The geopolitical landscape has fundamentally shifted, ushering in an unprecedented era of growth and innovation in the defence technology sector across Europe and the UK.
This overview outlines the current market dynamics, technological trajectories, investment opportunities, and the evolving legal frameworks that underpin this critical sector.
Market development: a new dawn for defence spending
For decades following the Cold War, European defence spending witnessed a 'peace dividend', leading to a significant reduction in military expenditure. However, recent geopolitical tensions, particularly Russia's actions in Ukraine, have served as a stark wake-up call, accelerating a paradigm shift. European nations and the UK are now committed to significantly bolstering their defence capabilities, driving substantial market growth.
European Union
The EU is demonstrating a clear commitment to strengthening its defence industrial base and fostering greater interoperability among Member States. Initiatives like the European Defence Fund (EDF) are injecting substantial capital into defence R&D. The EDF 2025 Work Programme, for instance, allocates over €1bn to critical areas such as ground combat, space, air combat, energy resilience, and cyber defence, with a strong focus on disruptive technologies. Beyond R&D, the European Defence Investment Programme (EDIP) aims to enhance production capacity with €1.5bn from the EU budget between 2025 and 2027 and includes measures to incentivise joint procurement from the European defence industry. Additionally, the Security Action for Europe (SAFE) initiative, enacted in May 2025, offers up to €150bn in long-term loans at competitive rates for Member States to procure critical equipment, with a strong emphasis on 'buy European' rules (65% of project value from EU/associated countries/Ukraine components). EU defence expenditure reached an estimated €326bn in 2024 (1.9% of EU GDP), with a further real-term increase of over €100bn expected by 2027.
United Kingdom
The UK is similarly accelerating its defence innovation efforts. A major £5bn technology investment is underway, with over £4bn specifically directed towards autonomous systems. This drive aims to enhance the accuracy and efficacy of the Armed Forces and boost export potential. The UK government has committed to increasing defence spending to 2.5% of GDP from 2027, with a long-term aspiration of 3.5% of GDP on "core" defence spending and 1.5% on "resilience and security" by 2035, amounting to a total of 5% of national income on national security. This significant uplift will fuel investment in areas like drone technology, laser weapon systems, long-range weapons, and advanced munitions. The UK defence industry contributes significantly to the UK economy, with Ministry of Defence (MOD) spending on industry amounting to £28.8bn in 2023/24.
Global market
Globally, the defence technology market is experiencing an undeniable surge. Heightened security concerns, persistent geopolitical instability, and ongoing conflicts are driving record increases in defence spending worldwide. The United States continues to be a dominant force, with its defence spending significantly outpacing most European nations. NATO allies, including many European countries and the UK, are increasingly committed to meeting and surpassing the 2% of GDP defence spending target. At the 2025 NATO Summit in The Hague, Allies pledged to increase investment to 5% of GDP by 2035, with 3.5% allocated to core defence capabilities and the remainder directed towards resilience and broader security measures. This global trend creates a fertile ground for innovation and investment across the entire defence value chain. The global defence market size is projected to reach $676.64bn in 2029, at a compound annual growth rate (CAGR) of 6.4%, driven by factors such as the increased use of military drones and demand for advanced military equipment. Western Europe is expected to be the fastest-growing region during this forecast period.
Technical predictions: the future of warfare is digital and autonomous
The future of defence technology is characterised by rapid advancements in disruptive technologies that promise to reshape battlefield dynamics and enhance national security. Key trends and predictions include:
- Artificial Intelligence and machine learning: AI is a transformative force, moving beyond data analysis to enable real-time, resilient, and explainable decision-making in complex operational environments. The focus is on leveraging AI to achieve 'decision dominance'.
- Autonomous systems: the proliferation of unmanned aerial vehicles (UAVs), unmanned naval vessels, and robotic ground systems is fundamentally changing the way militaries operate. These systems, reliant on secure, low-latency data networks and advanced AI, will increasingly perform surveillance, reconnaissance, logistics, and even combat missions. Counter-drone technologies will also see significant development.
- Cyber warfare and electronic warfare (EW): as military operations become increasingly networked and data-driven, cyber security is paramount. Investment in robust cyber defence mechanisms to protect critical infrastructure and prevent stealth attacks from state and non-state actors is a top priority. EW, including advanced jamming and signal intelligence capabilities, is also a rapidly growing area, particularly in contested electromagnetic spectrums.
- Directed energy weapons (DEWs): lasers, high-power microwaves, and high-energy particle beams are emerging as cost-effective and sustainable alternatives to traditional munitions for shooting down targets like drones, minimising collateral damage. The UK, for instance, is actively investing in new DEW capabilities for its Army and integrating dragonfire on Royal Navy warships.
