Brazilian Industrial Defense Base Profile

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Brazilian Industrial Defense

Base Profile

Perfil da Base Industrial de

Defesa do Brasil

DOI: 10.21530/ci.v15n3.2020.1054

Ariela Diniz Cordeiro Leske

Thauan Santos

Abstract

This paper aims to present an overview and analysis of the Brazilian

defense industrial base (IDB). Based on the Brazilian Industrial Defense

Base Mapping and its eight segments (ABDI-IPEA, 2016), our main

contribution is to provide the first national and comparative analysis

between these sectors, since there is a lack of knowledge in the

literature on the Brazilian defense-related companies scenario. Focusing

on the analysis of the international insertion of these companies

into the global industry through international trade, we analyze

defense-related companies based on (i) personnel and average salaries;

(ii) innovative and investment profile; (iii) share of export;

(iv) main destination countries; (v) technological intensity of exported

products; (vi) main obstacles when looking for external markets; and

(vii) main export support instruments. Despite the limitations in terms

of data, among the main conclusions stand out that each segment has

a specific profile, faces and responds differently to market barriers,

and in general its innovative profile is still focused on process, what

may limit the competitiveness of companies.

Keywords: Brazilian Defense Industry; Industrial Defense Base; Defense

Economics; Brazil; Defense.

1 Doutora em Economia da Indústria e da Tecnologia pela Universidade Federal do

Rio de Janeiro; Professora Adjunta do Programa de Pós-Graduação em Segurança

Internacional e Defesa da Escola Superior de Guerra, Rio de Janeiro, Brasil.

(arielaleske@gmail.com). ORCID: https://orcid.org/0000-0002-4995-3940.

2 Doutor em Planejamento Energético pelo Instituto Alberto Luiz Coimbra de Pós-Graduação

e Pesquisa de Engenharia. Professor Adjunto do Programa de Pós-Graduação em

Estudos Marítimos da Escola de Guerra Naval, Rio de Janeiro, Brasil.

(santos.thauan@gmail.com). ORCID: https://orcid.org/0000-0002-4001-4322.

Artigo submetido em 03/03/2020 e aprovado em 17/06/2020.

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Ariela Diniz Cordeiro Leske; Thauan Santos

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Resumo

Este artigo tem como objetivo apresentar uma visão geral e uma análise da base industrial de

defesa (BID) brasileira. Com base no Mapeamento da Base de Defesa Industrial Brasileira e

em seus oito segmentos (ABDI-IPEA, 2016), nossa principal contribuição é fornecer a primeira

análise nacional e comparativa entre esses setores, uma vez que há um desconhecimento

na literatura sobre o cenário das empresas brasileiras relacionadas à defesa. Com foco

na análise da inserção internacional dessas empresas na indústria global por meio do

comércio internacional, analisamos empresas relacionadas à defesa com base em (i) pessoal

e salários médios; (ii) perfil inovador e de investimento; (iii) participação na exportação;

(iv) principais países de destino; (v) intensidade tecnológica dos produtos exportados;

(vi) principais obstáculos ao buscar mercados externos; e (vii) principais instrumentos

de apoio à exportação. Apesar das limitações em termos de dados, dentre as principais

conclusões destacam-se que cada segmento tem um perfil específico, enfrenta e responde

diferentemente às barreiras de mercado e, em geral, seu perfil inovador ainda está focado

em processos, o que pode limitar a competitividade das empresas.

Palavras-chave: Indústria de Defesa Brasileira; Base Industrial de Defesa; Economia de

Defesa; Brasil; Defesa.

Introduction

In order to expand the consumer market, defense companies seek to export

their products in addition to acting in the commercial market; in some cases,

export is actually a necessary condition for their survival. Therefore, this paper

aims to describe the profile of exports of companies related to national defense,

identify the relevant factors of exports in this area and what are their main

weaknesses in the Brazilian defense-related companies.

We use data published by the Brazilian Industrial Defense Base Mapping

(ABDI-IPEA 2016). Eight segments are considered, namely: light and heavy

weapons and ammo and explosives (A); electronic systems and command and

control systems (B); military naval platform (C); nuclear propulsion (D); military

ground platform (E); military aircraft platform (F); defense-oriented space systems

(G); and equipment for individual use (H). These segments will be analyzed

jointly in terms of the following factors related to exports: (i) personnel and

average salaries; (ii) innovative and investment profile; (iii) share of export;

(iv) main destination countries; (v) technological intensity of exported products;

(vi) main obstacles when looking for external markets; and (vii) main export

support instruments.

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The paper will be structured as follows: first, and after this brief introduction,

there will be a section that presents the empirical review on international trade

in the defense sector, with a particular focus on exports. Then, there will be

a brief description of the Brazilian defense industry, based on the Brazilian

Industrial Defense Base Mapping. Next, we present the data on the Brazilian

Industrial Defense Base (IDB)’s international insertion. Finally, we show some

conclusions and reflections on the nature, profile and challenges faced by the

Brazilian defense industries.

International trade and some aspects of defense area

When it comes to international trade, it is often interesting to analyze the

issue from a regional perspective. Within the scope of regional South American

initiatives, the Union of South American Nations (UNASUR) stands out, especially

for giving much relevance to the area of defense due to the South American

Defense Council (CDS). We particularly emphasize the importance of UNASUR

in relation to increased (regional) demand, the stimulus to Brazilian exports of

certain companies operating in the defense sector, and the internationalization

of some of these companies.

