Source: Local Economies (UK)
Author: Adam Breeze
Date published: 2025-10-09
[original article can be accessed via hyperlink at the end]
The UK’s new Defence Industrial Strategy was published in September, with a headline commitment to increase defence spending to 3%. But what might it mean for inward investment?
Defence is big business. It always has been. And it’s bordering on scandalous that it has been taken for granted for so long by most inward investment agencies.
Defence spends around £30 billion with UK companies and supports more than 460,000 UK jobs. According to ADS, the aerospace and defence trade association, there could be an additional demand of a further 50,000 jobs by 2034/35 thanks to increasing spending.
Many of the major defence companies active in the UK are FDIs from the US and Europe: Lockheed Martin; Raytheon; Thales; Northrop Grumman; Boeing; General Dynamics; L3Harris; Leonardo; Rheinmetall and MBDA. Many of the ‘next big things’ in defence tech are emerging from niche clusters in Bavaria; Adelaide; Seoul; Tallinn, and of course, the brave battlefield innovators of Ukraine. If you aren’t tracking these companies, you’re behind the curve.
The headlines around the new UK strategy focused on warships, fighter jets, and national security. But buried in the detail is something far more interesting for economic development practitioners: the return of ‘Industrial Participation’ as it is known, or as the market calls it, ‘Offsets’.
“We have seen offsets work effectively to boost the economic benefit from procurement spend in other countries, for example Australia, Norway and Korea. Learning from their success, we will build a model to attract inward investment that works for the UK.”
As geopolitical volatility collides with a government desperate to deliver growth, the UK is belatedly waking up to what savvy nations have known for years: defence procurement isn’t just about buying kit, it’s about building robust industrial ecosystems.
Offsets Explained
Strip away the jargon, and offsets are simple. As Paul Mason, defence expert at the Council on Geostrategy explains,
“Offsetting works like this: if the MOD can’t find a British supplier on a mid-to-large size programme, there will be a rule mandating that the winning bid – say a South Korean maker of howitzers – has to create economic value in the UK to a high percentage of the project’s total value, by agreement with an offsetting unit.”
Two flavours exist. Direct offsets are defence-specific: co-production agreements, licensed manufacturing, maintenance facilities. Indirect offsets are broader: setting up factories, funding R&D centres, training workforces, or committing to local supply chains.
Offsets transform defence procurement from a cost centre into a growth engine. Done right, they create jobs, transfer technology, build sovereign capabilities, and de-risk reliance on volatile global supply chains. Done badly, they’re box-ticking exercises that deliver little and serve only to distort the market.
As Deborah Cheverton of the Atlantic Council warns:
“US-owned companies are right to be concerned that an overly prescriptive and inflexible offset strategy could be counterproductive. The US government regards offsets as market distorting, and critics of the approach argue that offsets encourage inflation and inefficiency. There is, however, little reason to believe that the United Kingdom will go down that road. By calling out Australia’s relatively flexible and pragmatic approach as the inspiration, and by openly acknowledging the risks involved, the United Kingdom has signaled that it intends to move carefully.”
The UK’s offsetting process is expected to be launched in early 2026, with Secretary of State for Defence John Healey saying that: “when we take a decision to buy abroad from allies, as we will, the UK’s economy will nevertheless be strengthened in return. New jobs, double technologies or investments. So that when we spend pounds abroad, we can also make Britain stronger at the same time.”
The Global Playbook
The UK Government is looking at global best practices in creating a new framework. Here’s a few examples of how offsetting works around the world:
Australia provides a world-class example of how a nation uses defence procurement to build its own sovereign capability. The best example is the programme to build Hunter-class frigates for the Royal Australian Navy. A 50% Australian Industry Capability (AIC) threshold meant that BAE Systems had to become an anchor investor in Australian industry, transferring skills and creating a self-sustaining defence manufacturing cluster.
Canada‘s Industrial and Technological Benefits Policy requires defence contractors to undertake business activity in Canada equal to 100% of the contract value. This is managed through a points system that incentivises spending in high-growth, innovation-heavy areas like R&D, advanced manufacturing, and regional SME development.
India runs one of the most aggressive offset regimes globally. Contracts above $70 million trigger a 30% offset requirement. When India bought Rafale jets from France, Dassault committed to sourcing components from Indian suppliers and establishing joint ventures resulting in tech transfer, local manufacturing capability and thousands of skilled jobs.
Poland takes a different tack, prioritising economic impact over defence-specific outcomes. When buying Patriot missile systems from the US, Poland secured commitments for Raytheon to establish production facilities and integrate Polish firms into global supply chains creating local jobs and embedding Poland as a critical node in NATO’s defence industrial network.
South Korea uses offsets to advance technology. Every major purchase includes mandatory tech transfer clauses. South Korea now exports advanced weapons systems globally, built on foundations laid through offset agreements.
The pattern is clear. Countries leveraging offsets aren’t passive buyers, they’re strategic investors using procurement to build capabilities, attract FDI, and position themselves in global value chains. More than 50 developed nations currently run offset or industrial participation schemes. The UK, until now, was conspicuously absent from that list.
The defence sector has been lobbying for this shift. Make UK Defence, representing over 700 SMEs in the sector, has spent months campaigning for exactly this change of direction, arguing that offset schemes could allow up to 90% of the economic value of overseas defence contracts to flow back into the UK economy over ten years.
This really matters for FDI. The increase in defence spending has the potential to create market conditions that attract global primes to establish UK operations, invest in R&D centres, and anchor supply chains here. If the UK signals that winning MOD contracts requires meaningful industrial participation such as co-production, technology partnerships, skills investment, then the UK becomes a far more attractive destination for defence multinationals.
For inward investment professionals, this is the opportunity.
Defence is no longer a niche sector, it’s the golden key that can unlock opportunities in advanced manufacturing, frontier tech, and high-value supply chains and can drive economic growth in every region – both directly and indirectly.
5 Things IPAs Can Do
To win these offset-driven investments, your city must start to think about the shift from general economic development to specialised defence readiness. This is the only way to be visible to the prime contractors.
– Conduct a Deep Defence Supply Chain and R&D Audit
Catalogue every SME, every university lab, and every piece of specialised engineering. Create a Capability Matrix to hand directly to potential inward investors.
– Plan a Defence-savvy Talent Pipeline
Partner with local institutions to accelerate defence-accredited training and simplify security clearance pathways. Talent acquisition is the biggest risk for these firms; you must de-risk it.
– Establish ‘Secure-by-Design’ Investment Sites
Identify and zone industrial land that already meets or can easily comply with security and cyber resilience standards suitable for defence manufacturers.
– Master the MOD Policy Loop
Have a single point of contact who understands Industrial Participation rules. Show the prime contractor exactly how your city will fast-track MOD approval for their offset commitments.
– Execute Proactive and Targeted Relationship Building
Stop sending brochures. Start tracking global defence procurement wins and pitch your place as the optimal, pre-vetted solution to their offsetting obligations.
Ask Adam about how Breeze Strategy can help you.
Adam Breeze is an inward investment consultant based in Manchester, UK.
He has worked with NATO and government agencies in the UK, USA, Canada and Germany. He advises defence, aerospace and nuclear companies on international expansion; represents the State of Tennessee in the UK (including at defence events like DSEI and Farnborough Air Show) and has recently developed defence sector propositions for Invest Staffordshire and Solent Freeport.
View original article at:
https://inwardinvestment.substack.com/p/defence-offsets-fdis-secret-weapon