The Government Aerospace Industry Interaction

Hitch Charles J. McKean Roland N. , The Economics of Defense in the Modern Age (Cambridge: Harvard University Press, 1961).

Peck Merton J. Scherer F. M. , The Weapons Acquisition Process: An Economic Analysis (Cambridge: Harvard University Press, 1962).

Scherer F. M. , The Weapons Acquisition Process: Economic Incentives (Boston. Mass.: Division of Research, Graduate School of Business Administration, Harvard University, 1964).

Stekler Herman O. , The Structure and Performance of the Aerospace Industry (Berkeley: University of California Press, 1965).

Stekler Herman O. , “Technological Progressiveness of the Aerospace Industry” (mimeo).

The same result occurs when bilateral monopoly (i.e., a single firm selling to a single buyer in the same market) is present. The bargaining process which is involved in determining the final price in this case has not, as yet, been fully incorporated into economic theories.

The economic benefits of vertical integration are usually the result of bringing technologically complementary processes together. However, even if the processes are not complementary, benefits may accrue from the improved coordination of successive stages or through a reduction in the required level of inventories. See Bain Joe S. , Industrial Organization (New York: John Wiley and Sons, Inc., 1959), pp. 155–159; and Adelman M. A. , “Integration and Antitrust Policy.” Harvard Law Review, XLIII (1949), 27–36.

See, for example, Gould J. R. , “Internal Pricing in Firms When There Are Costs of Using An Outside Market,” Journal of Business, XXXVII:1 (Jan. 1964), 61–67; Hirshleifer Jack . “On the Economics of Transfer Pricing” ibid., XXIX:3 (July 1956), 172–184: And Cook P. W. Jr. , “Decentralization and the Transfer-Price Problem,” ibid., XXVIII:2 (April 1955), 87–94.

See for example, Kaysen Carl , “Improving the Efficiency of Military Research and Development,” in Public Policy, XII (Cambridge: Graduate School of Public Administration, Harvard University, 1963), pp. 219–273, esp. pp. 248 and 261–262.

For discussions of the roles involved in the relationship between these professionals and large American corporations, see Wall Street Journal, July 16, 1965, p. 1 ff., and Aug. 12, 1965, p. 1. The indications are that these firms are keeping their own professional staff so that they would not be solely dependent upon outside assistance.

It might be argued that development contracts should not be awarded until the major uncertainties inherent in a system's development have been eliminated. The program definition phase of the procurement process, which was introduced in 1961 to reduce this particular uncertainty, will be discussed later in this article.

McKie James W. , Tin Cans and Tin Plate (Cambridge: Harvard University Press, 1959), pp. 91, 127–128 and 242.

Ibid., pp. 210–211 and 268–271.

See, for example, Peck Merton J. , Competition in the Aluminum Industry, 1941–1958 (Cambridge: Harvard University Press, 1961), pp. 120, 123, and 198–200; McIsaac Archibald M. , “The Cotton Textile Industry,” in Adams Walter , ed., The Structure of American Industry (rev. ed.; New York: Macmillan Co., 1954), p. 51. There is considerable information which stresses the cooperation which exists between the automobile industry on the one hand, and the steel, petroleum, and machine tool industries on the other. See, for example, Automotive Industries, Dec. 15, 1960, p. 49, Sept. 1, 1961, p. 73, Nov. 1, 1961, p. 37, and April 15, 1962, p. 100; Iron Age, June 11, 1964, p. 123.

This programming concept and the other procurement changes which have occurred in the DOD are described in Charles Hitch's Decision Making for Defense (Berkeley: University of California Press, 1965). This approach is now also being utilized by other government agencies.

Nelson R. R. , “Uncertainty, Learning and the Economics of Parallel Research and Development Effort.” Review of Economics and. Statistics, XLIII:4 (Nov. 1961), 353; Klein B. H. Glennan T. K. Jr. Shubert C. H. , The Role of Prototypes in Development, RAND Report RN 3467-PR (Santa Monica, Calif.: The RAND Corp., 1963).

