Analyzing the Defense Ecosystem: Strategic Insights

The defense ecosystem today is at a critical junction, ripe with opportunity for private capital, the traditional defense industrial base (DIB), and other commercial players such as hyperscalers to take critical roles in leading disruption within the innovation pipeline. Yet the window to reorient how public and private organizations invest to meet the challenges facing Western security is limited, with the coming decade being the most critical.

That’s because increasing geoeconomic tensions and evolving security threats are transforming the global defense landscape. Rising competition in technology is driving up defense budgets and mobilizing defense innovators across sectors. Major powers, such as Australia, Germany, Japan, and the United States, are seeking to rapidly modernize their defense capabilities across multidomain operations, a feat not possible without significant, concerted public and private investment to accelerate adoption.

Governments are investing. The North Atlantic Treaty Organization’s (NATO’s) €1 billion Innovation Fund, the first multination venture capital (VC) initiative in defense technology, announced its first round of deep-tech investments in June 2024. The United States committed more than $150 billion to research, development, testing, and evaluation (RDT&E) in fiscal year 2024 to support agencies such as the US Defense Innovation Unit (DIU) and the Office of Strategic Capital (OSC), marking a 55 percent expansion of defense funding during the past five years. And new institutional frameworks are emerging globally, from Japan establishing its Defense Innovation Technology Institute to the United Kingdom launching the Defense Innovation Initiative as part of a confirmed plan to raise overall defense spending.

The defense ecosystem: Three critical technology stages

Technological innovation is central to modernization efforts. Institutions have been rapidly assessing gaps and publishing calls to action, such as the NATO Emerging and Disruptive Technology Strategy and the United States Critical and Emerging Technologies List. We identified 17 disruptive technologies, spanning different phases of maturity, that have great potential to disrupt the national security landscape during the next decade (Exhibit 1). They also underscore broader themes in defense technology, such as an expanding definition of “critical technology” and dual-use technologies becoming more pervasive. In addition, they showcase private sector innovation leading a greater share of later-stage development and the urgency with which the innovation ecosystem seeks to modernize across all levels of maturity and readiness.

Despite the criticality of these 17 technologies, they risk being underfunded or failing to reach operational deployment if stakeholders are not appropriately aligned on funding and acquisition pathways. We see three distinct stages that each reflect the unique roles for stakeholders in the defense ecosystem:

1. Emerging innovation. These capital-intensive technologies are cutting-edge innovations representing significant opportunities accompanied by higher risk. These efforts often lack commercial incentives given the long horizon of development. This often leaves public funding as the principal catalyst to turn bold ideas and research into investable areas, bringing down the cost of capital to innovate.
2. Maturing technology. These are innovations with growing technical proof points that are not yet scaled or prepared to scale in defense. Private partners have an opportunity to lean in with public players to develop tailored support to accelerate technology from prototype to fielded capability.
3. Scalable capabilities. These mature defense-ready technologies are established but need to be adopted at scale to achieve full impact. For many of these technologies, there are critical infrastructure gaps that are barriers to broader adoption, but for private players—whether commercial to accelerate scaling or the traditional DIB adopting—leaning into these innovations earlier presents significant opportunities for growth and differentiation.

1. Emerging innovation

Technologies in this early-stage category are characterized by high capital intensity and extended development timelines. For example, producing high-quality ultrawide bandgap diamond substrates—which are regarded as a critical input for next-generation applications such as high-power radio frequency switches and limiters and extreme-environment electronics and sensors—requires costly investment in materials, equipment, and processes (for example, seed crystals, vacuum chambers, and polishing). Without clear demand or near-term procurement from defense or civil sectors, private capital often hesitates to invest in such technologies due to inherent risks and long timelines to achieve returns.

Across these technologies, defense-led publicly funded programs play a critical role in driving innovation and catalyzing technological advances through what can be ten or more years of development. But there are steps defense and civil research entities can consider to maximize the impact of their R&D investments.