Although its creation has contributed to the complexification and overlap

of South American security and defense structures (Villa e Bragatti 2015), the

CDS advanced significantly in the field of confidence and cooperation measures

in defense industries and technologies in the region (Souza 2016; Pagliari 2015),

contributing to the deepening of the regional integration process (Martinez e Lyra

2018). Since its creation in 2008, seeking to overcome the mistrust existing in the

region and to incorporate the defense sector as an harmonic pillar to facilitate

the process of regional integration (Arredondo 2017), the CDS constitutes itself

as an instance of consultation, cooperation and defense coordination (Abdul-

Hak 2013).

Its decisions were taken in consensus and respect for the diversity, desires,

values and traditions of each member state; they were only declaratory, without

a legally binding nature (Santos 2018a), therefore, it was not an operational

alliance along the lines of the North Atlantic Treaty Organization (NATO). As its

main objectives, the CDS proposes: (i) to consolidate South America as a zone

of peace, the basis for democratic stability and the integral development of its

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peoples, as a contribution to world peace; (ii) to build a South American defense

identity, which takes into account sub-regional and national characteristics, and

which contributes to strengthening the unity of Latin America and the Caribbean

(LAC); and (iii) to generate consensus to strengthen regional defense cooperation

(Aranguiz 2013).

One of the central points of the CDS is the possibility of resumption of the

defense industry, considering the complementarity of the production chain and

the scale amplitude. Thus, in seeking to rearticulate a Defense Industrial Base

(IDB) with a South American foundation, the CDS presents the possibility of

working on the construction of a South American defense industry, with a broad

market driven by state orders and with the participation of companies in their

countries (Padula 2015).

However, given the recent breakdown of UNASUR and CDS after 2018 (Fuccille

2018; Santos, Rodrigues e Leite 2019), as well as the relevance of Brazil with

regard to the defense budget, expenditure and investments in South America

(Rezende 2016), the focus of this paper will be only on the case of the Brazilian

defense industrial base. Therefore, in this section, the intention is to narrow

and tie the relationship between international trade, exports, innovation and

internationalization of companies, and then to specifically analyze the Brazilian

IDB case.

According to the classic theories of international trade, trade between

countries should focus on their comparative advantages — whether absolute

or relative. In the early decades of the twentieth century, the Heckscher (1991)

and Ohlin (1991) models indicated that the factor endowment of each economy

would determine its exports and imports. However, in the 1970s Chamberlian

hypotheses of product differentiation, economies of scale, and monopolistic

competition emerged, overcoming the simplified models that assumed pure

and perfect competition and often ignored market failures. In the “new” trade

theory (Helpman 1981; Krugman 1981), North-South trade was associated with

traditional comparative advantages determined by the intensity of factors of

production and with inter-industry trade, whereas North-North trade would be

based on economies of scale and product differentiation, being associated with

intra-industry trade.

In general, exports are considered as a factor that can contribute to economic

growth, either through the direct effect on the GDP, or through an increase in

the scale of production and productivity (Balassa 1978; Balassa 1985; Delgado,

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Fariñas e Ruano 2002; Cuaresma e Wörz 2005). This increase can derive from

learning through interaction with producers and consumers, resulting in the use

of new technologies and greater productivity, in a process called learning-by-

exporting (Salomon e Shaver 2005). The learning-by-exporting process also seems

to be influenced by the technological intensity of the companies. The greater

the technological intensity, the greater the learning-by-exporting (Fernandes e

Isgut 2005). Besides, countries with more experience produce and export goods

with high technological content (Catella e Gonçalves 2011).

On the one hand, companies can start the export process based on successful

innovations in the domestic market. Internal success can stimulate the company

to enter the international market (Vernon 1966). On the other hand, there is the

possibility of companies that export have also a greater tendency to innovate,

since exporting leads to process innovations, increasing productivity (Álvarez

e García 2008; Damijan, Kostevc e Polanec 2010). Also, the improvement of the

size of markets and the induces of the knowledge spillovers are effects that can

be appropriated by successful innovators (Vernon 1966; Aghion e Howit 2009;

Aghionet al. 2018; Grossman e Helpman 1989). Consequently, the larger and more

productive companies would be even more likely to innovate and, consequently,

to export (Melitz 2003; Caldera 2010; Raiher, Carmo e Stege, 2017; Lo Turco e

Maggioni 2014; Suárez-Porto e Guisado-González 2014).

In this sense, firm-technological resources can be an important factor for

international competitiveness (Rodríguez e Rodróguez 2005). Technological

advances and delays can be considered critical for international competitiveness

in medium and high technology goods (Dosi, Lechevalier e Secchi 2010; Dosi,

Pavitt e Soete 2009), with differences in products and production processes being

central to the competitive process, thus increasing the likelihood of insertion into

international markets (Dosi, Grazzi e Moschella 2015). Atkeson and Burstein

(2010) suggest that the product innovation can offset a change in trade costs,

having a substantial impact on heterogeneous firms exit, export, and process

innovation decisions. That product innovation has an important moderating

effect on the positive association between exports and productivity (Cassiman

e Golovko 2011). For Becker and Egger (2013), there is significant bias of the

impact of product and process innovations on exports. The result was particularly

large for firms with only product or process innovations as compared to firms

that did not innovate.

