The Defence and Dual-Use Tech Surge: A New Industrial Cycle Takes Shape

The defence sector is in the middle of its most consequential industrial reorganisation since the Cold War ended. Two forces have converged. Western governments have made a step-change — a sudden, lasting jump — in their defence spending commitments. And private venture capital (funds that back young companies) keeps shifting into dual-use technology, meaning products that serve both commercial and military markets.

The combined effect is restructuring the industry. It shows in supply chains moving back onshore, in where skilled people choose to work, and in the rise of a new class of defence-adjacent firms. For thirty years the industry had treated slow, incremental change as its default operating mode.

For corporate strategists outside the traditional defence primes — the large established contractors — the question has changed. It is no longer whether this cycle will matter to your sector. It is which adjacent capabilities, and which national supply chains, the cycle is strategically repositioning.

The Numbers Behind the Cycle

NATO members crossed the alliance's 2%-of-GDP defence-spending threshold collectively for the first time in 2025. By the first quarter of 2026, more than half of NATO members exceeded 2.5%. Germany, Poland, the Baltic states and the Nordics now spend at or above 3%. The structural shift is no longer rhetorical; it sits in national budgets and in multi-year procurement frameworks, meaning governments' long-term purchasing plans.

The pool extends beyond Europe. The United States carries a defence-modernisation backlog. Japan's defence budget has doubled in real terms — that is, after inflation — since 2022. Korea is the world's fourth-largest arms exporter, and India's localisation policy is moving defence production onshore at scale.

Add these together and the global defence procurement pool has expanded by an estimated 35–40% in real terms since 2022. That is the largest sustained increase since the Reagan-era build-up.

Private capital has followed. Dual-use venture investment crossed $40 billion in 2025 — five times the 2020 figure. Where the money has gone is telling:

• Autonomous systems — uncrewed air, surface and undersea craft. The largest single category.
• AI and decision-support software — tools that help commanders and analysts decide faster. The fastest-growing category.
• Space and orbital infrastructure — satellites and the systems that support them. Investment here is sustained and strategic.
• Microelectronics and trusted semiconductors — chips built in vetted, secure supply chains. Policy is pushing this production onshore.
• Hypersonics, directed energy and advanced propulsion — weapons and craft that fly at more than five times the speed of sound, weapons that use lasers or microwaves, and new engine technology. High risk, high strategic value.
• Cyber and electromagnetic capabilities — tools for digital attack and defence, and for contesting the radio spectrum. These sit ever closer to commercial technology.

Where the Industrial Cycle Reaches Beyond Defence

The point that matters economically is simple: the defence build-out is pulling demand through adjacent industries.

Critical minerals and refined materials — Supply chains for rare earths, tungsten, antimony, gallium and graphite are being rebuilt. Defence-procurement rules and friend-shoring policies — steering supply towards allied countries — are driving the change. Mining and refining capacity in stable jurisdictions is the scarce resource of this cycle.

Advanced manufacturing — Defence-grade additive manufacturing (industrial 3D printing), precision machining and specialised composites are all expanding capacity. That capacity will outlast the defence cycle, because it also serves aerospace, medical devices and high-end industrial markets.

Trusted electronics — The US CHIPS Act, the EU Chips Act and equivalent Asian programmes subsidise chipmaking at home. They are creating a parallel "trusted-supply" semiconductor ecosystem — chips made in vetted plants. The cost premium is now subsidised; the strategic premium will persist.

Energy resilience — Governments are buying microgrid technology (small, self-contained power networks), advanced nuclear — small modular reactors in particular — and energy-storage capacity under a defence-resilience banner. That procurement is reshaping the commercial cleantech market alongside it.

Talent flows — Aerospace and defence firms now compete head-to-head with frontier technology companies for AI, systems-engineering and advanced-manufacturing talent. Pay has reached parity, and that parity is changing labour-market dynamics in adjacent industries.

Who Wins, Who Adjusts

Three sets of firms are positioned to capture outsized value:

• Traditional primes — Lockheed, RTX, BAE, Airbus Defence, Leonardo and Northrop. The winners here are those reinvesting aggressively in autonomous systems and software-defined platforms (equipment whose capability lives mainly in its software), rather than defending legacy hardware.
• New defence-tech entrants — Anduril, Helsing, Saronic, Shield AI, ICEYE and the next generation of European deeptech firms (companies built on hard science and engineering). Talent, capital and procurement are now flowing to them all at once.
• Dual-use adjacents — firms in industrial software, advanced materials and trusted electronics. They can serve both commercial and defence markets without dedicated spending on defence-specific certifications.

Firms that need to adjust strategy include:

• Industrial conglomerates with relevant capabilities but no defence sales operation. The procurement-policy environment is friendlier than in any recent cycle.
• Aerospace tier-2 and tier-3 suppliers — the firms further down the supply chain — facing demand that exceeds their current capacity.
• Cleantech firms whose products fit energy-resilience procurement frames.

Risks to the Thesis

The cycle is not without execution risk:

• Political reversal is possible. It becomes more likely if European fiscal pressures intensify or US administration priorities shift.
• Industrial-base bottlenecks — skilled labour, regulatory clearance and export-control regimes (rules on which technology may be sold abroad) — are already constraining output.
• Valuation dispersion — the wide spread in the prices investors pay for similar firms — has reached early-2021 levels in some categories of the defence-tech venture market. Returns may compress significantly.
• Geopolitical de-escalation would be welcome. It would, though, force a rethink of how long the cycle lasts.

Even so, this cycle is more durable than the defence build-ups of the past, which rose and fell like commodity cycles. Three forces argue for that view.

Europe's security environment has deteriorated structurally. Governments are systemically re-evaluating their supply-chain dependence on geopolitical rivals. And AI and autonomy are now recognised as central to next-generation military capability. Together, these point to a multi-cycle capital commitment, not a single-cycle one.

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The World Research Institute provides defence-sector market sizing, supply-chain risk assessment, and corporate-strategy advisory for firms positioning to participate in the cycle. Contact our team to scope research.