Battlefields are evolving rapidly, with new technologies reshaping military strategy and tactics. Many of the new technologies originate in firms outside the traditional defence sector, rather than with the existing prime contractors. In the United States, the Department of Defense (DoD) created the Defense Innovation Unit (DIU) in 2015 to incentivise commercial tech companies to work on national security challenges. How successful has this new unit been in achieving its mission? We provide the first causal evaluation of the DIU’s effects on defence procurement. Using administrative procurement data and a firm-level panel covering 2017-2025, and employing propensity score matching, additional firm-level covariates and a staggered difference-in differences design, we find that the DIU has expanded both the extensive and intensive margins of defence contracting. We find not only a significant increase in the likelihood of receiving a DoD contract because of DIU treatment, but also in the size of the contract. Our findings show that defence innovation organisations can broaden and deepen the defence-supplier base. Governments updating their defence acquisition strategies in response to the lessons from recent conflicts can benefit from reforms that facilitate firm entry into procurement, overcoming the transaction cost and information asymmetry problems typical in defence markets.
Source : Bruegel
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