry Group JAS

S1.5 Weapons and Communications System

S1.6 The New IG JAS Procurement Method

S1.7 Subsystems Categories Outsourced to Non-Saab Subcontractors

S1.8 The JAS 39 Gripen Procurement Sequence

S1.9 The JAS 39 Gripen Investment Budget

S2 Estimating the JAS 39 Gripen Macroeconomic Spillover Multiplier: Going from Micro to Macro

S2.1 The Different Estimation Methods

S2.2 Method 1: Identifying and Aggregating Over the 45 Spillover-Receiving Firms

S2.2.1 Calculation Method

S2.2.2 Identifying the Origin of Spillovers

S2.2.3 On the Net Value Calculation Aggregated from Cases

S2.3 Method 2 (Indirect): Econometrically Determined Social and Private Rates of Return

S2.4 Method 3: Micro-to-Macro Simulation

S2.5 The Value of JAS 39 Gripen Spillovers: Analysis, Evaluation, and Discussion

S2.6 Summing Up

S3 A Future Research Agenda: The Advanced Firm as a Technical University

S3.1 The Double Customer Role of Government

S3.2 The European Dimension

S3.3 Suggested Continuation of the Project

S3.4 The Spillover Multiplier

S3.5 The Future Role of the Old Engineering Industry in the New Economy

S3.6 Overcoming the Underinvestment

S3.7 Advanced Firms and Technical Universities Competing for Public Resources

S3.8 The Optimal Public Procurement Area

Glossary

Bibliography

Index