How to Win the Defense Innovation Contest

Washington’s alliances are under immense strain. Many allies and partners are subject to increased threats from great-power adversaries, and they are coming to doubt whether they can rely on the United States. The response to these pressures is to rearm. Like the United States itself, U.S. partners across Asia, Europe, and elsewhere are building up their defense industrial and technological bases to improve their ability to project power, deter enemies, and prevail in a protracted conflict. The problem is that both the United States and its partners have treated their defense buildups primarily as domestic projects when what they need, in fact, is to pool their resources more effectively. The war with Iran demonstrates the risks of a siloed approach: American legacy platforms—stealth fighters, guided missile destroyers, and aircraft carriers—delivered potent attacks but could not eliminate Iran’s military threat. The conflict rapidly depleted U.S. stockpiles of high-end, long-range strike munitions and air defense interceptors, while U.S. bases, Gulf infrastructure, and shipping through the Strait of Hormuz proved vulnerable to cheap and plentiful Iranian missiles and drones. It was just the latest illustration that no single country, not even one as powerful as the United States, can by itself produce drones, ships, and critical munitions on a sufficient scale or develop a defense industrial base that is innovative and adaptable enough to prevail in a protracted, high-intensity conflict or to deter capable adversaries. This is especially true at a time when the adversaries of the United States and its allies are themselves pursuing deeper defense industrial and technological cooperation. During the war in Ukraine, Iran has shared drone technology with Russia, and North Korea has provided munitions and troops. China, which is engaged in its own massive military modernization and industrial scaling projects, has offered Russia dual-use components and economic relief. Moscow, in return, is transferring advanced weapons, know-how, and intelligence to its partners. The United States and a trusted circle of allies and partners—including NATO members; other U.S. treaty allies such as Australia, Japan, and South Korea; and capable partners such as Brazil, India, Israel, and Taiwan—are the world’s leaders in scientific and technological development. As such, they should be able to counter their rivals’ increasingly unified front. But their strengths will go underutilized or misallocated unless they more closely align their efforts. The traditional model of government-to-government cooperation—formal mechanisms including the United States’ foreign military sales program, bilateral coproduction agreements, and NATO procurement processes—remains useful but is inadequate. This system allows too many opportunities for politics to derail progress, and it moves too slowly to keep pace with a battlefield where technological change happens in weeks rather than years. The real momentum for effective and durable cooperation among U.S. allies and partners lies among the private companies and research institutions in which many of the technological innovations that yield cutting-edge military capabilities occur. To maximize the benefits of defense and technological collaboration, the U.S. government and its partners must pair national efforts with transnational ones: pooling allied capital, technical know-how, production capacity, and supply chains through networks of firms, universities, investors, and governments. Building these networks will not only make it possible to innovate more quickly and produce at scale. It will also reinforce the United States’ increasingly uneasy alliances and partnerships, providing durable connections that can withstand a transactional and turbulent world. PRIVATE-SECTOR POTENTIAL The United States and its partners are ramping up their defense production capacity and advancing defense innovation. New technologies that originated in the commercial sector, including outer space–based sensors, artificial intelligence, and autonomous systems, have transformed the battlefield in the past five years. The speed with which new technologies are developed and adopted has picked up, too, as demonstrated by the fast-paced innovation in drone technology in Ukraine. Countries are adjusting their innovation processes accordingly. The U.S. military, for instance, has acquired a drone system called LUCAS that is a copy of the Iranian Shahed drone. Last year, the Pentagon launched an ambitious acquisition program designed to make the adoption of new technologies faster and easier, and earlier this year, Secretary of Defense Pete Hegseth announced an aggressive strategy to integrate AI across the department. U.S. allies such as Germany and Japan and partners such as India, meanwhile, have streamlined their innovation structures and processes to better harness commercial technologies. But current efforts prioritize strengthening domestic defense industries and accelerating domestic technology adoption. Governments are enforcing domestic content requirements, procurement preferences that encourage governments to buy from domestic companies, and rules that reserve defense funding for homegrown firms—measures that by design make it harder for companies to source components, share software, or jointly develop