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The exchange rate depreciation can be also an important part of growth

accelerations and may improve welfare if there is a market failure that affects the

tradables sector more than the nontradable sector (Hausmann, Hwang e Rodrik

2005; Rodrik 2007). In some cases, it has been observed that export growth

can be preceded by significant exchange rate depreciation because it tends to

facilitate the commercialization of new products and entry into new markets

(Freund e Pierola 2012).

When it comes particularly to defense sector, there are some peculiarities,

especially after the Cold War, when the international arms market experienced a

dramatic structural change (Anderton 1995). Until the end of the Cold War, the

state’s political regime — whether it was democratic or not — was a common

concern. It is suggested that post-cold war policies have not mattered (Perkins

e Neymayer 2002), since “democracies have not been as altruistic or ethical as

they have claimed in recent years” (Akerman e Seim 2014, 23). Still after the Cold

War, the conflicts have presented smaller proportions, and for that reason it is

possible to observe greater relevance in the trade of small arms (Kinsella 2011).

The defense international trade is even surrounded by a dichotomy in

terms of political decision: importing or producing domestically (Levine et al.

1997). Regardless the choices, it is indeed necessary to allocate a significant

amount of resources. The imports do not require long-term commitment, nor

do they contribute economically (job creation and industrial training) or reduce

subordination in the global arms transfer and production system (Krause 1995).

The national production requires constant investment in R&D and productive

incentives, in addition to purchases that must be made by the State, at least

initially (Santos 2018b; Leske 2015, 2018). The second case offers some positive

externalities such as encouraging industrial production in higher value-added

sectors and skilled labor. The model tested by Levine et al. (1997) show some

variety of arms control policies that can increase welfare, including coordination,

price transparency and common arms export policy.

It is worth noting that the international arms transfer system has changed

in many levels after the end of the Cold War, with its overall volume reduced

mainly because of the strong decline in exports of the Soviet Union (USSR) and its

successor states (Brzoska 2004; Garcia-Alonso e Levine 2007). The arms market

has become more diverse, both in terms of supplier-recipient relationships and

of the types of weapons used. Buyers with financial resources bought expensive

weapons, predominantly from the United States (US) and Western Europe, while

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the others bought old weapons and small arms. Even the donations, which were

very common during the Cold War, were reduced (Brzoska 2004). However, more

recently, Villa and Weiffen (2014) highlight that the increase in arms spending

cannot be understood if one does not consider the coexistence of a stable power

balance in a regional security governance, as well as the desire of emerging states

to increase their regional or global roles.

Among the consequences, the reduction in this market is the reorganization

of productive structures. Many international companies closed, merged or were

incorporated, consolidating the industry and consequently concentrating production

on few companies and further narrowing the economically viable segments (Dunne

1995). Exports in the United Kingdom (UK) for instance decreased by 50% in

the late 1990s, resulting in significant losses for gross domestic product (GDP)

and reallocation of resources in alternative occupations (Sharp 2005). A recent

study indicates that exporting countries tend to reduce their military budgets

(Pamp e Thurner 2017). Other benefits can come from a greater insertion in the

international market, such as: firms will progressively become more efficient,

less dependent on public procurement and innovation policy support, as well as

more prone to knowledge sharing and inter-firm collaboration (Blom, Castellacci

e Fevolden 2014).

With this consolidation, developing arms-producing countries remain

dependent on imports of sophisticated critical subsystems, and little transfer of

the knowledge necessary to go beyond simple reproduction or copying of weapons

took place (Krause 1992). More developed countries have then increased their

military technological advantages compared to developing countries (Brzoska

2004), reinforcing a market structure in which the roles of technology and

knowledge producers and importers are clearly defined and relatively static.

Consequently, this scenario implies in companies whose innovative processes

are characterized by imitation and incremental innovations (Freeman e Soete

2008), contributing only marginally to the reintegration of these countries in

this international trade. As a result, commercialization and differentiation in the

international arms market imply that economic and military power are becoming

closer, reinforcing the status of inequality between developed and developing

countries in international trade in defense.

Fonfría and Duch-Brown (2014) stress the role of technological issues when

analyzing the performance of exports of the Spanish defense industry between

2003 and 2008. The authors argued that more intense exporters of defense

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material are more productive and, consequently, more involved in export and

technological activities. However, the intense regulation and political intervention

in the trade related to defense products tends to generate additional costs and

coexist with a parallel trade of military products. This latter factor may cause

trade-related studies in this area to be underestimated.

Finally, it is important to highlight the difficulty of adequately analyzing

indicators on production and trade. In terms of secondary data, the Stockholm

International Peace Research Institute (SIPRI) and the Military Balance (IISS)

are usually the most viable. Only the former is freely accessible, but its data

are aggregated by country, except for the information available on the top 100

companies in the area. In this sense, the next section wishes to contribute

providing a more detailed information regarding the production and foreign

trade of Brazilian companies that supply defense products.

The Brazilian IDB: What does the Mapping show?

Mapping features

The Brazilian Industrial Defense Base Mapping is the first effort undertaken

in Brazil with the objective to size and know the micro-data related companies

that provide defense products. The mapping was elaborated between 2014-2015

by the National Agency for Industrial Development (ABDI) and the Institute of

Applied Economic Research (IPEA), in addition to eight Brazilian specialists

contracted for this research, and the results were published in 2016. This was

carried out to better understand companies related to national defense.

