Military Aid and Innovation

Abstract

Can military aid to developing countries trigger innovation in the recipient economy? This question emanates from a puzzle in the literature and policymakers’ inclination to make aid more effective. Studies focused on military expenditure in the developed world show a positive relationship between military expenditure and innovation. Conversely, studies centered on military expenditure in developing countries often note the unintended, negative consequences of such expenditure. Borrowing from literature on innovation that examines diffusion channels from the military to the national economy, this research seeks to identify a similar process in developing countries. Using a congruence test on a least-likely case, this study finds that military aid—effectively a military expenditure subsidy—can indeed trigger innovation in a recipient economy. In Jordan, this is reflected by the emergence of an innovative domestic arms industry after its peace agreement with Israel and a major influx of U.S. military aid. Further, by dividing military aid into different sub-types and tracing and comparing their different effects, this study shows that military aid can lead to the emergence of new economic sectors when it supports the domestic government’s industrial vision and local economic priorities.