Harnessing the Power of SMEs to Strengthen Global Defense

Global investment in defense has reached record levels, driven by an increasingly volatile geopolitical climate and the urgent need to modernise our armed forces. This surge reflects not only heightened security concerns but is also recognition that technological innovation and industrial capacity are central to national resilience and allied deterrence.

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Innovation, agility, and resilience are not optional for the defense sector, they are essential. Across the globe, many of these core qualities reside in small and medium-sized enterprises (SMEs).

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Defense-related SMEs are vital enablers of innovation and growth. In Europe alone, more than 2,500 SMEs form the backbone of highly specialised supply chains. Yet these supply chains often remain fragmented along national lines, with limited cross-border cooperation, constraining the collective industrial capacity that allied nations need.

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This is not just a European challenge. SMEs in many countries face similar barriers: limited access to procurement opportunities, complex regulations, long export licensing processes, and difficulties scaling production or securing financing.

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But there are encouraging examples of progress. The UK's new SME spending targets and dedicated support hub (launched in March 2025) demonstrate how governments can expand SME participation and defense investment into local innovation, whilst creating highly-skilled jobs.

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Meanwhile Germany's defence industry highlights the value of SMEs working in tandem with major "systems providers", a model that both sustains industrial capacity and accelerates technological innovation.

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These examples point to a practical agenda for giving SMEs a central role in defense innovation and the supply-chain ecosystem.

Six Priorities to Unleash SME Potential in Defense

Around the world, there is a growing recognition that defense-sector SMEs cannot be left at the margins if we are to truly innovate and meet the demands of today's geopolitical environment.

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Yet many of the barriers SMEs face, from restrictive procurement frameworks to financing gaps, are not structural inevitabilities. They can be addressed with targeted policy choices and a clear commitment to tighter collaboration between governments, major primes, and smaller players.

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Based on lessons emerging from leading defence markets and our own experience as a growing SME, I see six practical priorities that could make a decisive difference for the defense industrial ecosystem.

1. Give Preference to Domestic Innovation in Defense Procurement

Granting preference to technological solutions developed locally is not a protectionist measure but a commitment to industrial and strategic sovereignty. Fostering a robust domestic technological and industrial base strengthens national resilience and ensures a more agile response in times of crisis.

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Prioritising domestic products (as long as they meet technical and operational requirements, of course) not only reinforces the domestic industrial fabric but also stimulates employment and investment in R&D. This principle applies as much to Europe or North America as it does to any other region facing an increasingly uncertain environment.

2. Reserve 20% of Public Defense Contracts for SMEs

As seen in many advanced economies, legally reserving a share of public defense contracts for SMEs diversifies the supply chain, stimulates competition, and facilitates access to strategic defense programmes.

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Such measures help address structural disadvantages faced by smaller firms compared to large prime contractors and allow their innovations to serve national defense needs and the broader allied community. Setting clear targets for SME participation ensures they are not confined solely to subcontractor roles but can contribute as lead innovators, where needed.

3. Accelerate Export Approvals by Dedicating Resources to Support SMEs

Internationalisation is often essential for SMEs to scale their businesses and strengthen their financial foundations. Yet in many markets, export licensing procedures can take months, acting as a bottleneck that closes off market opportunities.

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Governments can make a significant difference by allocating more professionals to guide SMEs, providing clarity on requirements, and prioritising applications from firms with confirmed contracts. In practice, such reforms can determine whether a company secures or loses a critical export deal with long-term implications for its economic viability.

4. Drastically Reduce Red Tape in National and Multinational Programs

Complex, opaque, or redundant administrative processes are a real barrier for many SMEs, which often lack extensive legal or compliance teams. Simplifying, standardising, and digitising procedures (especially for tenders, certifications, and audits) could lower these barriers.

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This is particularly important for access to multinational initiatives such as the European Defence Fund (EDF) or collaborative NATO programmes. These initiatives are designed to strengthen the shared industrial base but cannot do so effectively unless SMEs can participate on an equal footing.

5. Promote Public Guarantees to Improve SME Access to Finance

The credit offered by traditional banks is often insufficient for defense SMEs, limiting their capacity to scale production in response to growing customer demand. Public guarantee schemes can enable more flexible financing, allowing SMEs to invest in facilities, expand their workforce, and strengthen their own supply chains.

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This support not only accelerates company growth, but also enhances the competitiveness and autonomy of national and allied defense industries.

6. Foster a Genuine and Long-Term Culture of Public-Private Collaboration

Beyond specific policies, there is a need for a cultural shift in how governments, industry leaders, and SMEs work together. This means building mutual trust, sharing risks during early-stage technological development, and designing procurement programmes in which SMEs can contribute from the outset, not merely as subcontractors.

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National defense is a collective responsibility. By embedding SMEs as true partners in innovation, countries can strengthen resilience, accelerate the development of disruptive technologies, and ensure a more diverse and competitive industrial base.

A Shared Imperative

These six steps do not require sweeping structural reforms, but they do demand strategic vision, commitment, and consistent implementation.

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By extending such approaches across borders and aligning them with key defense priorities, governments can ensure that SMEs become not just contributors but central pillars of defense innovation.

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Empowering SMEs is more than an economic development measure, it is an investment in technological innovation and industrial capacity to respond rapidly to emerging global threats.

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