The purpose of the research was to identify companies that supply defense

products and their main characteristics, such as their size, employees’ profile and

the share that defense plays in these companies. As each segment was analyzed

individually — and with some autonomy and particularity —, here we intend to

carry out a joint and common analysis, allowing an overview of the Brazilian IDB

— constituting the main contribution of this paper to the specialized literature.

The number of companies analyzed is based on data from the Annual Social

Information Report (RAIS) (2003-2011) and differs from the number of companies

that gave rise to data on international insertion (2003-2013), as well as from those

that constitute the sample of innovation data (2000-2011). This mismatch between

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the periods analyzed is due to the lack of existing data. Data provided by RAIS

and Research of Technological Innovation (PINTEC) have different collection

periods, since RAIS is an annual research and PINTEC is carried out every 3

years. Despite the discrepancy between the collection periods, these are the only

data available to companies in the selected area. In relation to the primary data,

there is also a reduction in the sample due to the number of companies that

have responded to the questionnaires carried out by the specialists.

A synthesis of the Brazilian IDB

Table 1 shows the number of companies selected to compose the sample

by segments. The segments with the largest sample are (F) aircraft (34.3%) and

systems (9.8%), respectively. The segment with the lowest number of companies

is (A) weapons, ammo and explosives (2.2%). 86% of the selected companies

were picked up by RAIS and, over the period, the number of captured companies

increased by an average of 27% between 2003 and 2011, while the total number

of employed personnel increased by an average of 79% over the same period.

Table 1. Number of defense-related companies, employed personnel

and average salary (2003-2011)

Segments

Number of

companies

Number of

Companies at

RAIS

Employed

personnel

Higher-level

personnel*

Average salary

(R$)**

2003 2 011 2003 2 011 2003 2 011 2003 2 011

A 23 15 16 4,888 6,561 17% 22% 2,744.00 4,101.00

B 130 73 100 7,778 16,229 38% 48% 4,204.00 4,576.00

C 355 259 324 46,170 92,214 3% 5% 2,926.00 3,388.00

D 34 23 28 2,443 3,987 22% 21% 3,047.00 4,031.00

E 48 27 40 12,479 23,896 17% 28% 4,105.00 4.379.00

F 362 241 312 16,013 26,946 18% 25% 2,851.00 3.186.00

G 104 71 84 3,632 6,852 30% 42% 3,113.00 3.690.00

Total 1056 709 904 93,405 176,685 - - 22,990.00 27,351.00

Mean 150.86 101.29 129.14 13,344 25,241 20.7% 27.3% 3,284.29 3,907.29

Source: Own elaboration based on ABDI-IPEA (2016); *share of total; ** in order to convert reais (R$) to US dollars

(US$), use the exchange rate values in Appendix 1.

3 Light and heavy weapons and ammo and explosives (A); electronic systems and command and control systems

(B); military naval platform (C); nuclear propulsion (D); military ground platform (E); military aircraft platform

(F); defense-oriented space systems (G); and equipment for individual use (H).

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Regarding the profile of employed personnel, there is a significant concentration

in the naval segment (C), which represents 52.2% of the total in 2011. As a result,

this segment has the lowest percentage of workers with a higher level (5.0%)

and the second lowest average salary (R$ 3,388.00).

Then, it is possible to conclude that the percentage of employed personnel

in different segments of the Brazilian IDB with a higher level is well above the

national average. While some segments reach 48% (B) and, on average, higher

level personnel represent 27.3%, the national average according to the IBGE

(2013) is only 15% of the total employed personnel. Between 2003 and 2011,

there was an increase of 35%, on average, in the share of personnel with higher

education, but the average salary increased only 20%. Despite a relatively small

growth rate, the average salary at the Brazilian IDB is still higher than the national

average which, according to IBGE (2014), was only R$ 1,943.00 in 2012.

In order to investigate the relationship between the companies and the national

defense, questionnaires were sent to the companies that made up the sample of

the mapping

. Only the electronic systems and command and control systems

(B) and nuclear propulsion (C) segments have defense as their main market,

since the other segments carry out most of their sales in the commercial market

(ABDI-IPEA, 2016). This is one of the main findings of this paper, since Brazil

has different policies and fiscal instruments directed to “defense companies”

that in fact are actually supplying more commercial market rather than defense

market itself.

The innovative profile of the companies that compose the sample can be

observed from the data of the Research of Technological Innovation (PINTEC) and

are presented in Table 2. PINTEC seeks to capture some indicators on innovation

in the country and provides a series of data on the innovative process of national

companies, through a cross-section following the conceptual aspects proposed

in the Oslo manual (IBGE, 2011)

. Due to financial costs associated with the

analysis of all national companies, the survey was carried out by sampling.

4 The maximum percentage of responses was observed in the arms and ammo segment (A), where 30% of the

companies previously selected responded to the questionnaire. In the ground platform segment (E), only 10%

of companies responded. Overall, only 17% of companies answered the questionnaire on average.

5 Regardless of the progress made in PINTEC’s methodology, it still relies on traditional indicators, leaving aside

some qualitative and often specific indicators to sectors and companies, making them the target of criticism

about their real ability to capture important systemic aspects.

