Transaction costs and architectural complexity in no-capability defence acquisition

Abstract

The paper addresses the research gap between big and small military powers and investigates the challenges in defence acquisition through the perspective of a no-capability NATO nation. First, the author discusses different contractual approaches in no-capability defence acquisition using transaction cost economics and identifies three important transaction cost factors: seconding liaison officers, aligning budget calendars and agreeing on key user requirements. Second, the author inquires the systemic complexity that lies at the heart of modern weapon systems and shapes defence contracts. Drawing on architectural innovation, the analysis demonstrates that small/no-capability NATO nations have a structural disadvantage in relation to developing/acquiring advanced weapon systems. Finally, the author examines the "dual-use development strategy" as a vehicle for overcoming the structural no-capability disadvantage. Two contrasting case studies on Luxembourg and Estonia illustrate the importance of the competent and demanding military customer and the need for further research on the profile of small/no-capability NATO nations.