Importance of Defense Industry Development: Insights from Finland and Latvia
It is undeniable that the defense industries of most European states have seen rapid growth and development over the past four years. These changes are most evident in the states bordering Russia and Belarus—the Baltic states, Poland, and Finland. However, despite a shared history and geopolitical challenges since the dissolution of the Soviet Union, these states have pursued very different approaches to defense policy.
These challenging circumstances have shaped the growth of the defense industry in both regions and laid the foundations for contemporary developments. The region illustrates one of the biggest obstacles to a common European defense industry policy—the fragmented and conflicting industrial systems of different member states. However, Finland and Latvia are useful examples, demonstrating both private and state-centric approaches to defense industry development, as well as the importance of long-term policy planning.
The Finnish Approach: Strategic Partnerships and Supply Chain Security
During the Cold War, Finland’s total defense strategy, among other measures, directed the national economy to meet the needs of national defense. Despite the collapse of the USSR, the end of Finlandization, and Finland’s EU membership, the total defense system remained integrated into all levels of Finnish society. Although the perceived threat level was low, Finnish policy planning documents never ruled out the possibility of a future war or other crisis. Therefore, the country maintained conventional capabilities, including armored vehicles, artillery, aviation, and a large mobilization reserve.
These principles of defense planning also led to the development of a specific institutional approach to build the Finnish defense industry in the mid-1990s. The approach focused primarily on the need for a national security-aligned industry with an internationally competitive character. To accomplish this, Finnish government-owned companies merged, resulting in the creation of Patria, which has continued to be majority-owned by the Finnish state up to this point. At the same time, Finland formalized industrial cooperation—often referred to as offset—to involve local industry and enacted various laws to secure supply chains and promote the development of military and dual-use research.
With minor changes and additions, this Finnish model has persisted to this day. The main contributor to the development of the defense industry is Patria, owned by the Ministry of Economic Affairs and Employment, which accounts for about 60%–70% of the Finnish defense industry’s revenue. Currently, 50.1% of Patria is owned by the Finnish state, while 49.9% is owned by the Norway-based Kongsberg Defence & Aerospace AS. Thanks to its size, industrial base, technological capabilities, and knowledge base, Patria can serve as a key local partner in the procurement of capabilities vital to the defense system (such as F-18 or F-35 fighter jets). This, in turn, facilitates the transfer of expertise, ensuring local production and maintenance of capabilities essential to the Finnish Defense Forces.
In this way, Patria serves as a driving force behind the growth of the defense industry. This approach also helps secure supply chains and creates opportunities to ensure the operation of critical capabilities during a crisis or war. Additionally, the Finnish government establishes a strategic partnership with companies regularly involved in procuring capabilities for the armed forces by agreeing to jointly plan industry development and reserve capacity needed during a crisis.
Meanwhile, the export of military goods ensures domestic production of a larger volume during peacetime. This can serve as reserve capacity during war. The Ministry of Economic Affairs and Employment, the Ministry of Foreign Affairs, and other state institutions, such as Team Finland, help promote defense industry exports in Finland. In research and development (R&D), the Finnish Defense Research Agency (PVTUTKL) and the Scientific Advisory Board for Defense (MATINE), which operate under the Ministry of Defense, play leading roles. Both organizations involve the private and academic sectors in developing defense industry innovations.
The Latvian Approach: Unstable Policy Planning and Its Impact on the Defense Industry
Meanwhile, Latvian defense policy was built from the ground up in the early 1990s. From the first national defense policy planning document in 1995 until 2002, Latvia took an almost total defense approach. This changed rapidly with the start of accession to NATO in 2002. Latvia abolished conscription and modified the concept of defense to support participation in international military and peacekeeping operations. This also had consequences for the defense industry.
From 2002 to 2016, the defense industry development policy primarily focused on annual Ministry of Defense support for research activities and collaboration with universities. R&D support became another aspect of NATO integration, underscoring the importance of international scientific collaboration. Between 2002 and 2014, broader support for the growth of the defense industry was not recognized as an important component of national security. The approach during this timeframe favored collective defense and COIN capabilities. Moreover, the 2009 economic crisis severely limited research support that remained financially constrained until 2015.
