Why defence innovation, not firepower alone, will decide economic strength

As the United States grapples with dwindling weapons stockpiles and Germany struggles to escape economic stagnation, a common question is emerging on both sides of the Atlantic: can defence spending still underpin prosperity? According to London Business School's Professor Paolo Surico, the answer is yes, but only if governments focus less on volume and more on innovation.

Recent tensions between Donald Trump and America’s largest defence contractors have exposed a structural weakness at the heart of US military power. Despite unrivalled spending, the Pentagon could exhaust critical missile stockpiles in days during a major conflict. Trump’s public anger at defence firms prioritising dividends over production reflects a deeper problem: decades of procurement systems optimised for bespoke, high‑end weaponry rather than scalable, innovation‑driven capacity.

Surico argues that simply throwing more money at defence risks repeating the same mistake. A rapid increase in spending may boost output in the short term, but it can also fuel inflation, push up interest rates and worsen already heavy public debt, without strengthening long‑term productive capacity. The real economic dividend from defence has historically come not from guns and ships alone, but from sustained investment in research and development.

Many of the most transformative civilian technologies, from GPS and the internet to advanced pharmaceuticals, originated in defence‑led research programmes designed to solve strategic problems rather than maximise short‑term returns. Surico points to the Second World War and the Cold War not as eras of brute force, but as periods when governments deliberately used defence research to expand technological frontiers, crowd in private investment and build new industries.

This distinction matters acutely for Germany. Europe’s largest economy has barely grown since 2022 and now faces rising unemployment, an ageing workforce and intensifying competition from China. While Berlin has loosened fiscal rules to allow much higher defence spending, Surico cautions that defence budgets alone will not revive productivity. Without a strong innovation component, Germany risks propping up legacy manufacturers rather than fostering the next generation of technologies.

Surico’s research suggests that defence spending tied to innovation has far stronger and more durable growth effects than traditional procurement. It creates what he describes as a “Kennedy‑style deterrent”: one based on technological leadership and problem‑solving capacity rather than sheer firepower. By contrast, a strategy focused on replicating past military scale, building more platforms without advancing underlying technologies, delivers weaker economic returns and leaves countries vulnerable to future shocks.

The warning applies equally to Washington. America’s defence giants may yet scale up production, but the deeper challenge is aligning incentives so that defence spending rewards innovation, speed and adaptability rather than financial engineering. In an era where conflicts are decided by supply chains, software and industrial resilience, Surico argues that brain power has become as decisive as firepower.

From missile shortages in the Pacific to productivity stagnation in Europe, the lesson is the same. Defence spending can still change the world, but only if it is treated as an investment in innovation, not just insurance against war.

Further reading To read the full analysis in The Telegraph:

No end in sight for Germany’s economic crisis – Unemployment, productivity and growth challenges face Europe’s biggest economy (The Telegraph, 10 January)

Why Trump is gunning for America’s defence giants – US president’s threats send shock waves through the military establishment (The Telegraph, 9 January)