WASHINGTON—From the specter of US retrenchment to ongoing Russian revanchism, European NATO members must face up to a harsh reality: the Alliance lacks the industrial capabilities to meet today’s security challenges. Their recent promises to increase defense spending, while substantial and welcome, will not be enough alone to change this.
To adapt quickly enough to confront evolving threats, NATO allies must get the basics right. This means adopting functional and flexible financing mechanisms, streamlining regulatory frameworks, and building production foundations that prioritize scalable and sustainable innovation.
These challenges that NATO faces, as well as the need for the Alliance to get the basics right, are being actively discussed, including at the 2025 Netherlands-US Defense Industry Days conference in Washington, DC, this past October. At this event, organized by the Embassy of the Kingdom of the Netherlands and the Atlantic Council, policymakers, industry leaders, financiers, and experts discussed how transatlantic allies can accelerate defense innovation while strengthening their defense industrial bases. Below are a few of the authors’ major takeaways from this conference on how NATO can meet these challenges.
Don’t just spend more—spend smarter
Increasingly, the battlefields of the future will be won in the realm of innovation. Building ecosystems to support technology development will require allies to use newly unlocked defense dollars to fill immediate capability gaps and build flexible financing pathways to foster innovation. If done right, these defense ecosystems can allocate more resources directly to innovators, boosting returns on investment and generating cutting-edge capabilities in North America and Europe.
To do this, allies should take a two-pronged approach to financing innovation:
Accept risk to accelerate adoption. Many innovation initiatives—such as NATO’s Defense Innovation Accelerator for the North Atlantic (DIANA) organization—too often fall short because they prioritize immediate return on investment or quick-turn results over long-term innovation development. This places a strain on innovators, limiting their access to seed money and signaling to the private sector that the Alliance does not prioritize lasting defense technology innovation. Instead, NATO should give these initiatives greater latitude to prioritize experimentation and iteration rather than meeting often arbitrary metrics and quotas.
Protect research and development budgets. From the rise of the space domain to electromagnetic warfare, NATO allies must win not just a single innovation race; they need to win many at once. Research and development (R&D) budgets are critical to this effort. Yet, far too often, as participants at the conference noted, R&D budgets for defense technologies are cannibalized in favor of immediate operational needs, particularly during periods of heightened security pressure. By prioritizing R&D budgets, governments can send a clear signal to defense industries, investment bankers, and venture capitalists that NATO members see investment in defense technology as a long-term and sustainable demand. These signals can help spur greater private-sector investment in these technologies.
To produce at scale, regulate at scale
Current regulatory environments on both sides of the Atlantic are not designed for the speed of innovation or adoption needed in today’s rapidly evolving security environment. Instead, NATO allies must strike a careful balance: NATO countries should impose regulations that protect sensitive technologies and intellectual property while also encouraging cooperation among allies on innovation development. Two main principles should inform this approach:
Break down barriers to transatlantic defense industrial cooperation. In the United States, having to navigate dense bureaucracy can stifle innovation, hamper collaborative partnerships, and stretch lead times for critical defense technologies. However, US Secretary of War Pete Hegseth recently made several announcements that show promise in this area—including loosening restrictions on defense contractors and emphasizing speed—indicating that the Pentagon will work to streamline defense cooperation for allies looking to buy US capabilities. Despite this positive momentum, meaningful changes to US foreign military sales and armaments cooperation will require sustained efforts to reform these overly burdensome bureaucratic processes.
Keep agile firms top of mind when writing regulations. Small and medium-sized enterprises (SMEs) will make or break the next era of warfare. Yet defense industrial and innovation regulations often impose disproportionate costs on SMEs because they are designed only for the largest defense companies. For example, the US Cybersecurity Maturity Model Certification rightly protects sensitive data through third-party audit and monitoring requirements. But as written, the cost of compliance with these regulations is prohibitively expensive for SMEs, risking pushing many smaller defense firms out of the market altogether. Therefore, policymakers and military planners must establish more frequent, institutionalized relationships with SMEs to better understand how regulations affect these new players. A good step in the right direction would be for policymakers to apply regulations on a sliding scale, setting thresholds for how large a defense company must grow before it has to comply with certain requirements.
Build integrated innovation ecosystems
NATO should adopt a holistic approach to capability development that marries research, design, and production to turn industrial development into more than just the sum of its structural parts. Three ways to build this holistic approach are:
Champion defense industrial cooperation. To innovate at the necessary pace, the Alliance must build defense industrial co-development, co-production, and co-assembly pathways. Working industry-to-industry or industry-to-partner, such collaborative efforts can help enable allied industries to scale up production and develop cutting-edge defense technologies. This approach defrays risk for industry, builds stronger transatlantic bonds, and shortens lead times for capability delivery.
Advance a model that combines expertise across sectors. To build more resilient and sustainable defense innovation ecosystems, allies should foster a defense innovation model that integrates government, industry, and academia. With these three sectors working together, allies can coordinate experimentation, testing, and manufacturing efforts to accelerate development and deployment timelines. Applied across the Atlantic, such a model could replace isolated national pilot projects with a coordinated framework for sustained, interoperable innovation.
Establish a NATO Defense Innovation Unit to spur development. Modeled after the United States’ own Defense Innovation Unit, a NATO version of the institution would help the Alliance coordinate funding, regulation, and capability development. A NATO Defense Innovation Unit would maintain shared test facilities, align technical standards, and guide the transition of prototypes into fielded systems. It would serve as a permanent platform connecting NATO’s innovation initiatives—such as DIANA and the NATO Innovation Fund—with national and private-sector efforts.
