Finnish Defense Industry - Market Opportunities and Entry Strategies, Analyses and Forecasts to 2015
While Finland does not meet NATO standards for defense expenditure, it is one of the worldâ€™s largest arms exporters, and it provides a favourable business environment for foreign companies.
Finnish defense expenditure to increase in forecast period
Finnish defense expenditure grew at a compounded annual growth rate (CAGR) of nearly 6% in the review period, and is expected to continue to grow at a CAGR of nearly 4% in the forecast period, to reach a value of approximately US$4.5 billion by 2015.
Growth is expected as a result of Finlandâ€™s participation in international peacekeeping initiatives, its modernization plans, and the perceived security threat from Russia. This growth is expected to be faster than many of Finlandâ€™s neighbouring European countries, such as Germany, France, the UK and Sweden.
In the review period, the Finnish government allocated just over 60% of its defense budget towards revenue expenditure and nearly 40% was spent on procurement and equipment. The government is planning to reduce troop numbers by approximately 100,000, and therefore the share of capital expenditure in the defense budget is expected to increase to roughly 40%.
Homeland security will also record growth in the forecast period, as a result of increased criminal activity, the illicit drug trade and human trafficking. Despite registering a CARC of just over -3.5% in the review period, homeland security expenditure is expected to increase at a CAGR of nearly 3.75% and reach a value of just over US$2 billion.
Peacekeeping, modernization and security threats drive defense growth
Finland has over 1,000 personnel participating in nine different peacekeeping roles around the world, in conjunction with the European Union (EU), the United Nations (UN) and the North Atlantic Treaty Organization (NATO), amongst others. The majority of these troops are deployed in Bosnia-Herzegovina, Kosovo and Afghanistan.
Much of Finlandâ€™s defense equipment is obsolete due to neglect during the past decade, but active operations in peacekeeping missions require modern and advanced defense systems, including fighter aircraft and air surveillance systems. Despite modest defense budget growth, Finland is expected to allocate a greater percentage of is defense budget on capital expenditure in the forecast period in order to modernize its equipment.
Despite the fact that Finland enjoys peaceful diplomatic relations with Russia, it perceives Russia as a security threat because of their violent relations before 1991. This suspicion was enhanced in 2005 when Finland became aware that Russia had illegally entered its airspace more than 10 times.
Finland does not meet NATO defense expenditure standards
Unlike the US and China, which dominate global defense expenditure, Finland spends a relatively small amount on its defense budget, and this is also lower than most European countries, such as Germany, France, Spain and the UK.
Also, as Finnish defense expenditure constitutes just over 1.5% of its gross domestic product (GDP), it does not meet NATO standards that defense expenditure in member countries must constitute 2% of national GDP. By 2015, Finlandâ€™s defense expenditure as a percentage of GDP is expected to reach 1.56%, which indicates slow progress towards NATO standards.
Finland is top exporter in global arms market
Despite the fact that Finlandâ€™s defense imports and exports declined in 2009, it was ranked as the twentieth largest exporter of arms in the world during the review period. Finlandâ€™s primary defense exports are ships and armored vehicles, and Poland is the largest consumer of Finnish defense exports with a share of nearly 35%, followed by Egypt with approximately 30%, and Croatia with just over 20%. In the forecast period, exports are expected to increase to support European military operations in Iraq and Afghanistan.
From 2006â€“09, Sweden held the largest share of Finnish imports, with nearly 35%, followed by Switzerland with just over 15% and France with roughly 12%. This changed in 2009 when France and Italy became the largest suppliers and each held a 30% share of the Finnish import market. In the forecast period, imports are expected to grow as Finland attempts to modernize its military and purchases military equipment from other countries.
Favorable business environment
The Finnish government allows full ownership by foreign companies attempting to enter its defense industry and also encourages partnerships between domestic and foreign defense companies. It also requires a 100% offset value for all contracts with foreign companies exceeding US$13 .3 million, so that 100% of any contract value is pumped back into the Finnish economy. The main objective of this offset policy is to enhance Finlandâ€™s technological capabilities, and preference is given to defense related offsets.
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