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Table 2. Defense-related companies that innovated and their investment in

innovation (PINTEC, 2000-2011)

Segments

Companies at

PINTEC

Innovative

Companies

Investment in innovation

(R$)

Investment rate

2000 2011 2000 2011 2000 2 011 2000 2 011

A 9 8 8 5 20,232.00 59,024.00 5.0% 3.9%

B 17 30 13 24 209,142.00 274,157.00 4.4% 0.5%

C 75 142 46 71 245,413.00 628,340.00 3.8% 1.8%

D 9 10 5 6 51,116.00 35,483.00 6.2% 2.2%

E 7 17 6 13 56,132.00 2,746,458.00 3.1% 3.3%

F 42 81 31 39 445,398.00 1,434,383.00 7.3% 9.3%

G 8 22 6 15 9,854.00 167,166.00 11.3% 6.6%

TOTAL 159 288 109 173 1,037,287 5,345,011.00 - -

Mean 27 48 16,4 24,7 148,183.90 763,573.00 5.9% 3.9%

Median 13 24 8 15 56,132.00 274,157.00 5.0% 3.3%

Source: Own elaboration based on ABDI-IPEA (2016).

The investment rate in innovation, which represents how much companies

invest in innovation in terms of its sales revenue, was on average 5.9% in 2000,

but decreased to 3.9% in 2011. There was a significant drop in the (D) nuclear

propulsion segments (-4 pp), (B) electronic systems (-3.9 pp) and (C) naval

platform (-2 pp). If we consider only domestic research and development (R&D)

investment, its average as a function of company revenues was 1.9%, while

the national average as a whole was 0.84% (IBGE 2011). Therefore, despite

its reduction in the proportion invested, the group of companies related to the

Brazilian IDB still presents a more innovative profile than the national industry

average — which is in line with the higher level of employed personnel and then

its average salary in the Brazilian IDB.

Among the mapping companies, on average only 19% were analyzed by

PINTEC. The segment with the largest participation in PINTEC was the naval

platform (C), in which, from an initial list of 355 companies, only 142 were

part of PINTEC in 2011. The space segment (G) was the smaller segment, with

only 21% in the same period. Between 2000 and 2011, the number of companies

analyzed by PINTEC increased 85% (among those making up the sample). Due

to such increase, it is hard to identify if the increase in the number of companies

that innovated was due to the amount of companies itself or if companies that

already have been part of the research started to innovate.

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The innovative profile is also captured by PINTEC (see Table 3). For sample

data, product innovation was implemented by about 10% more companies than

those implementing process innovations over the period. Between 2000 and

2011, there was a reduction in the number of companies in the weapons (A) and

ground platform (E) segments that introduced product innovations. The fact that

the naval segment (C) has a larger sample within PINTEC ends up reflecting the

number of companies that introduced innovations in general.

Table 3. Innovative profile of defense-related companies (PINTEC, 2000-2011)

Segment Year

Product Process

Product

and

process

TOTAL

Total

New

to the

company

New to

the

national

market

Total

New

to the

company

New to

the

national

market

2000 10 4 6 9 4 5 7 26

2011 5 2 3 5 4 1 3 13

2000 17 8 9 11 5 6 8 36

2011 28 11 17 20 12 8 20 68

2000 51 25 26 46 30 16 27 124

2011 72 36 36 72 53 19 49 193

2000 7 4 3 7 2 5 4 18

2011 8 3 5 7 5 2 6 21

2000 26 13 13 8 5 3 6 40

2011 14 5 9 15 10 5 13 42

2000 26 13 13 25 13 12 15 66

2011 31 12 19 38 26 12 25 94

2000 7 2 5 6 3 3 5 18

2011 15 5 10 16 7 9 13 44

Source: Own elaboration based on ABDI-IPEA (2016).

Since it influences exports, product innovation has been shown to be relatively

more important than process innovation (Dosi, Grazzi e Moschella 2015). In this

sense, defense-related companies are acting jointly towards a better international

insertion, although still relatively low if we consider the selected sample. Despite

the fact that most of the segments of this sample operate in the commercial

market, according to the companies’ perception, the spin-off (27%) has been

slightly higher than spin-in (22%). On average, 27% of respondents argued to have

developed technologies for military purposes and then used in the commercial

market (IPEA-ABDI, 2016).

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In this context, in a summarized and partly conclusive way, the mapping data

indicates that the Brazilian IDB operates in a dual perspective (Dagnino 2008).

Despite the fact that they operate mostly in the commercial market, defense-related

companies are able to meet the specific demands of the defense sector. This is

fundamental in a country like Brazil, where the demand for military products is

low and unstable. This characteristic of demand is a result of the country’s not

involving in wars in its recent history and the large concentration of the Ministry

of Defense (MD) budget in personnel expenditures (Matos, Fingolo e Schneider

2017). Another consequence of the low demand of the national armed forces

is the importance that the exports assumed: besides expanding the commercial

consumer market, they can also help maintain a minimum production capacity

for defense. Therefore, the next section will present different data on the export

of defense-related companies in Brazil.

The International Insertion of the Brazilian IDB

Defense-related companies exports profile

Between 2003 and 2010, the number of companies that exported grew slightly.

