The footprint of defence production: Economic implications

As countries around the world raise defence spending, understanding the implications of a defence production footprint for local economies is becoming increasingly important for policy. Yet comparable evidence remains limited, partly because defence procurement data are rarely available at the local level. This paper studies the economic footprint of defence production using a new measure of defence-industrial presence across TL3-level localities in 15 European countries. Rather than estimating local fiscal multipliers, the paper identifies localities that host defence production establishments and their supply chain and assesses whether those localities display systematically different economic outcomes. The empirical strategy estimates the long-run conditional association between a defence industrial presence and output using panel Dynamic OLS. The paper also examines whether the association is stronger in more innovative places and computes impulse response functions based on local projections to assess whether localities hosting defence-related production have experienced different output trajectories after the annexation of Crimea by Russia in 2014. Results show defence industrial presence is positively and significantly associated with higher regional income levels. The findings provide insights to inform debates on defence spending, industrial capacity and local economic development.