systems across borders. The reasons are political as much as strategic. Governments protect domestic production to create jobs in electorally important districts, retain sovereign control over critical supply chains, and reduce dependencies on allies they may lack confidence in. U.S. adversaries are already pursuing deeper defense industrial and technological cooperation. Yet the need for cooperation is too great to allow defense buildups to proceed in national silos that produce inefficiencies, duplication, and missed opportunities. Innovation benefits from the pooling of materials, goods, services, knowledge, and talent. Even when government-to-government relations are strained, partnerships can flourish at the ground level, among startups, established businesses, and universities. Commercial firms, researchers, and investors have incentives to maximize opportunities and efficiencies, which naturally lead them to cross-border collaboration. Companies have an interest in attracting foreign investments and selling their goods and services abroad. Compared with intergovernmental cooperation, these partnerships are also less likely to face political pushback. And private institutions tend to be more agile than public ones, able to learn and adapt quickly. Some of the groundwork for building these links is already in place. Many firms and research institutions in the United States and partner countries are multinational, operate internationally, or work with foreign research institutions and businesses. These include defense technology firms such as the Swiss-founded and U.S.-based Auterion, whose Artemis project involved a deep-strike drone developed in Ukraine and manufactured in Germany, Ukraine, and the United States. South Korea’s Hanwha Group and the Rhode Island–based Vatn Systems, meanwhile, are jointly developing autonomous underwater drones for the U.S. Navy. The U.S. and Indian governments recently launched an initiative to jointly develop and produce maritime drones and counterdrone systems, bringing in firms from both countries. The German Fraunhofer Institute is working with U.S. universities and public-sector partners on applied research in cybersecurity, AI, sensing technologies, and dual-use systems. In March, the United Kingdom’s University of Plymouth and the German drone and AI company Helsing signed a memorandum of understanding for research related to marine autonomous systems, and Canada’s University of Alberta and Australia’s University of Queensland announced a partnership on defense research. Yet relationships such as these are the exception rather than the rule, representing only a fraction of the cross-border collaboration that is needed. Opportunities to expand transnational collaboration are greatest among U.S. allies and partners with significant industrial capacity, high levels of private-sector investment in commercial and dual-use technology, and defense spending dedicated to R & D and the acquisition of new technologies. Reliability and shared values also matter. The United States and its partners must ensure they are working with countries that have similar threat perceptions, commit to protecting sensitive information, maintain export controls to prevent the unchecked proliferation of technology to adversaries, and respect human rights. PLAY TO YOUR STRENGTHS If Washington and its partners can make better use of their comparative advantages, they will find it easier to innovate and adopt technologies quickly and produce at scale. The United States leads the way in many cutting-edge technologies, such as AI, space technology, and quantum computing. But partner countries’ scientific, technological, and industrial bases can complement U.S. strengths. Switzerland, for instance, has the world’s highest density of AI talent and the European universities that are best at turning cutting-edge research into startups. Close allies such as Japan and South Korea have superior shipbuilding capacity and semiconductor fabrication capacity that exceed current U.S. output. Germany excels at precision manufacturing, and the United Kingdom has expertise in sensors, fundamental research, and AI. Brazil has strengths in rare-earth resources and aerospace engineering, India in software talent and low-cost manufacturing at scale, and Israel in cybersecurity, missile defense, and unmanned systems. There are precedents for joining forces to accelerate innovation. In June 2025, the Swedish defense firm Saab and the American company General Atomics Aeronautical Systems announced a partnership to develop an unmanned airborne early warning system by integrating Saab sensors into a General Atomics platform; their cooperation reduced development time and the cost of production. The United States’ Anduril Industries and Germany’s Rheinmetall also teamed up in 2025 to develop autonomous air and counterdrone systems for Europe, combining American autonomous technologies with the ability of European manufacturers to integrate new technologies into larger systems to enable faster deployment. Tapping into different countries’ procedural and funding advantages can also help the United States and its partners make more efficient use of their defense dollars. Cooperation can be especially useful in helping startups survive what is commonly referred to as the “valley of death,” a period after the prototyping stage in which many new companies lack