In the segments of arms (A) and nuclear propulsion (D), more than half of the

companies exported. Notwithstanding, in others such as electronics (B) and space

(G) the percentage was below 30%. Therefore, Table 4 shows that international

insertion of these firms is still limited, since the number of companies that export

is on average as high as 40%.

Table 4. Share of export by defense-related companies (2003-2010)

Year 2003 2004 2005 2006 2007 2008 2009 2010

A 59% 59% 53% 59% 59% 71% 65% 65%

B 18% 22% 18% 23% 22% 21% 24% 26%

C 28% 26% 27% 32% 30% 34% 38% 37%

D 38% 35% 38% 32% 47% 35% 41% 53%

E 31% 33% 35% 42% 33% 40% 44% 42%

F 19% 20% 20% 27% 27% 25% 29% 29%

G 14% 18% 16% 19% 17% 18% 20% 24%

Source: Own elaboration based on ABDI-IPEA (2016).

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Table 5 shows the top 10 destination countries of defense-related companies’

export between 2008 and 2013. It can be seen that the top 10 accounted for

66.5% of the destination of exports (2008) and reached 84.7% (2013), indicating

a greater dependence on these markets and a reduction in the diversification

of the main partners. In 2013, the main destinations were the U.S. (38.3%),

Argentina (18.0%) and Venezuela (6.1%), totaling US$ 4,645.4 billion. Among

the other countries with significant share of exports in 2013, stand out the U.K.

(1.9%), Italy (1.8%), Azerbaijan (1.7%) and Colombia (1.6%).

Table 5. Top 10 destination of defense-related companies’ export (2008-2013)

Countries 2008 2009 2010 2 011 2012 2013

U.S. 38.6% 31.1% 19.9% 21.4% 23.9% 38.3%

Argentina 15.8% 14.7% 28.7% 30.5% 18.0% 18.0%

Venezuela 0.8% 1.5% 2.2% 1.3% 2.7% 6.1%

Ireland - - - - 2.2% 5.1%

China 2.7% 6.3% 6.2% 9.2% 13.3% 5.0%

Chile 3.1% 1.7% 3.4% 4.1% 4.9% 3.5%

Kenya - - - - 2.7% 2.3%

Brussels 1.7% 0.0% 0.0% 0.0% 0.3% 2.3%

Mexico 2.1% 1.3% 1.5% 4.1% 4.8% 2.2%

South Africa 1.8% 2.1% 2.1% 1.9% 1.6% 1.9%

Others 33.5% 41.2% 36.0% 27.2% 25.6% 15.3%

Total (millions) 7,899.60 5,539.40 6,013.10 6,841.90 7,338.70 7,444.10

Mean (millions) 246.9 184.6 214.8 213.8 222.4 240.1

Median (millions) 120.3 77.4 96.0 76.3 50.2 91.8

Source: Own elaboration based on ABDI-IPEA (2016).

These top 10 countries comes from different natures: (i) regional integration

and strategic environment; (ii) international cooperation — south-south cooperation

(SSC); and (iii) historical trade relationships. In the first case, Latin American

countries in general stand out, such as Argentina, Venezuela, Chile and Mexico; in

the second case, it arises from particularly international cooperation arrangements

such as BRICS (China and South Africa); finally, the third case is due to Brazil’s

historical trade tradition with top five partners, such as the U.S. and the EU.

In the first two cases, it may be associated with the narrowing or the search

for closer approximation with countries of the Global South through Brazilian

foreign policy (BFP) in the period in question.

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With regard to its foreign policy agenda, Brazil has also avoided hard power

strategies, for example by renouncing nuclear weapons while joining the Nuclear

Non-Proliferation Treaty (NPT) (Carranza 2017). This nature of Brazilian foreign

policy differs from the case of arms production in Asia, which “is heavily influenced

by concepts of techno-nationalism, which views autarky (self-sufficiency in

armaments) as serving not only national defense needs, but also as maximizing

national political, strategic, and economic autonomy” (Bitzinger 2015, 453).

In terms of quality, data are more encouraging. Data on the technological

intensity of exported products shows that these tend to be higher value-added

products. The Organization for Economic Cooperation and Development (OECD)

classifies the industrial sectors based on the level of technological intensity in

the 34 countries that make up its base (OECD 2015). Through the “technological

intensity” indicator, industrial sectors are classified into four levels: high,

medium-high, medium-low and low (Hatzinchronoglou 1997; OECD 2011). Table

6 shows how it applies to defense-related companies.

Table 6. Value exported from defense-related companies based on technological

intensity of exported products, in millions of dollars (2008-2013)

Segment Year

Total

exported

value

High

intensity

Medium-

high

intensity

Medium-

low

intensity

Low

intensity

Non-

industrial

A 2008 284.0 5.0 278.8 0.0 0.1 0.0

2013 425.1 1.0 422.7 0.7 0.5 0.2

B 2008 29.9 19.5 9.9 0.3 0.2 0.0

2013 58.0 31.6 25.6 0.5 0.3 0.0

C 2008 2,121.2 33.7 1,938.7 129.9 15.2 3.7

2013 1,582.4 50.2 1,398.3 102.9 28.5 2.6

D 2008 15.3 1.5 13.4 0.4 0.0 0.0

2013 25.9 0.7 22.6 2.6 0.0 0.0

E 2008 1,584.1 25.7 1,402.3 140.0 16.1 0.0

2013 1,407.3 7.5 1,305.0 91.1 3.4 0.3

F 2008 6,096.2 5.858.8 141.2 78.0 18.3 0.0

2013 5,536.3 5.281.3 179.5 66.3 9.2 0.1

G 2008 53.6 2.6 44.5 6.2 0.3 0.0

2013 29.1 9.5 16.0 3.3 0.3 0.0

Source: Own elaboration based on ABDI-IPEA (2016).

