Focus on Israel to Innovate Defense Industry

[Kim Hoseong, Professor of Business Administration, Korea Army Academy at Yeongcheon] There is a country on the opposite side of the globe where defense exports have been continuously increasing. That country is Israel. According to export and import data by country provided by the Stockholm International Peace Research Institute (SIPRI), even during the 1990s when the Cold War ended and defense sales of advanced defense industry countries sharply declined, Israel’s exports increased, and this upward trend became even steeper in the 2000s and 2010s. At the center of this excellent performance are Israel’s major defense companies: IAI (Israel Aerospace Industries), Rafael, and Elbit Systems. IAI derives 70-80% of its sales from exports, and Rafael, well known in Korea for the issue of introducing the portable air defense system Iron Dome, generates about 50% of its sales from exports. Elbit Systems, the only private company among the three, has achieved rapid growth in the 21st century, with about 75% of its sales coming from exports.

Israel, like Korea, is a country that is always prepared for war. Generally, the development of the defense industry in Israel is known to be related to the large-scale regional conflict between Israel and the Arab bloc, as well as numerous terrorist activities. Of course, these factors influenced the development of Israel’s defense industry, but if one were to point out the decisive reason why Israel has such a strong defense industry today, it would be the French arms embargo after the 1967 Six-Day War. An embargo is a measure by which a country suspends all economic exchanges with a specific country in all sectors, usually used to economically isolate a particular nation. This event had a profound impact on the continuous growth of Israel’s defense industry for the next 20 years. In particular, after the 1973 Yom Kippur War, new internal demand for weapon systems led to rapid growth of the defense industry, which in turn resulted in increased defense exports based on the developed defense industry.

The increase in a country’s defense exports brings advantages in various aspects. Israel’s increase in defense exports does not only positively affect the profits of defense companies. It also has larger strategic effects such as improving the national image. However, the most important reason to increase defense exports, in my opinion, is that it contributes to enhancing the combat power of the national military. This is related to the economic concept of ‘Economy of Scale.’ In other words, producing 20 tanks for both domestic use and export rather than 10 tanks only for domestic use spreads the development and production costs, lowering the unit price of equipment and enabling the military to purchase more equipment. In summary, Israel was able to develop into a military power by achieving demand that could not be met domestically through overseas markets, thereby not only gaining economic benefits for its defense industry but also directly helping to enhance its combat power through the economy of scale effect that lowers the unit price of equipment.

How did Israel achieve such excellent results? Synthesizing various studies, it can be said that the active intervention of past governments created the current Israeli defense industry. When comparing Israel’s defense industry with those of other countries, three special aspects can be found. First, due to the critical security situation, Israel adopts conscription for both men and women. Therefore, most Israelis have a military background, and a defense industry ecosystem is formed where citizens working in advanced engineering-related research institutes or schools have very close relationships with defense companies. Second, Israeli weapon systems are developed in cooperation with the military even if they are not necessarily used by the Israeli military in the future. This serves as a kind of guarantee that other countries look to in defense exports. Third, the cultivation of human resources suited to the national security environment. The government’s dedicated production of human capital for national defense provided an optimal environment for developing very sophisticated and advanced military capabilities in a small country. In summary, the close relationship among government, industry, academia, and research, centered on the government, and the public’s understanding of the military promoted the development of high-quality and effective weapon systems tailored to the specific needs of the Israeli military, while also creating a weapon development ecosystem that provides guarantees for the successful export of weapon systems.

However, Israel’s government-led defense industry development strategy was not a panacea. In addition to the government-owned major defense companies mentioned above, IAI and Rafael, Israel had IMI (Israeli Military Industries). This company was also the first defense company established in Israel in 1933. IMI experienced a sharp decline in sales and exports in the 21st century, suffering huge losses. The main reasons include overlapping main product lines with Rafael and a lack of innovation. It survived until recently through continuous government subsidies and restructuring but was split into two companies in 2014: IMI Systems and Tomer. IMI Systems was sold to Elbit Systems in 2018, while Tomer continues to be government-owned and operated for security reasons.

Israel’s government-led growth strategy caused problems such as producing inefficient government-owned companies like IMI, but it is clear that this growth strategy succeeded on a large scale by producing competitive domestic defense companies in the global defense market and contributing to the enhancement of national combat power. I believe that the government’s central role in forming a community of industry, academia, and research, along with presenting clear strategic goals, was key to this success. Through the Israeli case, I would like to conclude by suggesting that Korea should also examine whether its unified defense industry development strategy is working well.

This content was produced with the assistance of AI translation services.