For instance, multiple agencies often research the same technology by design to provide fresh perspectives on the same problems. High-entropy alloy funding in the United States, for example, remains split between several entities. While having multiple independent efforts is a core aspect of research and can unlock new answers, the scale of duplication across many of these disruptive technologies may warrant review. In addition, when technologies begin to gain traction with private capital, public funding can sometimes be uncoordinated between sources and risk duplicating or contradicting private capital investments. Better coordination between publicly funded programs could stretch R&D budgets further and clarify demand signals around innovation priorities, making it more likely for private capital to enter the picture.

Catalyzing the modernized defense frontier

Emerging defense technologies are advancing, offering groundbreaking potential for military superiority and operational effectiveness. From AI to advanced manufacturing, the innovation pipeline is accelerating—and that’s worth celebrating. However, technology adoption remains a sizable hurdle, with significant barriers threatening to delay or derail progress.

The current defense innovation ecosystem is fragmented, with distinct roles spread across government labs conducting foundational research, public institutions providing demand signals and funding, start-ups pioneering breakthrough technologies, large traditional commercial players scaling solutions, and the DIB mobilizing, deploying, and sustaining military operations. This fragmentation causes inefficiencies, significantly slowing the transition of technologies from the lab to the edge of the battlefield.

To streamline the tech transition, we need a modernized defense frontier—a new way of operating that transforms how we scale emerging technologies and accelerate adoption by removing barriers. Specifically, public and private sectors will need to collaborate to address funding inefficiencies, infrastructure barriers, and critical talent gaps, working together in an ecosystem in which departments and ministries of defense, leading contractors, and disruptive innovators can easily convene and drive results. Achieving and adopting this frontier means capturing value from what is estimated to be a more than $250 billion opportunity, realized by overcoming three challenges to defense innovation adoption.

1. Revolutionizing capital and funding, deployment, and efficiency

Efficiently allocating the more than $180 billion in public and private R&D capital is essential to overcoming the defense sector’s longstanding challenges in developing and scaling disruptive technologies. However, R&D investment in many critical technology areas (excluding AI) appears to be flat-to-declining, creating a significant risk to the maturation cycle for these technologies. Without sufficient funding growth, promising innovations may stagnate in areas such as in-space propulsion, ultrawide bandgap materials, and high-entropy alloys, limiting their operational impact.

2. Investing in a culture of innovation and leveraging tech to grow and retain aerospace and defense talent

Workforce challenges and organizational health have been longstanding issues across the DIB, with 70 percent of aerospace and defense (A&D) companies reporting organizational health scores below the global median. Further, there are three core employee issues driving significant annual productivity losses, estimated at $300 million for a median-sized A&D company: a lack of skills, a lack of engagement, and an inability to prioritize high-value-add work.

3. Unlocking next-generation infrastructure for production, computing, and connectivity

The most significant opportunity for disruption across ecosystem players may be through unlocking infrastructure, scaling production of these technologies, removing barriers to adoption by building up assets (such as property, plants, and equipment), and increasing computing and connectivity capacity.

FAQ

Q: How can public and private entities collaborate more effectively in the defense ecosystem?

A: Public and private entities can collaborate through unified frameworks, coordinated technology roadmaps, and clear role definitions to ensure efficient allocation of funding and streamlined technology adoption.

Q: What are the key challenges in scaling emerging defense technologies?

A: Challenges include funding inefficiencies, infrastructure barriers, and critical talent gaps that hinder the transition of technologies from development to operational use.

Conclusion

The race to modernize Western and allied-partner defense capabilities has catalyzed billions of dollars in technological investment from public and private entities. However, the key to securing the future of Western defense lies in scaling the adoption of critical technologies. By aligning stakeholders on funding priorities, creating a strong foundation for successful technology transfer, and attracting the next generations of innovators, the defense ecosystem can overcome barriers and thrive in an increasingly contested landscape.