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When it comes to technological intensity of the exported products, the

highest value generated is related to the medium-high intensity products and the

evolutionary behavior has been positive in the analyzed period, as expected for

the defense industries. Comparing the sector to the average profile of Brazilian

exports, this result seems more encouraging. Several authors analyzed data of

the Brazilian foreign trade according to the technological intensity and the result

differs considerably from those found in the Brazilian IDB Mapping. Based on

the data, the balance of the value of products with medium-high intensity was

negative and, in general, the products of greater prominence are those of low

technology and non-industrial (De Negri 2005; Pereira, Porcile e Furtado 2001;

Torezani e Campos 2013; Vogel e Azevedo 2015. As mentioned before, medium-

high and high technological intensity products allow companies to be more

competitive, which may allow a better international insertion (Dosi, Lechevalier

e Secchi 2010; Dosi, Pavitt e Soete 2009).

Difficulty in accessing the international market

In the questionnaire used in the Brazilian IDB Mapping (IPEA 2016), companies

were contacted in 2015 in a survey about the obstacles they faced while seeking

insertion in foreign markets. Table 7 summarizes the results for all segments

under analysis. Among the main difficulties related to the international market

(evaluated as very high and high importance), there are: industrial protection

in destination countries (78%), unfavorable exchange rate (69%) and internal

bureaucracy (66%), respectively.

In this market, it is common to have some protection to the companies in

destination countries. However, companies do not benefit from the same (or

similar) policy in the case of Brazil. In addition, unfavorable exchange rates

and bureaucracy are identified as problems that reflect structural weaknesses

and macroeconomic policy in the country, so they are not necessarily linked to

the endogenous difficulties faced by companies and/or the particularities of the

defense sector itself. Analyzing the segments individually, we realize that each

one faces different obstacles, but it is noticed that the percentages indicated above

are strongly influenced by the aircraft (F), space (G) and naval (C) segments.

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Table 7. Identified obstacles by Brazilian defense-related companies

when looking for external markets (2015)

Obstacles

Importance

Very

high

High Medium Low

Very

low

Unfavorable exchange rate 33% 37% 28% 2% 1%

Port and airport costs 31% 33% 17% 13% 5%

International freight costs 18% 33% 23% 22% 5%

Domestic transportation costs 16% 26% 34% 19% 6%

Technical barriers of potential buyer countries 11% 31% 37% 18% 2%

Lack of information on potential buyers’ laws 13% 19% 48% 17% 3%

Lack of credit 27% 34% 29% 9% 1%

Lack of credit insurance (guarantees) 29% 35% 23% 11% 2%

Domestic bureaucracy 36% 31% 19% 11% 3%

Brazil is not associated with defense products 15% 29% 43% 11% 2%

Brazilian price is not competitive with similar foreign

companies

23% 37% 27% 13% 1%

Brazilian quality/technology is not competitive with

similar foreign companies

11% 19% 39% 22% 10%

Brazilian governments from other countries support their

companies more than the Brazilian government does

48% 30% 19% 3% 1%

Brazilian company is not able to exhibit products at

international fairs abroad

19% 17% 28% 27% 8%

Source: Own elaboration based on ABDI-IPEA (2016).

In the segment of electronic and command and control systems (B), for

example, port and airport costs, lack of credit and guarantees stand out, while in

the military naval platform segment (C) the outstanding obstacles identified by

companies were the public support for foreign competing companies, domestic

bureaucracy and unfavorable exchange rate. On the other hand, the military

ground platform segment (E) highlights that the main barriers are domestic

bureaucracy and lack of guarantees, while the military aircraft platform (F)

and defense-oriented space systems (G) segments stress the role of government

support to foreign companies, domestic bureaucracy and unfavorable exchange

rate. In this way, it can be concluded that among the main obstacles identified

by Brazilian defense-related companies are macroeconomic (domestic) and

industrial (domestic and international) variables.

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According to CNI (2018), in 2008, 82% of Brazilian commercial companies

interviewed stated that the exchange rate would be the main obstacle to exports.

Airport and port costs came in second place with 41.5%, followed by customs

bureaucracy (38.7%) and international freight cost (34%), respectively. More

recently, in 2018, airport and port costs appear first in the survey (51%), while

unfavorable exchange only appears in seventh place. The difficulty in offering

competitive prices (43.4%) and fees charged by consenting bodies (41.9%) were

in second and third place. Thus, there is a significant change in the obstacles

identified by defense and other Brazilian companies, since the category “port

and airport costs” ranked in fourth places (31.0%) and difficulty in offering

competitive prices in the seventh (23.0%).

Public instruments of export support

Export support policies can be an important tool to boost sales abroad. In

the scope of the Brazilian IDB mapping, the instruments of support provided by

the Brazilian Development Bank Exim (BNDES Exim), Drawback, and BNDES’

Export Financing Program (PROEX) were analyzed. Table 8 shows that Drawback

has been the most widely used incentive for companies. However, it can be

observed that in relation to the sample, the number of companies that used

some of these instruments is very low and that there is only a small increase

between 2003 and 2007.

