Significant government investment was the key to this transformation. But this spending would not have achieved anything if Canada had not simultaneously established the institutions, financing mechanisms, and infrastructure needed to quickly turn political promises into large-scale industrial production. NATO leaders, who will gather in Ankara on July 7–8 for the 2026 summit, should bear this lesson in mind.
In Europe and North America, governments are increasing defense spending. They are announcing rearmament plans, government procurement programs, and spending targets, including a commitment to spend 5% of GDP on defense by 2035.
Recognizing defense as a strategic priority, increasing spending, and improving the government procurement system—all of these are steps in the right direction. But to turn resources into military capability, industrial capacity must be built.
As Ukraine demonstrates, in modern warfare, funding precedes combat operations. After Russia’s full-scale invasion began in 2022, Ukraine mobilized billions of dollars to expand the development and production of drones.
The payoff is incredible: drones costing just a few thousand dollars are capable of destroying military equipment worth hundreds or even thousands of times more. Even if drones are intercepted, they still inflict significant damage on Russia, as it is forced to launch air defense missiles that cost tens or hundreds of thousands of dollars.
None of this would be possible without funding for the factories, engineers, software, supply chains, and production capacity needed for mass drone production.
NATO countries do not lack resources, technical expertise, or political will. But they lack the market structures capable of transforming these advantages into military capabilities—at the speed and on the scale required by the current security situation. Production capacity remains limited, delivery times stretch out over years, and critical supply chains are unreliable.
Due to persistent bottlenecks, inflation in the defense sector continues to rise, which reduces purchasing power and delays the deployment of urgently needed equipment.
Operational Readiness and Long-Term Demand
If NATO allies wish to build the industrial capacity necessary for military deterrence, they will have to ensure wartime-level industrial responsiveness without imposing wartime-level economic controls. This means new approaches to market development are needed.
The first task is to create reliable long-term demand. This is an essential prerequisite for attracting private investment to build new factories or expand production lines. To achieve this, national governments must provide convincing, multi-year procurement commitments, both independently and jointly with allies.
The second task is to finance this new demand. Even when future orders are guaranteed, industrial expansion requires low-cost, long-term capital. New factories, equipment, and production lines require significant initial investments.
Typically, manufacturers take out loans from commercial banks to finance such investments. The cost of this capital is ultimately reflected in the price the government pays for military equipment and ammunition. When commercial financing is unavailable or too expensive, authorities often have no choice but to intervene.
Market-based approaches are more productive and cost-effective than the current system. The first step should be to establish a dedicated multilateral structure that will serve as a specialized platform for financing the development and expansion of the defense industries and related supply chains.
This is precisely the role that the Defense, Security, and Resilience Bank (DSRB)—whose establishment is currently under discussion—should play.
More Than Just a Lending Institution
By shaping a state-backed defense finance market, the DSRB will help reduce the cost of financing industrial expansion. As the reliability of the financial environment improves, this—along with long-term demand commitments that guarantee future revenues—will attract commercial lenders and private investment.
As a result, the burden on defense budgets will be significantly reduced; under the current system, these budgets must cover not only direct investments in military capabilities but also associated financial costs, industrial risks, and inefficiencies.
The more these costs can be reduced, the more drones, missiles, and ammunition countries will be able to afford. Committing to allocate more resources is good. But it is even better to do more with the resources that have already been allocated.
DSRB Bank is not just another lending institution. Over time, it will establish a unique yield curve for defense, security, and stability with an AAA rating.
Thanks to this, companies, banks, and governments will be able to access financing terms specifically designed for the long-term investment horizons required to build factories, strengthen supply chains, and expand defense production.
Strengthening defense capabilities is not just a matter of security policy; it is also industrial policy. The very same investments that bolster military deterrence help support industry, innovation, exports, and economic growth.
Through multi-year government procurement contracts—which signal the existence of demand—and the DSRB, which will provide a financing platform, the allies will finally be able to create a properly functioning defense market. It will not replace national defense budgets, but it will increase their effectiveness.
Defense spending will turn into investment. Investment will turn into production. And production will turn into deterrence.
In 1939, Canada became a military-industrial hub not because it spent more money than everyone else. No, it created the institutions, financing mechanisms, and industrial structures that made it possible to transform spending into production.
Fiona Murray,
Professor of Entrepreneurship at the MIT SloanSchool of Management , Chair of the NATO Innovation Fund.
Robert Murray,
Practicing Professor at Johns Hopkins University, Senior Visiting Fellow at the Atlantic Council, former Head of Innovation at NATO, and Honorary Member of the Geostrategy Council.
© Project Syndicate, 2026.
www.project-syndicate.org