sufficient funding to stay in business long enough to break even. Small countries tend to have more rapid procurement and decision-making processes that can lead to faster contracting, which speeds up production. On the other hand, Germany, a large country, has significantly increased its defense spending since the Russian invasion of Ukraine, in 2022, but its defense industry cannot fully meet the expanded demand and procurement requirements. Firms from other countries can fill the gap, accelerating innovation and production. Certain countries offer advantages based on their place in global supply chains, including those for the rare earths that are essential to both clean energy and critical defense technologies. Washington is already recognizing this opportunity: the U.S. International Development Finance Corporation recently approved a $565 million loan to the Brazilian mining company Serra Verde to increase its production of heavy rare-earth metals, and the deal included an option for the U.S. government to acquire a minority equity stake in the firm. Similarly, Australia’s Lynas Rare Earths secured a contract from the U.S. government to build a rare-earth processing facility in Texas. With these kinds of partnerships, American technology developers will have the option to source materials, components, and services from friendly countries, contributing to U.S. security and reducing exposure to supply disruptions in a rare-earth industry that is still dominated by China. THE WORLD’S A FACTORY Bringing new technologies to the battlefield requires significant industrial production capacity—capacity that even the United States may not have. This is where allies come in. The United States can develop and invest in new technologies and then enlist partners to help manufacture them. Those partners can stockpile the finished goods, and the United States can buy them when the need arises. This model is already in place for various munitions and major platforms produced abroad under U.S. licenses. Japan’s Mitsubishi Heavy Industries, for example, has a license from the U.S. firms RTX (formerly Raytheon) and Lockheed Martin to produce Patriot missiles, which then serve to replenish the U.S. and Japanese stocks that have been depleted by assistance to Ukraine and the war with Iran. The U.S. firm Northrop Grumman and the Polish arms manufacturer Niewiadow-PGM also agreed in February to jointly produce more than 180,000 155-millimeter artillery shells annually in Poland, serving both the European and U.S. markets. If the U.S. government and others make it easier for defense contractors to access foreign markets, many more of the firms producing innovative military systems will become commercially viable. Startups and spinoff companies that produce drones, counterdrone systems, autonomous platforms, and munitions in the United States, Asia, and Europe have potential but sometimes lack strong and reliable domestic demand. International demand can provide the necessary incentives to scale up production. Right now, limited domestic procurement, export controls, and the absence of guaranteed demand keep many of these firms from the scale they could otherwise achieve. Governments can use what are known as reciprocal defense procurement agreements to support access to foreign markets and secure such contracts. The United States already has roughly two dozen such agreements, but they are underused. Washington should extend them to capable partners not yet covered by an agreement, such as India; update existing agreements to encompass commercial and dual-use technologies, not just traditional platforms; and encourage foreign governments to buy American weapons, all while incentivizing U.S. companies to use these agreements to source foreign components. There are additional geographic benefits to pooling development and production capacity. Producing technology and weapons in countries on or near potential frontlines in Asia and Europe both contributes to deterrence and provides advantages in the event of war. Given that modern military strategies rely on the rapid deployment of large numbers of replaceable drones and inexpensive, long-range munitions—what strategists call precise, attritable mass—it is helpful to produce these systems near potential war theaters to keep costs low and avoid lengthy transportation processes that an adversary could disrupt. Helsing has applied this logic in setting up what it calls “resilience factories” across Europe, which will allow the German company to scale up manufacturing should a conflict occur. Anduril’s Ghost Shark autonomous undersea vehicle also takes advantage of distributed production: because it is produced by the company’s Australian subsidiary, manufacturing does not depend on U.S. shipyards already strained by submarine orders, and production capacity will endure even in the event of a disruption to transoceanic supply routes. THE BEST PRODUCT WINS With easier access to allies’ and partners’ defense markets, states can source the best technology available. U.S. firms, for example, design the world’s best AI chips, but partners abroad make key contributions: the chips are mostly fabricated in Taiwan and require extreme ultraviolet lithography systems exclusively built by the Dutch company ASML. To bring partners into U.S. defense innovation processes in a more systematic way, the Pentagon’s Defense Innovation