From 2014 to 2022, during the Russian invasion of Ukraine, Latvia made efforts to maintain the previous period’s defense policy while integrating total defense concepts in certain areas. After 2016, the annexation of Crimea and the war in eastern Ukraine influenced a shift in the approach to developing the defense industry and the overall defense system. During this period, Latvia formalized local involvement in large defense procurements. The COVID-19 pandemic also affected Latvia’s approach to developing the defense industry, emphasizing supply chain security and considering the potential for strategic partnerships. Support for R&D increased, and for the first time, offset requirements for capability acquisition were implemented, beginning with the SPIKE SR procurement in 2018. Between 2016 and 2022, the scope and range of development mechanisms for the defense industry increased rapidly, driven by new defense planning priorities.
However, from 2022 to the present, there has been a systematic transition to total defense, complemented by the collective defense approach. Therefore, 2022 is considered a critical juncture in the approach to defense and, consequently, defense industry development policy. By shifting to a classical total defense system, Latvia identified production of critical capabilities as a vital component of national defense. The State Defense Corporation was established, with a declared purpose to develop and manage defense industry production at the national level. At this point, state support to produce conventional capabilities, such as artillery shells or ammunition, increased.
The Latvian approach, characterized by shifting priorities and limited state involvement until 2016–2018, created a defense industry ecosystem that was markedly different from Finland’s. Since local procurement and industry development were not strategic goals, the defense industry was dominated by privately owned enterprises that primarily worked with clients abroad. Edge Autonomy illustrates this because, although it began operations late in the first decade of the twenty-first century, it did not provide the National Armed Forces with UAV products until 2018–2020. As a result, international competitiveness, rather than national security, drove overall development. This also creates substantial difficulties for the new state-centric approach toward the defense industry, which aims to create a model closer to the Finnish one.
A Look Toward the Future
With the increased geopolitical tensions along the EU and NATO’s eastern border, the ability of states to ensure the security of supply and local production of conventional capabilities has once again become a matter of national security and sovereignty. The overall shift toward increased production capacity observed in many EU member states also raises questions about long-term industry development and its connection to defense policy in general.
Due to differences in defense industry development policies, the defense industries of the two countries operate in different ways. In Finland, the public sector, represented by Patria, dominates, aided by a long-term approach that integrates the defense industry with national security planning and capability development. At the same time, in Latvia, the private sector is dominant, with the state playing a limited role through the State Defense Corporation. This reflects the state’s disregard for defense industry development and its role in national security. Conventional production capabilities remain low, with private enterprises focusing mostly on internationally competitive component production and export. In Finland, the Ministry of Economic Affairs promotes the development of the defense industry, whereas in Latvia, it is the Ministry of Defense that does so.
Therefore, despite the successful and functional Finnish model, the development of Latvia’s defense industry currently requires a tailored approach suited to local circumstances. Concepts such as strategic partnerships or the operation of a state-owned capital company must be developed in close cooperation with the private sector. The successful growth of the defense industry will depend on foreign investment, support for local science, and joint procurement with neighboring countries, while also setting clear and specific capability development goals and deadlines. Such is the case for many EU and NATO states, where the defense industry was not deeply integrated with defense planning.
This article is based on the research paper Stuck in Institutional Inertia: Defense Industry Development Policies in Latvia and Finland published by Center for Geopolitical Studies Riga and available at https://www.geopolitics.center/outputs/defense-industry-development-policies-in-latvia-and-finland
Image: Finnish soldiers traverse the battlefield in the BMP-2 MD during Exercise Arrow 23, Finland, May 3, 2023. Exercise Arrow is an annual, multinational exercise involving armed forces from the U.S., U.K., Latvia, Lithuania and Estonia, who train with the Finnish Defense Forces in high-intensity, force-on-force engagements and live-fire exercises to increase military readiness and promote interoperability among partner nations. (U.S. Army Photos by Sgt. Brayton Daniel).
Image Credit: U.S. Army 2BCT-1CD by Sgt. Brayton Daniel, Public domain, via Wikimedia Commons.