The FDI angle:

  • Greenfield foreign direct investment (FDI) in the space and defence industry hit an all-time high in 2023.
  • This is driven by demand for ammunition and weapons in Ukraine and to arm Western militaries.
  • Defence budgets in European Nato members and Canada hit a record high last year.
  • Why does this matter? Conflict has made previously shunned investment by the defence industry more sought after by locations.

Space and defence companies announced a record number of greenfield FDI projects last year, as western governments spend more on defence to supply Ukraine and their militaries amid concerns about further Russian aggression and a Nato-sceptic Donald Trump being re-elected as US president.

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More than $2.6bn was pledged to 100 FDI projects by companies in the space and defence industry in 2023, according to fDi Markets, up from $1.09bn across 60 projects a year earlier. This was more than any average across previous five-year periods and the highest capex and projects ever recorded since the database began tracking greenfield FDI in 2003.

Heightened geopolitical tensions and conflicts have increased weapons demand and changed investor perceptions of the defence industry’s environmental, social and governance credentials. “The evolving security landscape prompts a shift to consider defence as a fundamental precondition for a free and fair society,” says Stuart Dee, a researcher in defence and security at Rand Europe, a non-profit organisation.

FDI into space and defence involves varied activities from the manufacture of weapons, ammunition and drones to research and development (R&D) into robotics, satellites and technologies used in modern warfare. Among the most active defence investors last year were Israeli drone maker Elbit Systems, defence contractors such as the UK’s BAE Systems and France’s Thales Group and Saab, the Swedish maker of anti-tank weapons. 

More on conflicts and their impact on investment:

Germany’s Rheinmetall is also investing billions to expand its capacity to produce ammunition, tanks and air defence systems. In February, the company pledged €300m to a new factory in Germany. It is investing elsewhere such as Spain, Hungary, Italy, South Africa, Romania and Ukraine.

A Rheinmetall spokesperson tells fDi that for large investments, like those in new plants, the defence industry needs long-term contracts and purchase guarantees. The company received €10bn-worth of orders from the German federal government in 2023 alone and expects around €15bn or more this year. 

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“This is why Rheinmetall is investing heavily in the production of artillery rounds, powder and explosives,” said the spokesperson, who adds the company has invested about €3bn into Germany’s so-called Zeitenwende. This is the historic change in the country’s defence policy, which includes a €100bn fund to build out Germany’s army, announced in 2022 after Russia’s invasion of Ukraine.

Countries in the US-led Nato military alliance have greatly increased their defence budgets since the Ukraine war began. In 2023, real defence spending in European members and Canada rose by 11% to an all-time high of $369bn, according to Nato figures. Eighteen of the 31 Nato members are expected to meet the defence spending target of 2% of their gross domestic product in 2024, up from just three members in 2014.

Government funding into equipment, which Nato recommends should be at least 20% of their defence budget, is key for the defence industry, says Fenella McGerty, a senior fellow for defence economics at the International Institute for Strategic Studies. But the surge in demand for weapons from governments providing military support to Ukraine and needing to backfill inventory has also exposed gaps in arms production.

“The level of investment required to increase production can also be off-putting in an environment where the security of demand is not guaranteed,” adds Ms McGerty. “Rapid increase in arms production is being inhibited by supply chain challenges and recruitment difficulties.”

The ramp-up in defence FDI and European defence budgets comes at a time of intense scrutiny. The self-proclaimed Nato-sceptic, Donald Trump, the  Republican nominee in the upcoming 2024 US presidential election, had previously threatened to withdraw from Nato over concerns about European countries not spending enough on defence. In February, Trump told a campaign rally in South Carolina that Russia can do “whatever the hell they want” if Nato members failed to meet defence spending targets. 

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