The Two Faces of Innovation: Rise and Change of the Dual-Use Sector in Germany and Europe

### From smartphone to weapon: This everyday technology has a double life ### Putin's war as a booster: Why billions are now flowing into German tech companies with double lives ### Not just tanks and rifles: How civilian start-ups are turning modern defense on its head ### The "turning point" in the tech sector: Germany's delicate balancing act between innovation and armament ### Two-faced progress: The dangerous dilemma behind the most important technologies of our time ###

The new relevance of dual-use technologies – definition and historical development of the term

The term "dual-use" refers to goods, software, and technologies that can be used for both civilian and military purposes. This dual use is not a new phenomenon, but the concept and its strategic significance have fundamentally changed over time. Originally, after World War II, the term referred to a narrowly defined area: fissile material that could be used both to generate energy in civilian nuclear power plants and to build nuclear weapons. This early definition was reactive and primarily served to control a state-developed, highly sensitive technology. Historically, however, the dilemma of dual use goes back even further. A striking example from the time before the term was coined is the Haber-Bosch synthesis of ammonia, which, on the one hand, revolutionized agriculture through artificial fertilizer, but on the other hand, enabled the mass production of explosives and chemical weapons in the First World War.

Today, the meaning of dual-use has expanded dramatically. It encompasses a wide range of commercial products and technologies that could potentially be misused for military purposes, the production of weapons of mass destruction, or terrorist activities. Controls are no longer limited to physical goods. They explicitly extend to intangible assets such as software and technical know-how, which can be transferred via digital channels such as email, cloud storage, or video conferencing. This expansion reflects the reality of a digitized and networked world in which technological capabilities are no longer necessarily tied to material objects.

The paradigm shift: From “spin-off” to “spin-on”

The growing importance of the dual-use sector is inextricably linked to a fundamental paradigm shift in the global innovation landscape. During the Cold War, the defense industry acted as the primary driver of technological progress. Groundbreaking inventions such as the Global Positioning System (GPS), microwave technology, and digital photography emerged from military research and development and were only later adapted for the civilian market – a process known as "spin-off." The state and its defense companies were the undisputed innovation leaders.

After the end of the Cold War, this dynamic increasingly reversed. Today, the private, commercial sector drives the majority of research and development, particularly in key areas such as artificial intelligence, biotechnology, and information technology. Military organizations are now increasingly dependent on adapting and integrating these commercially developed technologies for their own purposes. This reverse process is known as "spin-on." This development has far-reaching consequences: Armed forces are no longer the sole drivers of innovation but are becoming customers in a dynamic civilian market. They must learn to deal with agile start-ups and fast-moving technology cycles that differ significantly from the traditional, lengthy procurement processes of the defense industry.

Dual-use as a strategy: More than just a product category

This changing innovation dynamic has led to "dual-use" becoming far more than just a regulatory classification for export control purposes. For a growing number of companies, especially technology-oriented startups and their investors, it has become a conscious and central business strategy. Instead of passively being classified as dual-use producers by authorities, these companies are actively positioning themselves in both markets – the civilian and the government-military.

Pursuing a dual-use strategy means making conscious decisions and compromises. It involves designing products from the ground up to meet the needs of both customer groups. This requires a deep understanding of the often very different procurement cycles, regulatory hurdles, and financing mechanisms of the commercial and military worlds. For a startup, this strategy can open up access to a broader range of financing sources, from venture capital to government funding programs and defense contracts. At the same time, it enables diversification of revenue streams and reduces dependence on a single market. The semantic and strategic transformation of the term "dual-use" is thus no coincidence, but a direct consequence of the changing global research and development landscape. Its meaning has evolved from a top-down control mechanism to a bottom-up market strategy, reflecting the shift in innovation leadership from the state to the private sector.

Growth drivers of a booming industry

The rise of the dual-use sector from a niche to a strategic focus for governments, investors, and companies is driven by a convergence of several powerful forces. These are creating an environment in which the demand for and supply of dual-use technologies are growing exponentially.