Unit, tasked with speeding up the U.S. military’s adoption of emerging technologies, is attempting to make international firms eligible for a procurement program called Commercial Solutions Opening and is working on joint prototype contracts with Australia and the United Kingdom. More firms bidding for defense contracts would yield healthier competition. In the United States and Europe, a small number of large, established defense firms tend to dominate domestic markets in which the government is the only client. This monopsony—a market structure in which a single buyer faces a handful of sellers—guarantees demand and presents incumbent companies with few rivals, giving them little incentive to control costs, move quickly, or innovate. Without a deliberate government effort to promote competition, recent increases in defense spending could aggravate these problems. Left alone, cross-border markets favor scale. If only the firms that already have global reach, capital, and political access are able to secure partnerships with other large firms abroad, these companies will consolidate their advantage and keep small, innovative players out of the market. Governments therefore have to design procurement rules, security-clearance regimes, and subcontracting regulations in ways that allow a small Estonian software firm, a Brazilian sensor maker, or a university spinoff to enter the same kinds of transnational arrangements as defense giants such as Anduril and Rheinmetall. Real competition can produce technological breakthroughs and unconventional solutions to operational challenges, but fostering it is a policy choice, not a natural outcome. SET THE STANDARDS Realizing the collective benefits of allied defense efforts depends on interoperability—the ability of military platforms and systems to communicate, integrate, and operate alongside one another. Traditionally, U.S. allies and partners relied heavily on American technology, which meant they would be fighting with compatible or even interchangeable systems. Many U.S. allies, for example, fly the same F-35 Lightning II fighter jets produced by Lockheed Martin, so they can share logistics, maintenance, spare parts, and training, and they can operate as a combined force in the field. Yet as European countries pursue national rearmament efforts, they risk ceding that advantage by investing in complex systems that are not interoperable with one another or with U.S. systems. Transnational cooperation among industries can and should support interoperability, including when partners and allies seek to produce their own military systems. Researchers and engineers can adopt common technical standards and open architectures during research and development to ensure interoperability with other applications and systems in the early stages of development. Later, businesses can build shared interfaces, use common components, exchange technical data, and, after delivering a final product, coordinate to ensure that software updates and servicing do not make once interoperable systems incompatible. Companies have a commercial incentive to produce interoperable systems, too, because technologies that can be quickly integrated into national armed forces and used in cooperation with allies will be more attractive to government buyers. Firms can also drive the adoption of common technical standards. The independent Sensor Open Systems Architecture Consortium serves such a function, providing U.S. businesses a platform to develop open standards and best practices. U.S. government agencies and departments participate in this process but do not direct it, and they uphold the forum’s standards through their procurement regulations and decisions. A similar approach could prove useful for bringing together international partners to develop standards in other areas. Were industries to adopt common standards related to secure communications, AI and related software, and munitions interfaces, allied systems would be able to work together with less friction. Formal agreements among states are sometimes necessary to enable companies to cooperate more closely on matters of interoperability. Agreements that allow the United States and its partners to accept one another’s airworthiness, safety, and quality certifications, for instance, speed joint development and production by eliminating the requirement for recertification in every national market. But in other cases, research institutions and firms can do a great deal on their own. The American firm Shield AI entered into a partnership with the Swiss-founded, pan-European company Destinus in November 2025, for example, to integrate Shield AI’s Hivemind software into Destinus’s drone platforms, which are sold in European and Ukrainian defense markets. This enabled Destinus to quickly upgrade its drones without undertaking major redesigns for every customer. SHARE THE WEALTH The transfer of technology, knowledge, and know-how is a necessary part of transnational defense innovation, and companies and universities are already finding ways to make it happen. Private-sector developers deliberately design certain technologies to be exportable. Anduril, for instance, produces sensors, communication modules, and software as commercial technologies so that they will not be subject to U.S. export controls on military goods. The more firms and governments can turn directly to civilian markets