Table 8. Export Support Instruments used by selected companies

Year

BNDES Exim Proex Drawback

A B C D E F G A B C D E F G A B C D E F G

2003 - - 3 - 1 2 - - - 5 1 4 1 - 7 5 38 2 7 22 6

2004 1 1 3 - - 2 - - 1 5 1 5 - - 9 9 39 2 8 24 9

2005 - - 9 - 4 2 - - 2 5 2 2 1 - 6 7 49 5 10 25 8

2006 - - 4 - 3 3 - - 2 4 1 3 2 1 8 9 50 3 10 30 9

2007 - - 7 - 2 2 - - 4 3 - 2 6 2 9 9 45 2 12 30 9

Source: Own elaboration based on ABDI-IPEA (2016).

The drawback is a support instrument that exempts tax companies from

imported components and other inputs incorporated into the final product

destined for products to be exported. This instrument is particularly relevant in

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the Brazilian case, given the high volume of imports at all levels of the national

aircraft industry’s production chain, for example. Generally, the scarce connection

between the companies and the instruments of support can be an indicator of a

policy failure, at least in the adhesion to the needs of the companies.

Companies may have or not knowledge/access to these instruments or the

instruments themselves may not be adequate to the needs of these companies. In

any case, if there is a policy and, in turn, it does not reach important companies

strategically, it is possible that there is a failure in the interaction between

companies and government. This is because public support has historically

been critical to the productive and innovative success of defense companies,

even in the case of private companies, greatly contributing to the insertion in

the sector and obtaining significant plots in this market. According to Conca

(1997), there have been times in the history of the Brazilian defense industry

when the institutional inefficiency was responsible for its failure (Karp 1999).

Final remarks

Analyzing the defense industry and the defense market is challenging,

mainly because the availability of data is often limited. In Brazil, there was still

no publication that generally presented the profile of defense-related companies.

The Brazilian IDB mapping published by ABDI-IPEA in 2016 constitutes an effort

in this sense and offers a first approximation of these companies, although from a

sectorial perspective without necessarily analyzing the defense sector as a whole.

Then, this paper sought to make a conclusive and comparative synthesis of the

mapping, something that has not been done at the moment of its conclusion

and to date; besides we have critically analyzed the sectors, showing their main

differences. Even though some data were outdated due to the lack of official and

academic data, our main contribution was to analyze the “photograph” of that

moment, in view of the lack of continuous data dissemination for this specific

group of defense-related companies.

In this sense, it was first observed that each segment has a specific profile

and, consequently, a joint analysis mitigates or even omits the perception of

some differences between them. It is then believed that trying to fit the general

profile of the Brazilian IDB may be useful to help understanding its limitations

and critical issues.

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When it comes to international insertion of the Brazilian IDB, it is possible

to conclude that the selected sample points to positive factors in relation to its

competitiveness:

• Companies had an increase in the number of personnel with a higher

level and an average salary higher than the national average;

• Among the companies analyzed by PINTEC, more than 70% made

innovations in the analyzed period;

• Product innovations were slightly higher than innovations in process;

• The products exported are medium-high and high-tech;

• The main destination of defense-related companies are countries in the

immediate region of Latin America (Argentina, Venezuela, Chile and

Mexico) and countries related to international cooperation arrangements

such as BRICS (China and South Africa), as well as from historical trade

traditions (US and EU); and

• The main barriers to insertion are on average more related to structural

and macroeconomic issues, rather than to internal business conditions.

Despite limitations in terms of data and time period analyzed, which cannot

complete or exhaust the subject, it was possible to draw an initial and general

profile of the industry (detailed by different segments) and to define relevant issues

that need further analysis (such as personnel profile, technological innovation

profile, destination markets, and types of financing).

One of the main features of the defense products market are its barriers, so it

is not surprising that this was the main difficulty pointed out by companies. This

difficulty could be overcome by offering innovative products. However, the innovative

profile is still focused on process and shows weakness in product innovations.

This feature may limit the competitiveness of companies. In the same line, the

fact that exports are mainly destined for South American countries, neighbors and

Mercosur partners, without involvement in conflicts, corroborates the difficulty

of inserting the products of Brazilian companies operating in the defense area.

Among the possible related issues that come from this debate, there are

challenges of political and economic nature, which require greater debate and

transparency in the defense sector in general, and in the case of Brazil in particular.

Therefore, the contribution of this paper is paramount to finally present an

overview of the sector so that industry itself, academia, policymakers and other

stakeholders have a better knowledge of the sector’s profile, size, challenges and

opportunities of Brazilian defense.

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Appendix 1

Year Nominal exchange rate

2000 1,83

2001 2,35

2002 2,92

2003 3,08

2004 2,93

2005 2,43

2006 2,18

2007 1,95

2008 1,83

2009 2,00

2010 1,76

2011 1,68

2012 1,96

2013 2,16

2014 2,35

2015 3,33

2016 3,49

Source: Own elaboration based on Ipeadata database. Nominal exchange rates were

calculated based on the average of nominal monthly exchange rates from the official

Brazilian government database. Available at: <http://ipeadata.gov.br/ExibeSerie.

aspx?serid=38389>.