Geopolitical tensions as a catalyst

The most important demand-side driver is the deteriorating global security situation. The return of strategic competition between major powers, particularly between the US and China, as well as the war in Ukraine, have fundamentally changed the perception of security in Western democracies. After decades of relative stability, NATO and EU states are faced with the need to rapidly modernize their defense capabilities and secure technological superiority. This urgency has created massive demand for innovative solutions in areas such as artificial intelligence, autonomous systems, and advanced communications – capabilities where commercially developed technologies are often more agile, advanced, and cost-effective than traditional defense equipment. The conflict in Ukraine serves as a living laboratory, impressively demonstrating the value of adaptable, software-driven dual-use systems such as drones and AI-assisted reconnaissance.

Rising defense budgets and new sources of funding

The geopolitical upheavals have led to concrete financial consequences. Governments across Europe have drastically increased their defense spending. Germany has doubled its military procurement budget, while the EU has allocated €1.5 billion for defense-related research and development in 2024 alone through initiatives such as the European Defense Fund (EDF). A particularly significant step was the establishment of the NATO Innovation Fund, which, with €1 billion in capital, specifically invests in dual-use start-ups in member states. These public funds create an attractive and well-financed market, which in turn attracts private capital. Initiatives such as Horizon Europe and the EDF are increasingly prioritizing dual-use potential in their funding allocations, further strengthening the synergies between civilian innovation and security policy objectives.

The role of start-ups and venture capital

On the supply side, agile start-ups are primarily challenging the traditional defense industry, dominated by a few large arms companies. These young companies are able to quickly adapt innovations from the commercial sector and adapt them to military requirements. This trend is fueled by a growing willingness of venture capitalists (VCs) to invest in the sector. 54 VC funds were identified worldwide that explicitly specialize in dual-use technologies. The geographical distribution of these funds is revealing: Almost half (48%) are based in the USA, followed by the UK (11%). Notably, 15% are located in Ukraine, the Baltic states, and Eastern European countries such as Poland and the Czech Republic – a direct reflection of the increased security urgency in these regions.

These developments have set in motion a self-reinforcing dynamic. Geopolitical risks create a clear demand impetus for new military capabilities. Governments respond with massive public investments, creating a lucrative market. This market, in turn, reduces risk for private investors who have traditionally shied away from the long and bureaucratic sales cycles in the defense sector. The now-flowing venture capital funds agile start-ups that develop cutting-edge technologies, which are then sold to governments to meet the original demand. This cycle, in which geopolitical risk is directly converted into venture capital and technological innovation, is creating a new, transatlantic defense industrial ecosystem that exists parallel to and increasingly influences traditional procurement channels.

The legal framework: control and complexity in Germany and the EU

The growing importance of dual-use technologies is accompanied by a complex and constantly evolving regulatory environment. States and international communities face the challenge of enabling legitimate trade and promoting innovation while simultaneously preventing the proliferation of technologies that could endanger international security or be misused to violate human rights.

The EU Dual-Use Regulation 2021/821

The central legal instrument for controlling the export of dual-use items in the European Union is Regulation (EU) 2021/821. This regulation, which replaces its predecessor from 2009, establishes a common system for controlling the export, brokering, technical assistance, transit, and transfer of dual-use items. Its primary objective is to contribute to international peacekeeping and prevent the proliferation of weapons of mass destruction.

At the heart of the regulation is Annex I, a comprehensive list of controlled goods based on internationally agreed control regimes such as the Wassenaar Arrangement. A license is required for the export of goods included on this list from the EU customs territory. The regulation provides for various types of license to meet the diverse needs of trade:

General Union Export Authorisations (EUGEAs): These allow the export of certain goods to certain countries (e.g. Australia, USA, Japan) under specified conditions, thus simplifying trade with trusted partners.

National General Export Authorisations (NGEAs): Member States may issue their own general authorisations, provided they are compatible with the EUGEAs.

Global and individual licenses: These are issued by national authorities for specific exporters and transactions and allow exports to multiple end-users (global) or to a specific end-user (individual).

Large-scale project permits: A special form for exports within the framework of large-scale projects.

A key innovation in the 2021 regulation is the increased consideration of human rights aspects. It introduces new controls for certain cyber-surveillance technologies that could be used for internal repression or to commit serious human rights violations. The regulation also requires exporters to conduct due diligence on their transactions and maintain detailed records for a period of five years.

