For at least a few generations, discussions about America’s defense industrial base have centered on the Department of War (DOW) and major defense contractors (the Primes). That partnership won wars and remains indispensable. But it no longer fully describes the infrastructure required for today’s environment, let alone that of the future.
A much broader defense economy has started to take shape. The emerging ecosystem includes traditional defense companies, technology firms, advanced manufacturers, software developers, investors, universities, research organizations and communities. This is a positive trend, although collaboration progress varies greatly across the country.
Maintaining America’s military advantage will depend on more than the size of the defense budget or our ability to develop the world’s greatest arsenal. In addition to innovation, we will need the capital, manufacturing capacity, supply chains and talent to accomplish the country’s goals at speed and scale. That is the new defense economy.
Emerging Technologies Change the Equation
Recent battlefield reports have provided a powerful reminder that the character of warfare can change quickly. Those with first-hand experience in Ukraine and the Middle East confirm the important roles that autonomous systems now play in both offensive and defensive military operations.
The pace of change in autonomy seems unprecedented. Technologies that once required lengthy development cycles can now improve through software updates and rapid iteration. Systems can be tested, modified and returned to the field much faster than traditional acquisition cycles can accommodate.
This does not mean inexpensive autonomous systems will replace sophisticated platforms. The more important opportunity involves the ability to more closely integrate the two. America’s future military advantage will likely depend on combining highly capable traditional systems with larger numbers of lower-cost and adaptable autonomous platforms. That combination can provide both technological sophistication and greater scale. Developing the technology, however, is only part of the challenge.
Innovation Requires Production
The United States possesses several structural advantages around innovation. Our universities, national laboratories, technology companies, entrepreneurs and capital markets all play a role in developing an ecosystem that encourages innovation and growth. However, the constraint may soon revolve around manufacturing capacity and reliable supply chains to build quickly enough and in sufficient quantities. That concern reaches well beyond the major defense primes.
It reaches into machine shops that produce precision components. It involves microelectronics, batteries, critical minerals, energetics, castings and forgings. It requires skilled machinists, electricians, welders, engineers and technicians. And it depends on thousands of smaller manufacturers that may be several tiers removed from the final product or solution.
Encouraging signs exist. New companies have quickly entered the defense market. Recent analysis by the Center for Strategic and International Studies estimated that roughly 10,000 new firms entered the defense market during the preceding two years. Nontraditional companies received more than $120 billion in Department of War contract obligations in fiscal 2025.
Expanding the number of companies participating in defense is important. But those companies ultimately need to produce at scale. The government and industry are investing in additional production capacity. Policymakers appear to pay more attention to critical supply chains and the risks created by dependence on foreign sources now. They must do so because innovation without production capacity does not provide deterrence.
Capital as a National Security Capability
Capital provides the fuel to grow and sustain the defense economy. Private investment in defense and dual-use technology has expanded substantially. The National Defense Industrial Association’s Emerging Technologies Institute recently estimated that more than $400 billion of private capital flowed into defense and dual-use sectors over the previous five years.
That is encouraging. America’s capital markets are one of our greatest competitive advantages. However, the next stage will require more than venture capital to fully scale production capacity.
Companies moving from prototype to full-scale production need factories, equipment, inventory and working capital. Their suppliers need financing as well. Some businesses will require growth equity. Others will need private credit, traditional bank financing or access to public capital markets.
The DOW recognizes the importance of this issue. The Office of Strategic Capital was created specifically to attract and scale private investment into technologies and supply chains important to national security.
But access to direct government funding will likely remain a small portion of the overall capital the new defense economy requires. This points to a broader way of thinking about the role of finance in defense. Legislators should consider other tools to attract capital, such as loan guarantees and tax credits, to leverage direct funding. Ultimately, we need a financial support system capable of moving companies through the full journey from innovation to commercialization to scaled production.
America’s Defense Geography Can Expand
America’s defense industrial base has historically been concentrated in several well-established regions. Those clusters remain critically important and will continue to be anchors. However, the need for greater industrial capacity creates an opportunity to broaden the map.
Communities with manufacturing expertise, research universities, technical colleges, adjacent military installations, energy resources and skilled workforces that could contribute more to national defense dot the map.
As one example, the Upper Midwest and Great Plains represent an under-leveraged region. North Dakota has developed GrandSKY, a large public-private partnership, that has built an impressive ecosystem around autonomous aircraft and drones. (See prior AG coverage of GrandSKY). In a neighboring state, the Governor recently launched the South Dakota Defense Institute to serve as a central hub to connect industry, education and government to expand the state’s defense and national security sector. Other regions offer their own strengths.
We do not need to replace existing defense clusters. We need to expand the national ecosystem and connect more of America’s industrial and technological capacity to the national security mission.
A broader geographic base can strengthen supply chains, increase the available workforce, bring new companies into the defense market and provide greater resilience. It can also give communities that have not historically viewed themselves as part of the defense industrial base a role in the national security mission.
Building the New Defense Economy
One of the biggest challenges in building the new defense economy revolves around turning military interest into demand signals that companies and capital providers can rely upon. The gap between a successful prototype and a funded program can be substantial.
A venture investor may be willing to finance technology development based on the potential size of a market. Financing production capacity requires something more. Growth investors and lenders need greater confidence in future revenue and cash flow. And manufacturers need similar visibility before committing to additional employees, equipment, inventory and facilities.
The federal funding cycle can make those signals difficult. Procurement processes operate on timelines that are very different from those of technology companies and private capital markets. Annual funding uncertainty adds another layer of risk. This environment creates a difficult transition hurdle for emerging defense companies.
Closing that gap should be a priority. Multi-year procurement, larger production commitments and other mechanisms that provide greater visibility into future demand can help. When the government provides credible demand signals, private capital can do what it does well.
The government does not need to finance the entire defense economy. But its procurement and funding decisions often determine whether private capital can. The stronger the demand signal, the more private capital can help turn innovation into production.
From Innovation to Deterrence
America has all the necessary ingredients to continue to lead. We have world-class entrepreneurs and technology companies. We have sophisticated manufacturers and deep capital markets. We have outstanding universities and research institutions. We also have patriotic communities across the country with the workforce and industrial heritage necessary to build things at scale.
The defining defense challenge of the coming decade may not be whether America can invent the next generation of military technology. It may be whether we can build the economic and industrial system capable of turning that innovation into military capability efficiently, in large quantities.
That makes rebuilding America’s defense capacity much more than a Department of War responsibility. Manufacturers, tech firms, investors, universities, policymakers and communities all have a part to play.
The next generation of American deterrence will be built not only in laboratories and traditional defense plants. It will be built through a much broader American defense economy. The pieces are largely in place. Now we need to connect them.