How Australia could leverage a local submarine build

It seems likely Australia’s next submarine will be built locally with a foreign design partner. If this is the case it’s important Australia identifies and maximises economic and social benefit by maximising the spillover effects.

I will here concentrate on the short, medium and long term economic advantages of spillovers. This is where the government’s focus should lie.

Estimates of the economic multipliers associated with defence spending are usually between 1.7-1.9, although the range identified is very large from close to zero to around 6. A relevant example is the Swedish Griffin Fighter Plane development, where the spillover effect was at least 2.6.

The relevant effects relate to core technologies, related technologies, general engineering technologies, general industrial technologies contributing to the industrial commons and economic complexity, and the development of localised industrial competence blocs. These benefits occur through upskilling of workers and the associated labour mobility as well as through patents and access to new manufacturing technologies and new production systems.

Firms at the global productivity frontier, which is facilitated through these types of spillover effects and by operating in a high economic complexity environment, are on average 4-5 times more productive than non-frontier firms in terms of multi factor productivity, while this difference is more than 10 times with respect to labour productivity (which includes capital intensity).

Concentrating firms in close proximity reduces the production costs of the individual firms in the cluster, and is frequently labelled a positive externality by economists.

There are different types of spillovers in this area: those that exploit regional economies of scale; and urbanisation spillovers that exploit the regional economies of scope. Likewise there are vertical spillovers between firms in a given value chain and horizontal spillover effects between firms in different value chains.

Despite some reservations about R&D spillovers, there is evidence these are both prevalent and important also as relates to universityresearch. It is also possible to divide spillovers into knowledge embodied in capital equipment, and disembodied knowledge that is being put to use by an industry unrelated to the industry that created the knowledge.

The technology domain impacts the behaviour of the spillover effect. For example, in biotechnology spillovers may increase over time as the ability to absorb them increases, whereas in aerospace spillover effects have a high dependency on access to global knowledge of which universities do not play a very large part.

There are some key actions that will maximise spillovers including:

Increasing the absorptive capacity of firms

This is the capability to identify, assimilate, and exploit new information, and requires upskilling across the whole supply chain in the processes, capital equipment and technologies that will be used in the project. This should be made the responsibility of the system integrator

Ensuring the transfer of knowledge is not dependent on the transfer of employees between organisations

This requires direct, face-to-face interaction, and as a result, geographical proximity. Firms close to key knowledge sources can be more innovative than firms located elsewhere, so agglomerations should be both encouraged and supported.

Increasing flexibility of the labour market

More flexibility should enable a more rapid dissemination of competence, and clusters act as a hub for the attraction of global talent. The nature of the technology is closely related to the issues of intellectual property and non-disclosure agreements which can act as a barrier to the knowledge diffusion through human mobility. This requires careful management in defence projects to balance the need for openness to maximise spillover effect with the need for secrecy to maximise national security interests.

The creation or strengthening of a local system integrator

The integrator would force the creation of local firms that can contribute to both the solution of problems not previously solved and the production and delivery of the offerings embodying the solutions. This will also drive spillover effects through enhanced linkages between buyers and suppliers and also through demonstration effects.

Focusing on increasing export for all participants in the project supply chain Export is closely related with productivity and survival.

Establishing domestic centres of excellence for R&D

These would focus on emerging problems in domains related to critical performance dimensions of the submarine system (e.g. stealth, signal capture and processing, range, endurance)

Maximising the economic complexity in the relevant regions and in the nation as a whole Both where the participants in the project supply chain are located, and by encouraging suppliers to locate to regions where the economic complexity is high.