Europe Resumes the Arms Race: What Role for Businesses?

How National Industry Can Respond to the Needs and Opportunities in Defense Innovation

In recent days, we learned that Tekever achieved “unicorn” status in its latest funding round, being valued at over one billion euros. It thus joins an exclusive club of Portuguese companies, including names like Outsystems and Sword Health, while others like Farfetch have exited.

For years, it seemed clear that joining this mythical club required being in the digital applications business. But Tekever has shown that things have changed: a transformative company can also break through. In other words, this club isn’t just for “yuppies” — it’s open, in a way, to “old money” as well.

Of course, Tekever isn’t exactly old (it was founded in 2001), nor is it an ordinary manufacturing firm. It makes drones — and today, drones are at the heart of modern warfare, as we see daily in the news. The increased investor interest in the company, driving up its valuation, is thus a result of Europe waking up to a new geostrategic reality. A reality that doesn’t bode well for the long term but offers intriguing short-term challenges for European businesses.

Reindustrialization and Strategic Investment

In this new context, European countries are implementing policies focused on reindustrialization, reshoring, and technological sovereignty — especially in strategic sectors like energy, semiconductors, and digital technologies. They are also bolstering their technological innovation capacities through increased public investment and industrial protectionism.

At the European level, massive investment strategies are being prepared to enhance innovation and production capabilities in defense and security, notably through the European Defence Fund and the ReArm Europe / Readiness 2030 plan.

These reinforced public investments will not just be for drones, ammunition, or military boots — although all of these are necessary and will benefit industrial companies that had seemed outdated, as happened with Tekever. In an increasingly tech-driven warfare context, the majority of investments will be directed toward artificial intelligence applications, electronics and control systems, advanced materials, and areas of applied research capable of delivering scientific or technical breakthroughs and competitive advantages.

Increased public investment in the economy — more diversified and not solely focused on cutting-edge technologies — will benefit not just industrial sectors but all innovative companies within their respective fields. We may see fewer apps for buying luxury clothes (and unfortunately also fewer for climate change mitigation or promoting sustainable behaviors), but more for cybersecurity and defense systems.

A New Era for European Innovation Programs

The new European framework program for research, development, and innovation — successor to the current Horizon Europe — will take another step toward market orientation. It will evolve into a program focused on competitiveness, shifting away from its roots in basic research funding, and aiming to finance the entire industrial process, from innovation to manufacturing.

This is beneficial for companies, which will see an increase in available funding sources, including for production activities that have so far received little public support.

National programs will inevitably follow suit, increasing support for activities closer to the market, such as demonstration, manufacturing, and even commercialization of equipment and solutions applied in defense, security, mobility, construction, health, and other areas.

Opportunities for (Almost) Every Sector

This major transformation of public support mechanisms will create significant opportunities for companies that know how to position themselves and take advantage of these new programs to innovate, improve, scale, and internationalize their products.

The rearmament and autonomy effort involves virtually everything — from thread for sewing uniform buttons to artificial intelligence algorithms — and can include companies from all sectors, even those that until now considered themselves outside national or European development priorities.

Portugal currently has around 380 companies active in the defense sector, generating revenues of €4.75 billion and accounting for 2% of national exports. The sector consists mainly of tech companies employing around 40,000 people, with wages nearly double the national average (€1,595 vs. €808). These companies supply high-value-added components — such as software, engineering, and system integration — to giants like Rheinmetall, Urovesa, General Dynamics, Airbus, and Embraer.

But Europe’s heightened rearmament efforts could involve many more national companies, in sectors like textiles, health, metalworking, ICT, aerospace, or precision engineering. This will require investment in dual-use technologies (civilian and military), forming partnerships with European clusters, and investing in certification to gain international visibility and trust.

A new Portuguese unicorn could well emerge from unexpected sectors — as long as it performs better and faster than its competitors.

INOVA+ can support companies in this new context by helping identify funding opportunities, develop proposals, and establish strategic partnerships for innovation projects in the defense and security domains.

The Balance Between Defense and Sustainability

In summary, Europe’s arms race is not necessarily bad for businesses — as it never was in the past — and can be particularly promising for industrial companies. However, the management of public support will be crucial. Funding for these new investments has to come from somewhere. Announcing new business incentives means little if they require maintaining or increasing the already heavy tax burden — especially in Portugal — which disproportionately affects SMEs.

We also cannot afford to sacrifice the still incipient investments in sustainability and climate change mitigation, a threat as certain and imminent as any armed conflict.

Balancing increased public investment in defense and other key areas, on one hand, with the need to reform the corporate tax burden, on the other, will only be possible through state optimization, strong governance coordination, and improved public service efficiency — doing more with less. This, in turn, opens up another kind of challenge and opportunity for innovative companies — but that’s a topic for another article.