in allied countries to buy goods and components that can be modified for military purposes—bypassing burdensome export, import, and investment controls—the more rapidly they will be able to adopt and further develop new technologies. Research institutions and industries also foster the transnational exchange of talent, which strengthens expertise and understanding among allies and partners. Universities have well-established international visiting programs. Technology and defense firms send their own employees to meet with clients, visit production facilities abroad, and provide services on site. They also work closely with foreign government officials on certain projects. For example, when Brazil acquired the Saab JAS 39 Gripen fighter jets based on a contract signed in 2014, Brazilian air force officers and civilian engineers went to Saab’s sites in Sweden to work through the technical and operational requirements for the project and to monitor production. Technology firms such as the U.S. companies Palantir and Shield AI have also embedded their staff with U.S. and partner military units abroad to facilitate technology adoption, training, and servicing. Offset agreements between governments and technology firms can also encourage development and production. In such arrangements, the firms agree to transfer technology and related knowledge to a foreign country, which in turn commits to additional investments, domestic production, and services. Offsets are attractive to both the developers of exportable weapons systems and the importing countries, especially middle and small powers that lack large defense industrial bases of their own or are trying to build domestic capacity. Countries such as Brazil and Switzerland have used these mechanisms to access advanced avionics, sensors, and aircraft systems, for instance, and the local production, jobs, and technology transfers that come with offsets have helped them secure domestic political support for the programs. Touchscreen displays for military aircraft developed by the Brazilian company AEL Sistemas, the result of an offset agreement with the Sweden-based company Saab, were so well designed that the Swedish air force later decided to use them in their own fighter jets. ALL IN IT TOGETHER Cooperation among firms, investors, and research institutions across borders can help bind allies and partners together at the state level. It gives states shared interests. By entangling national economies and industries, it pushes back against political pressure to decouple. And because these relationships have a longer lifespan than the typical terms of elected governments, they can help alliances and partnerships withstand periods of political change. Transnational defense innovation is so effective because it does not rely on formal alliance mechanisms. Firms, research institutions, and government investors choose to work together on operational, technical, and scientific matters when they identify opportunities to add value. In Ukraine, the U.S. company SpaceX spearheaded collaboration with Kyiv through its provision of the Starlink satellite communications network. In Taiwan, Auterion and other American and allied firms have worked with local institutions, including the National Chung-Shan Institute of Science and Technology, to build the island’s drone industry. Elsewhere, initiatives such as the India-U.S. Defense Acceleration Ecosystem bring together startups, investors, universities, and government labs to jointly develop defense technology. As these types of networks develop, they not only help allies and partners innovate and adopt new technologies more quickly—they also demonstrate substantial joint capacity to potential adversaries. Yet industry cannot drive transnational defense innovation all on its own. Governments must also adopt policies that enable these connections to thrive. Taking such steps will be difficult in the current political environment, in which many governments are motivated to protect domestic production in order to create jobs in key electoral districts, maintain sovereign control over critical supply chains, and reduce dependencies. These instincts are hardening into law. The United States is raising requirements for its armed services, other federal agencies, and their contractors to buy American-made products, and the European Union is embedding a preference for European-made goods into its rearmament strategy. The EU’s $175 billion Security Action for Europe loan instrument will fund only those defense projects in which no more than 35 percent of the components come from external suppliers; the European Defence Industry Programme similarly requires that 65 percent of a funded product’s components originate in the EU, Norway, or Ukraine. The political logic is explicit: European money should build European industry. Policies that enable transnational defense innovation do not necessarily undermine these national efforts and need not go against the political grain. Protectionist rules are designed to govern finished platforms and prime contracts—which means that the dense, lower-visibility web of component supply, software and talent transfer, and joint development that drives modern innovation can exist alongside these regulations. Even the European defense initiatives that privilege European content have carve-outs for trusted partners such as Canada and the United