- Space-based capabilities: space is recognised as a critical domain for military operations. Investment in satellite-based surveillance, secure communications, and anti-satellite capabilities is escalating, highlighting the growing importance of space as a strategic frontier.
- Advanced materials and additive manufacturing (3D printing): innovations in materials science are leading to the development of stronger, lighter, and more resilient defence equipment. Additive manufacturing offers significant potential for on-demand production of spare parts and customised components, enhancing supply chain resilience.
- Quantum computing: while still in its nascent stages, quantum computing is anticipated to have a profound impact on defence, particularly in areas like cryptography, secure communications, and complex problem-solving.
- Hypersonics: the development of hypersonic weapons dramatically shortens strike timelines and increases unpredictability, posing new challenges for defence and necessitating advancements in counter-hypersonic technologies.
- Digital twins: expanded use cases for digital twins will allow militaries to test battlefield scenarios, evaluate weapons system performance, and monitor equipment wear-and-tear virtually, enhancing efficiency and reducing costs.
Read more about ethics and regulation of AI in defence tech here, and more about disruptive technologies in defence here.
Investment opportunities: a landscape ripe for strategic capital
The confluence of increased defence spending, technological disruption, and geopolitical urgency presents compelling investment opportunities across the European and UK defence tech sector. Both established players and innovative startups are poised for significant growth. Venture capital funds are increasingly entering the defence tech space, recognising the substantial growth potential driven by innovation and heightened security needs. This creates strong momentum for early-stage investment in disruptive startups. In parallel, companies with strong cross-border partnerships and EU/UK-centric supply chains are increasingly attractive investment targets. These firms are well-positioned to benefit from government procurement initiatives that emphasise domestic or regional sourcing.
Key investment areas
- Ammunition and munitions: the ongoing conflict in Ukraine has highlighted critical capability gaps in ammunition stockpiles, driving strong demand for large-caliber artillery and air defence systems. Companies specialising in munitions manufacturing and supply chains are experiencing unprecedented growth.
- Drone technology and counter-drone systems: the widespread use of drones in modern warfare creates demand for both advanced drone platforms (reconnaissance, combat, logistics) and sophisticated counter-drone technologies (jamming, kinetic interceptors, DEWs).
- AI and software for defence: investments in companies developing AI-powered solutions for command and control, data analytics, intelligence, surveillance, and reconnaissance (ISR), and autonomous decision-making are highly attractive. The shift from hardware-centric to software-driven defence systems is a major trend.
- Cyber security and electronic warfare: given the increasing threat of cyber attacks, companies offering robust cyber security solutions for military networks and advanced electronic warfare capabilities are critical.
- Space-based defence technologies: companies involved in satellite systems for surveillance, secure communications, and anti-satellite capabilities are strong investment targets.
- Dual-use technologies: technologies developed for civilian applications but with potential military utility ("dual-use") offer significant market diversification and growth potential.
See more about the funding revolution in defence tech here.
Fields of use for disruptive defence technologies and AI opportunities
Disruptive defence technologies, underpinned by advancements in AI, are creating entirely new capabilities and transforming existing ones across the defence spectrum. This presents myriad opportunities for companies developing and integrating these cutting-edge solutions:
Automated Systems and Robotics
- Autonomous weapons systems: while raising ethical concerns (see more here), the development of AI-driven autonomous systems for various combat roles, from precision targeting to complex swarming operations, is a key area of research and investment.
- Unmanned systems – logistics and supply chain: AI-powered autonomous vehicles and drones are being deployed to deliver supplies to troops in contested or hard-to-reach areas, reducing risks to human lives and optimising logistics.
- Automated reconnaissance and surveillance: AI-enabled drones and sensors provide real-time situational awareness, identifying patterns and anomalies at speeds impossible for human analysis.
- Predictive maintenance: AI algorithms analyse data from sensors on military equipment to predict potential failures, enabling proactive maintenance and significantly improving equipment reliability and operational readiness.
Intelligence and decision support
- Advanced data analytics and fusion: AI sifts through vast datasets from different sources (e.g. satellite imagery, intercepted communications, social media) to extract actionable insights, improve intelligence gathering, and enhance situational awareness.
- Predictive decision-making: AI models can simulate various battlefield scenarios, anticipate critical logistical demands, and detect hostilities before they materialise, providing military leaders with critical insights for rapid and informed decision-making. This directly addresses the VUCA (Volatility, Uncertainty, Complexity, Ambiguity) challenges of military environments.
