This article originally appeared on Aviation Week.
The defense industry has a long history of innovation. Government funding has fueled the industry’s innovation engine, from advanced battlefield technologies to those ubiquitous to modern-day life. For decades, these innovations took place largely within contractors’ four walls, but this model alone no longer works.
After peaking in the late 1980s, research, development, test and engineering budgets had experienced a 20% real decline by the 9/11 attacks. The war on terror led to a temporary spending boom, but congressional budget restrictions and the need to recapitalize continue to put pressure on spending, just as emerging threats are driving the need to innovate.
At the same time, most other industries are pushing new boundaries. The commercial sector now massively outspends the defense industry in research and development (R&D), in absolute and relative terms. Beginning in 1980, U.S. businesses surpassed the government in R&D spending for the first time. Since then, investment growth by businesses has outpaced that of the government by three times. In 2016, Alphabet, Intel and Microsoft spent a combined $39 billion on R&D, averaging 17% of revenue. This was higher than that of the entire global aerospace and defense sector, which spent shy of $30 billion, merely 4% of revenue.
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Michael Goldberg is a partner at the management consulting company Bain & Co., based in Los Angeles. Jim Harris is a Bain partner based in Washington. Both are leaders in Bain’s Aerospace and Defense Practice.