FINANCIAL ASPECTS OF GLOBAL PRODUCTION NETWORKS FOR THE DEFENSE INDUSTRY

Abstract

The article provides insights into financial and economic aspects of international partnerships in the defense sector. A critical review of operational practices of the largest defense companies provides evidence that subcontractor financing (in particular, in case of multi-phase contract financing or investment capital budgeting) is used only if the main contractor gains an advantage (in situations when high demand products are available only from a small, undercapitalised supplier or when a ‘critical’ product supplier faces certain financial difficulties). The findings demonstrate that working and investment capital raising practices refer more to the specifics of how companies accept payments from their customers rather than focusing on the particular military product they offer. Although the company funding needs including capital size and time investment are directly affected by the product type, the factors that drive the company needs in financing are characterised by contract duration and the specific services or products provided to customers in a package. The study suggests a well-reasoned action plan to be implemented at the government level along with specifying the areas of international cooperation to reduce the negative effects from the final severance of value chains between Ukrainian companies and the CIS defense industry. In particular, the study substantiates the need to liberalize the regulatory framework for transferring of military equipment and dual-use goods; the need to change management practices at state-owned enterprises in terms of timely disposal of inefficient assets along with asset corporatization and privatization; the need to reform the standards and technical regulation framework in the area of defense-related product design and manufacturing; the need to implement tax incentives and mandatory payments for defense industry enterprises which invest in production growth. A special emphasis is put on the role of Ukraine – NATO cooperation to modernise the national defense industry and enhance the integration of Ukrainian businesses into global production networks along with demonstrating the benefits gained from international cooperation, in particular this refers to Ukraine's access to important regulatory documents, including military doctrines, which contributes to facilitating reforms within the Armed Forces of Ukraine; approval of the package of measures which are critical to raising awareness and to support NATO partners in the Black Sea region; and finally, the recognition of Ukraine as an Enhanced Opportunities Partner in June 2020.