Last month, U.S. President Joe Biden signed an executive order prohibiting some private U.S. investment in certain technologies that could be used to bolster China’s military, such as semiconductors, quantum computing and artificial intelligence systems.
While denying the Chinese military industrial complex access to capital and know-how is important, the U.S. must also take affirmative steps to develop and commercialize those technologies here at home.
The U.S. is in its decisive decade for competition with China, and technology is the primary arena for the rivalry. To remain competitive, the U.S. national security apparatus should strengthen ties with private industry and use the power of capital markets to strengthen companies that will keep us in the game.
Under its policy of military-civil fusion, the Chinese Communist Party deploys science and technology to promote military and economic strength. The People’s Liberation Army receives significant technical support from Chinese companies and universities, and Beijing is cutting down on red tape and using legal and extra-legal tools to entice innovative companies to oblige.
The U.S. is unparalleled when it comes to innovation and the government can continue apace through increased focus on technology adhering to legal norms and rewarding actual results. As one of the largest purchasers of technology in the world, the Department of Defense has extraordinary power to generate demand signals and shape private-sector markets.
First, the Pentagon should use Advanced Market Commitments to fulfill future demand for technology critical to national security. AMCs have helped finance critical products including vaccines when the marketplace would not develop them. For the Pentagon, AMCs could come in the form of spending minimums on certain crucial technologies, especially expensive hardware like quantum computing, over the next several years.
Second, the Pentagon should guarantee loans for select dual-use startups, as it already does for companies involved in defense production. Credit markets would inevitably follow, called in by the Pentagon’s Bat-Signal. Given this framework already exists — and works quite well — the Pentagon could open up vast amounts of private-sector funding, with just some guaranteed government funding.
Third, the Pentagon should create a trusted clearinghouse for investors, creditors, and commercial partners, which could be done by expanding the mandate of the already-existing Trusted Capital Marketplace Initiative. This network would share due diligence with acquisition officers, as well as centralize quality analysis and inform major government purchases. It would also increase collaboration and formal partnerships between dual-use technology companies and established defense companies.
Such relationships could accelerate the integration of commercial technology into existing programs while reducing contracting burden on the Pentagon and non-traditional companies. Example incentive models include contract evaluation and award fee criteria, reimbursement of mentor-protégé related costs, and preferential access to defense experiments and exercises.
The Pentagon has taken some important steps to acquire better technology faster. It has increased engagement with small business and startups via tools like the Other Transaction Authority, as well as the Small Business Innovation Research and the Small Business Technology Transfer programs. Last year, the Chief Digital and Artificial Intelligence Office (CDAO) launched an online marketplace for rapid AI acquisition.
Despite this progress, the Pentagon still lacks department-wide guidelines on acquiring AI.
“DOD is in the process of planning to develop such guidance, but it has not defined concrete plans and has no timeline to do so,” said a June 2023 Government Accountability Organization report.
Lacking a coherent strategy, the U.S. is leaving billions in private and public dollars on the table that could help shore up the nation’s defense capabilities. The U.S. is ceding ground to China, which threatens the international order. The Pentagon must use its resources to leverage U.S. capital markets — one of our enduring advantages in strategic competition — and help promising dual-use tech companies scale, innovate, and deliver for the benefit of global democracy.
Steve Escavarage is an Executive Vice President in Booz Allen Hamilton’s Global Defense Business leading the Firm’s Digital Battlespace portfolio. He serves as an Industry Commissioner on the Atlantic Council’s Commission on Defense Innovation Adoption.
Adam Hammer is the Co-Founder and President of Roadrunner Venture Studios. He serves as an Industry Commissioner on the Atlantic Council’s Commission on Defense Innovation Adoption.
