Australia needs a national strategy that explicitly prioritises the integration of small and medium enterprises (SMEs) into its defence industrial base to strengthen sovereign capability and infrastructure resilience.

Despite high-level pledges to build a self-reliant defence industry, Australia too often treats SMEs as an afterthought. This gap matters because modern defence increasingly relies on fast-moving dual-use technologies, such as artificial intelligence, drones, advanced sensors and autonomy. In these areas, startups and SMEs drive innovation.

Without active inclusion of such firms, Australia risks hollowing out its innovation pipeline and supply chains at a time of intensifying strategic competition.

As Assistant Minister for Defence Matt Thistlethwaite recently warned, ‘demand for innovation in defence is both urgent and persistent.’ Meeting that demand will require tapping into the agility of Australia’s best small high-tech firms, not just its established primes.

Building an enduring defence industrial base is not a theoretical luxury but a strategic imperative. The 2023 Defence Strategic Review underscored that Australia had lost its automatic regional tech edge and must field advanced capabilities at pace.

Achieving that will depend on diversifying suppliers. A broader SME base offers more rapid, flexible solutions and redundancy against supply-chain shocks. Australia’s allies already recognise this. For example, the US Congress has long mandated more than US$1 billion annually for the Pentagon’s Small Business Innovation Research program to harness commercial research and development. The US Defence Innovation Unit and National Security Innovation Network routinely open calls to non-traditional suppliers and help scale promising dual-use prototypes. In Britain, the Defence and Security Accelerator has injected nearly £1 billion (A$2.1 billion) in innovation funding into SME‑led ventures and is now establishing an SME support hub and formal spending targets after finding that only 4 percent of defence contracts went to small businesses in 2023-2024.

These programs send a clear message: high-growth SMEs are valued partners, not outsiders.

In contrast, Australia’s procurement and contracting structures still favour legacy primes. Complex requests for tender, heavy certification requirements and fixed‑price contracts put small firms at a disadvantage. The recent ASDEFCON review of defence contracting noted that costly flow-down obligations and slow payment can choke SMEs, recommending simplification of contracts and even mandating payment terms down the supply chain.

In practice, defence projects above the $500,000 threshold mostly involve major suppliers. Even though Canberra increased the direct-award threshold from $200,000 to $500,000 in 2022, many SMEs say they still struggle to navigate complex procurements that are geared towards billion‑dollar platforms and prime contractors. As George Henneke pointed out in a 2023 Strategist article, Australia’s policies effectively ‘push innovation out of defence-focused technologies’ and leave smaller innovators squeezed at the margins.

This prime-centric model means many dual-use innovators end up pursuing civilian markets instead. Yet the Australian example shows what could be possible if barriers were eased. A humanitarian defence package to Ukraine announced in October 2023 included advanced gear from various Australian SMEs: counter-drone jammers from DroneShield; ultrafast metal 3D printers from SPEE3D; mine-clearing detectors from Minelab; and portable X-ray units from Micro-X.

These companies developed cutting-edge technologies with clear defence applications, but mostly on small budgets and commercial cycles. They are capable and globally competitive—as demonstrated by sales and investment—but were only tapped for defence missions because the government intervened. Domestically, however, their progress has been hampered by limited pathways into Australian Defence Force programs. If Australia had a dual-use inclusion strategy, such SMEs would be actively shepherded from prototype to prime‑contract sub-release (and export) rather than left navigating the valley of death alone.

It is not too late to change course. Australia should adopt a dedicated dual-use inclusion strategy that removes systemic barriers and offers SMEs de-risked pathways into defence. This could include clear SME‑first procurement goals and targets as Britain is now doing, a grant program or innovation pipeline explicitly for defence dual-use research and development, and financial tools such as seed grants or low-interest loans to bridge development gaps.

Building on AUKUS Pillar Two initiatives, Australia should also formalise public–private matchmaking forums, where innovators and investors meet Capability Acquisition and Sustainment Group or Advanced Strategic Capabilities Accelerator staff well before formal tenders, signalling demand and funding prospects.

Above all, defence needs more procurement dual-fluency: officers who understand startup timelines and are empowered to team SMEs with primes, such as the US mentor-protege and Defence Innovation Unit Immersive Acquisition programs. Success in allied programs shows that these measures pay off: British firms funded by the Defence and Security Accelerator have raised far more follow-on investment and jobs than initial grants alone.

Australia’s 2023 Defence Strategic Review and US security strategies indicate that integrating commercial tech is now critical to security and protecting national infrastructure. A dual-use inclusion strategy would seize that opportunity, helping our innovative SMEs scale globally while deepening the resilience of national supply chains. For a middle‑sized economy, that means nurturing exports as much as addressing local military needs. By setting clear goals for SME participation and backing them with targeted support, Australia can turn its rich tech sector into a true pillar of defence resilience.