- Human-AI teaming: developing interfaces and systems that allow soldiers to effectively collaborate with AI-driven robotic partners, augmenting human capabilities rather than replacing them.
Cyber and information warfare
- Proactive cyber defence: AI will evolve to predict and prevent cyber threats through advanced pattern recognition and anomaly detection, safeguarding critical military networks and infrastructure.
- Deception and counter-deception: AI can be used to generate realistic disinformation or detect sophisticated enemy deception campaigns.
- Electronic warfare augmentation: AI enhances the ability to analyse and combat hostile electronic signals, improving jamming capabilities and enabling more effective use of the electromagnetic spectrum.
Training and simulation
- AI-powered training simulations: realistic and immersive virtual environments for military personnel, allowing for complex scenario planning and skill development without real-world risks or costs.
- Personalised training programs: AI can analyse individual performance and adapt training modules to optimise the soldiers’ learning success.
Advanced munitions and weapons systems
- Precision targeting and guidance: AI algorithms enhance the accuracy of munitions and enable more precise targeting in complex environments.
- Swarming drone technologies: AI-driven swarms of drones capable of coordinated actions to overwhelm enemy defences or perform complex surveillance tasks.
- Next-generation missile defence: AI is crucial for processing vast amounts of sensor data to detect, track, and intercept hypersonic and other advanced missile threats.
Legal framework: navigating a complex regulatory landscape
Operating and investing in the defence technology sector requires a thorough understanding of a complex web of national, European, and international legal frameworks. These frameworks govern everything from research and development to production, export, and international cooperation. Key legal considerations include:
Export controls and dual-use regulations
- EU dual-use Regulation: this Regulation controls the export of goods, software, and technology that can be used for both civilian and military purposes. Exporters often require licences, and strict checks on end-users and destination countries are mandatory.
- National export control laws: individual EU Member States and the UK have their own national export control laws (e.g. the German War Weapons Control Act and Foreign Trade and Payments Regulation) that may impose additional restrictions or notification obligations, even for non-commercial or research-related activities.
- Compliance: companies must implement robust internal compliance programs to ensure adherence to these regulations, which are crucial for preventing the proliferation of sensitive technologies and avoiding severe penalties.
Sustainable Finance Regulations (ESG)
- The EU's sustainable finance framework – including the Sustainable Finance Disclosure Regulation (SFDR), the EU Taxonomy, and the Corporate Sustainability Reporting Directive (CSRD) – does not prohibit investments in defence or dual-use technologies. However, it places limits on controversial weapons.
- While defence investments might historically have faced ESG scrutiny, the current geopolitical climate is leading to a re-evaluation, with a growing recognition of defence as a necessary and responsible investment area for national security and stability.
Procurement law
Defence procurement in Europe and the UK is governed by specific regulations that emphasise transparency, competition, and strategic considerations. Companies need to navigate complex tender processes, often involving consortia and cross-border collaborations. See our article for more on procurement issues in the UK.
Intellectual property protection
Protecting proprietary technologies and innovations is paramount in the defence sector. Robust IP strategies are essential, particularly given the sensitive nature of many defence technologies. See here for more.
Data protection and cyber security regulations
Handling sensitive defence-related data necessitates strict adherence to data protection laws (e.g. GDPR) and cyber security regulations to prevent breaches and maintain operational security. Read more.
Foreign direct investment (FDI) screening
Many European countries and the UK have mechanisms to screen foreign direct investments in critical sectors, including defence, to protect national security interests.
Sanctions and embargoes
Companies must be vigilant about international sanctions and embargoes that may restrict trade or engagement with certain entities or countries.
Offset requirements
In some defence contracts, especially large ones, governments may impose "offset" requirements, obliging foreign suppliers to invest in or procure goods/services from the domestic industry.
See more on legal issues, including in particular around the use of AI, here.
A rapidly evolving landscape
The European and UK defence technology sector is undergoing a profound transformation, driven by an urgent need for enhanced security and a renewed commitment to investment and innovation. For C-level executives and investors, this presents a unique window of opportunity. While the sector is characterised by complex technological advancements, significant capital outlays, and a stringent regulatory environment, the potential returns – both financial and strategic – are substantial.
Navigating this dynamic landscape successfully requires a deep understanding of market trends, a keen eye for technological disruption, and robust legal counsel to ensure compliance and mitigate risks. Companies and investors who strategically engage with this evolving sector, embracing collaboration and innovation within the established legal frameworks, are poised to play a pivotal role in shaping the future of European and global security.
Find out more about issues and opportunities in the aerospace & defence sector and how we can help here.