The government is faced with complex administrative problems in these areas, for there is a shortage of personnel with expertise in evaluating the accuracy of the company's cost estimates.

Scherer , op. cit., pp. 174–179; Weiner Neil S. , “Multiple Incentive Fee Maximization: An Economic Model,” Quarterly Journal of Economics, LXVII:4 (Nov. 1963), 603–616.

Office of the Secretary of Defense, Department of Defense Guide to the Evaluation of the Performance of Major Developments Contractors, July 26, 1964, p. 8.

See for example, Aviation Week, July 1963, p. 98; Aug. 1, 1963, p. 36, and July 13, 1964, p. 64.

Peck Scherer , op. cit., and Scherer , op. cit.

The program of financing these research projects is called Independent Research and Development (IRAD). A discussion of this program may be found in Flint's Richard N. , “Independent Research and Development Expenditures,” Journal of Law and Contemporary Problems, XXIX (Spring 1964), 611 ff.

Stekler , op. cit., p. 132.

Office of Scientific and Technical Information, NASA, Proceedings of the Second NASA-Industry Program Plans Conference, Washington, D.C., Feb. 11–12, 1963.

The procurement process can also be improved if there is an exchange of technical data on problems which are common to several systems but which have been awarded to different companies. In an effort to increase the reliability of the subsystems and components, various agencies and their major suppliers in 1961 began to exchange information about their reliability tests. This reduced the number of duplicate experiments which had to be performed, thus decreasing costs without sacrificing reliability. Aviation Week, Feb. 13, 1961, p. 79, and Nov. 6. 1961, p. 76.

Honeywell has recently developed a technique which is useful for long-range planning in the defense industries. Basically, the technique seeks to identify the missions and programs which are limited by technological difficulties and to determine what the deficiencies are. The procedure indicates, by numerical ratings, the needed degree of improvement over existing capabilities, thus showing where technological change is most needed. This tool cannot, however, indicate whether or not a particular program will be funded. Aviation Week, Jan. 4, 1965, p. 54.

Some of the information which is needed for long-range planning in the aerospace industry is listed in Defense-Space Market Research, ed. Weston J. Fred (Cambridge: M.I.T. Press, 1964), p. 34.

In addition, there is some evidence that such conferences might stimulate technical change, for invention and innovation result from recognized social needs. Gilfallen S. C. , “The Prediction of Technical Change,” Review of Economics and Statistics, Nov. 1952, pp. 368–385.

Aviation Week, Jan. 27, 1964, p. 37, April 27, 1964, p. 28, and March 8, 1965, p. 16.

The manpower problems which are faced by firms in the defense industry have been analyzed by Ernest D. Phelps and William Gallagher, “Integrated Approach to Technical Staffing,” Harvard Business Review, July Aug. 1963, pp. 122–129; Management Review, Dec. 1961, pp. 40 ff., July 1962, pp. 43 ff., Aug. 1962, p. 39, and Oct. 1963, pp. 42–45.

Aviation Week, Oct. 5, 1964, p. 24.

These scientific resources can then be devoted either to completing contracts which have already been started which might improve the government's evaluation of the company's performance or to new research which would increase the company's competence. In either case, the company should benefit.

Aviation Week, July 20, 1964, p. 10, and Sept. 21, 1964, pp. 103–107.

It is also possible to consider the cost savings that might be obtained if technicians rather than skilled scientific manpower were recruited. The aerospace industry has proportionately fewer junior scientific personnel than most other industries. The Industry-Government Aerospace Relationship, II (Stanford: Stanford Research Institute, 1963), 249–251.

In order to make positive recommendations about arrangements which would encourage technological progress, it is first necessary to study the determinants of innovations and invention. NASA has made grants to several universities to study this phenomenon and to obtain an understanding of the entire research mechanism.