Kingdom, and they cannot fully wall off the licensed production, foreign subsidiaries, and dual-use inputs on which European systems already depend. When transnational arrangements deliver a country clear benefits, such as by creating jobs, providing sovereign production lines on a partner’s soil, and transferring foreign technology, it should satisfy the nationalist imperatives that drive governments today. In defense markets, real competition is a policy choice, not a natural outcome. The task for policymakers is not to defeat economic nationalism but to channel it—to secure domestic wins through allied cooperation. It is reasonable to try to boost production at home, but governments also need to keep the defense market open to international competition. That means carefully reassessing policies and laws that require the procurement of domestically produced military systems. Relaxing domestic content provisions through broad waivers and standing exceptions for trusted allies is one way to do so. Avoiding overly strict interpretations of such requirements is another. Governments should also refrain from unnecessarily labeling information as secret or highly classified, ease rigid technical data restrictions that prevent information sharing, and allow mutual recognition of security clearances to enable partners’ access to classified information. All of this would make it easier for companies to jointly develop and produce dual-use and military systems—and for governments to procure them. Many U.S. allies and partners have valid concerns about their military and technological dependence on the United States. To assuage them, Washington should make clear that it is seeking not a continuation of an imbalanced defense relationship but true interdependence. Acquiring foreign technology and other goods for the U.S. military; jointly developing new technologies, applications, and systems; and investing in partners’ scientific and technological efforts can go a long way toward proving the United States’ commitment. And, of course, Washington must resist the temptation to weaponize interdependence in the technology and defense sectors for short-term gains. The United States and its trusted allies and partners must also ease export controls as applied to one another, even as they prevent the transfer of military and dual-use technology to adversaries. Reducing bureaucratic burdens will encourage defense technological collaboration, including in the general-purpose and dual-use technologies that will serve as the basis of future cutting-edge capabilities. Washington has taken meaningful steps to loosen export controls on sensitive technology associated with nuclear-powered submarines for Australia and the United Kingdom, U.S. partners in the AUKUS agreement. That spirit should animate efforts with other allies and partners and apply to a wider array of defense-related technologies. Some technology exchanges and joint innovation efforts can happen through existing institutions. NATO’s Defence Innovation Accelerator for the North Atlantic works with startups to find solutions to military problems, the European Defence Fund helps finance collaborative R & D across EU member states, and AUKUS Pillar 2 coordinates the development of advanced capabilities such as AI, quantum, undersea systems, and hypersonics. Yet these bodies could all accomplish more if they widened eligibility requirements for the firms they work with. The United States also has an opportunity to streamline its partnerships with foreign governments and businesses with the passage of the 2026 National Defense Authorization Act, which requires the U.S. government to create an assistant secretary of defense for international armaments cooperation. For this office to make a difference, however, it will need resources, real authority over export licensing coordination and partner engagement, and a directive to foster a common defense innovation ecosystem. And to streamline cooperation even further, U.S. allies that do not already have similar offices should create them, and those that do should give them stronger mandates. Rising geopolitical tensions, protracted wars, and rapid technological change are making it all the more important for the United States and its allies to work together on defense technology. Companies and universities are already reaching across borders to support innovation and scale up their projects—but they need the backing of governments to reap the full benefits of a transnational approach. Governments cannot afford to let political pressure to keep weapons and technology production at home get in the way of cooperation. Facing today’s security threats requires both scaling up and scaling out, both domestic rearmament and a pooling of allies’ collective strengths. At a moment when U.S. allies doubt American reliability and Americans doubt their allies’ ability to take on greater security responsibilities, fostering transnational defense innovation will anchor these vital relationships in a common industrial and technological purpose, to the lasting benefit of all. You are reading a free article Subscribe to Foreign Affairs to get unlimited access. - Paywall-free reading of new articles and over a century of archives - Six issues a year in print and online, plus audio articles - Unlock access to the Foreign Affairs app for reading on the go Already a subscriber? Sign In