Impact of military innovations on economic models
When the Battlefield Becomes a Lab
The line between military R&D and civilian technology has been blurring for decades, but the pace has accelerated dramatically since the late‑1990s. Think about the smartphone: its core components—GPS, accelerometers, high‑density batteries—trace back to defense contracts aimed at improving navigation, targeting, and battlefield communications. The same pattern repeats with the internet, which grew out of ARPANET, a project funded by the U.S. Department of Defense to create a resilient communications network.
What makes the military such a fertile ground for breakthrough tech?
- High‑stakes funding – Governments can allocate billions in a single fiscal year, tolerating risk that private capital often shuns.
- Mission‑driven urgency – When a new threat appears, the need for a solution can compress development timelines that would otherwise stretch for a decade.
These dynamics generate “dual‑use” innovations—technologies that serve both defense and commercial markets. The classic narrative credits the defense industrial base, but recent research emphasizes that many of today’s information‑based technologies are actually cultivated outside the insulated defense sector. As Griffin (2019) notes, “the swift emergence of information‑based technologies as decisive enablers of advanced military capabilities are largely developed and produced outside of the technologically isolated defense industrial base.
In practice, this means that the military often acts as a pull market, specifying performance needs that private firms—especially nimble start‑ups—rush to meet. The result is a feedback loop: commercial breakthroughs feed back into military capability, which then spurs new civilian applications.
The Ripple Effect: From War Tech to Main Street
When defense spending translates into civilian prosperity, economists call it a spillover effect. A recent ASD‑Europe report highlights that public investment in military R&D “generates returns far beyond the defence sector.
- Knowledge diffusion – Engineers who work on a classified project may later join a commercial firm, carrying tacit know‑how.
- Supply‑chain upgrades – Defense contracts often demand higher standards for materials, software, and manufacturing, which then become the new baseline for civilian suppliers.
- Market creation – A new capability (e.g., night‑vision imaging) can open entirely fresh consumer categories.
Here are a few concrete examples that illustrate the breadth of impact:
- Satellite navigation: Originally a military GPS system, now a backbone for ride‑sharing, agriculture, and disaster response.
- Drones: Early UAVs served reconnaissance; today they power package delivery, crop monitoring, and cinematography.
- Cybersecurity tools: Techniques forged to protect classified networks now underpin the security services of banks, hospitals, and cloud providers.
These spillovers aren’t just anecdotal; macro‑level studies suggest a measurable boost to GDP. While exact figures vary, estimates from the OECD and the U.S. Congressional Budget Office have placed the multiplier for defense R&D between 1.5 and 2.0, meaning each dollar spent can generate up to two dollars of broader economic activity. The caveat is that the multiplier depends heavily on how “open” the procurement process is—something the Air Force has been testing in recent years.
Open Innovation: The Air Force’s SBIR Experiment
The Small Business Innovation Research (SBIR) program is a federal mechanism that sets aside a portion of its R&D budget for small firms, often with the expectation that fresh ideas will flow into larger procurement pipelines. Historically, the Air Force’s SBIR contracts followed a fairly linear path: a small company wins a Phase I study, graduates to Phase II, and eventually, if the technology proves valuable, it gets folded into a larger acquisition program.
Facing a perceived slowdown in innovation, the Air Force piloted a “bottom‑up” reform that loosened procedural constraints and encouraged more iterative, collaborative development. The CEPR column on this reform notes that the Air Force’s experiment “addresses the problem of declining innovation” by giving small firms greater flexibility in contracting and by allowing them to engage directly with end‑users earlier in the process.
Key elements of the reform include:
- Streamlined proposal reviews – reducing bureaucratic layers to cut decision time from months to weeks.
- Co‑development workshops – bringing engineers from the Air Force, academia, and industry together to refine requirements in real time.
- Milestone‑based funding – tying disbursements to demonstrable progress rather than fixed deliverables.
The results, discussed in the NBER working paper, suggest that open approaches to innovation procurement can yield measurable benefits. While the study stops short of quantifying exact cost savings, it reports faster prototype delivery and a higher rate of transition from prototype to operational system.
For economists, this experiment offers a natural test case for new growth models that incorporate “open innovation” as a catalyst. Traditional Solow‑type models treat R&D as a black box; the Air Force’s SBIR reforms provide observable variables—contract flexibility, partnership intensity, and speed of knowledge transfer—that can be fed into more nuanced, endogenous growth frameworks.
Economic Models Meet the Arsenal: How Growth Theory Shifts
Classic endogenous growth theory (e.g., Romer 1990) emphasizes that knowledge spillovers drive long‑run economic expansion.
Public‑goods nature of security – Unlike a private firm’s product, national defense is non‑excludable and non‑rivalrous, meaning the social return to R&D is typically higher than the private return. This justifies substantial public investment.
Dual‑use externalities – As noted earlier, many defense inventions become commercial staples. Incorporating a “dual‑use coefficient” into growth equations helps capture this extra boost.
Risk‑adjusted procurement – Open‑innovation reforms lower the risk premium attached to early‑stage research, effectively increasing the expected net present value of a project. In a dynamic stochastic model, that shift can raise the equilibrium level of R&D investment.
A simplified illustration:
- Let K be private capital, R be R&D expenditure, α the productivity of private R&D, and β the productivity of defense R&D (including spillovers).
- Traditional models: Y = A·K^θ·R^α.
- With defense spillovers: Y = A·K^θ·R^α·(1 + β·D), where D is defense R&D spending.
If β > 0, each dollar of defense R&D raises total output more than a dollar of private R&D, reflecting the broader diffusion of military tech. Empirical work from the OECD suggests β may be as high as 0.3 for certain high‑tech sectors, though estimates vary.
The Air Force’s SBIR reforms effectively increase β by making the diffusion pathway more efficient—faster prototyping, tighter collaboration, and earlier market exposure. In a calibrated model, a 10 % rise in β could translate into a 0.5 % increase in long‑run GDP growth, a non‑trivial figure when compounded over decades.
These insights have policy implications.
- Promote openness – Encourage procurement that invites external innovators, rather than relying solely on legacy contractors.
- Facilitate knowledge bridges – Sponsor joint labs, fellowships, and conferences that link military engineers with civilian academia and industry.
- Track spillovers systematically – Develop metrics that capture the downstream commercial adoption of military technologies, feeding better data into growth models.
What the Future Holds: From AI to Green Defense
Looking ahead, two trends promise to reshape the military‑innovation‑economy nexus.
Artificial Intelligence and Autonomy
AI is already a cornerstone of modern combat systems—target recognition, autonomous logistics, and decision‑support tools. The Department of Defense’s Joint Artificial Intelligence Center (JAIC) has earmarked billions for AI research, much of it in partnership with private AI labs. Because AI development is heavily data‑driven, the military’s access to large, labeled datasets can accelerate algorithmic breakthroughs that later cascade into sectors like healthcare diagnostics and autonomous vehicles.
The economic model implication is a network externality: AI improvements in one domain improve the value of AI in all others. This magnifies β even further, but also raises concerns about skill concentration—if a handful of firms dominate both defense and commercial AI, the spillover benefits may become unevenly distributed.
Green Defense and Climate Resilience
Paradoxically, climate change is spurring a new wave of defense‑driven innovation. The military’s need for resilient infrastructure, low‑emission fuels, and energy‑independent bases has led to investments in synthetic fuels, micro‑grids, and advanced materials. These technologies have clear civilian upside—think of electric aircraft or high‑efficiency energy storage.
A 2023 report from the European Security and Defence (ASD) policy community highlighted that “public investment in military R&D often generates returns far beyond the defence sector” especially when the research aligns with broader societal challenges like decarbonisation.² The implication for growth theory is that defense R&D can serve as a catalyst for green innovation, potentially aligning the β coefficient with sustainability goals.
A Balanced Outlook
While the upside is compelling, it’s worth noting the risks. Over‑reliance on military funding can skew research priorities toward security needs at the expense of pure curiosity‑driven science. Moreover, the dual‑use dilemma raises ethical questions when technologies designed for combat find civilian applications that may exacerbate surveillance or inequality.
Policymakers and economists, therefore, need to strike a balance: maintain robust defense R&D to sustain the spillover engine, but embed safeguards—transparent review processes, ethical guidelines, and mechanisms for equitable diffusion.
In sum, the evolving landscape of military innovation offers a vivid illustration of how strategic public investment can reshape economic models. By embracing open procurement, tracking spillovers, and aligning defense R&D with broader societal challenges, we can turn the battlefield’s laboratory into a catalyst for sustainable, inclusive growth.