National implementation in Germany: AWG and AWV

In Germany, the European legal framework is implemented and supplemented by national laws. The central provisions are the Foreign Trade Act (AWG) and the Foreign Trade Ordinance (AWV) based on it. The AWG establishes the basic framework that foreign trade is free, but can be restricted for reasons of national security, public order, or to fulfill international obligations.

The specific licensing requirements and procedures are regulated in the Foreign Trade and Payments Ordinance (AWV). The authority responsible for issuing licenses and enforcing the regulations is the Federal Office of Economics and Export Control (BAFA). BAFA reviews applications, grants licenses, and monitors compliance with the complex regulations. Germany is known for its strict application of the EU regime, with particular attention to controlling the transfer of intangible technological knowledge.

National expansions and the challenge of new technologies

A crucial aspect of the EU system is that it allows member states to introduce national controls for additional goods beyond the common EU list. Germany exercised this option in July 2024 and expanded its national export list (Part I, Section B of the AWV) to include a number of so-called "emerging technologies." These now include, among others, certain quantum computers and their components, specific semiconductor manufacturing equipment, and advanced AI systems.

This step highlights a fundamental tension in the European export control system. While the EU Commission is striving for a harmonized approach to avoid a regulatory patchwork, individual member states are forced to proceed unilaterally due to rapid technological development and acute security concerns. The speed at which technologies such as AI and quantum computing are advancing exceeds the adaptability of the often slow, consensus-based international control regimes. National unilateral actions such as the German one are therefore a logical, albeit challenging for the internal market, response to a security dilemma in which waiting for an international consensus is perceived as too risky. Here, the law itself becomes a strategic instrument in the race for technological security.

International Regimes: The Wassenaar Arrangement

At the global level, the Wassenaar Arrangement is the most important multilateral agreement for controlling the export of conventional arms and dual-use goods. It was established in 1996 as the successor to the Cold War-era COCOM regime and currently has 42 member states. Unlike COCOM, which was specifically directed against the Eastern Bloc, the Wassenaar Arrangement is not directed against any specific state. Its primary purpose is to promote transparency and greater accountability in arms transfers to prevent destabilizing accumulation of weapons.

Member states voluntarily commit to subjecting goods listed on common lists (munitions list and dual-use list) to national export controls and to inform each other of the approval or rejection of exports to specific countries. However, this arrangement has critical weaknesses: it is not legally binding, decisions are made by consensus, and there is no veto mechanism. If one member state rejects an export, another can still approve it. In a time of increasing geopolitical confrontation, this consensus-based approach is proving increasingly ineffective, further reinforcing the tendency toward unilateral or minilateral measures among like-minded states.

Hub for security and defense – Image: Xpert.digital

The hub for security and defense offers well-founded advice and current information in order to effectively support companies and organizations in strengthening their role in European security and defense policy. In close connection to the SME Connect working group, he promotes small and medium -sized companies (SMEs) in particular that want to further expand their innovative strength and competitiveness in the field of defense. As a central point of contact, the hub creates a decisive bridge between SME and European defense strategy.

Suitable for:

• The Working Group Defense of the SME Connect – Strengthening SMEs in European defense

Technology fields in focus: The 5 building blocks of modern defense

The blurred boundary between civilian and military technology is most evident in the key technology fields of the 21st century. These areas determine not only the economic competitiveness but also the strategic capability of states.

Overview of important dual-use technology fields

Overview of important dual-use technology fields – Image: Xpert.Digital

Artificial Intelligence (AI) and Autonomous Systems

Artificial intelligence is arguably the most striking example of a profound dual-use technology. In the civilian sector, it is driving innovations in medical diagnostics, autonomous vehicles, and financial analysis. The same algorithms that recognize patterns in medical images can also be used to analyze satellite images for target identification. In the military, AI enables the development of autonomous weapons systems, accelerates the analysis of massive amounts of data for reconnaissance, and can drastically shorten decision cycles in combat operations. The ability of AI to operate independently in complex and dynamic environments is central to both civilian robotics and military drones and unmanned vehicles.

Unmanned systems: drones and robotics

Unmanned aerial vehicles (drones) and ground robots have become indispensable in both worlds. In civilian applications, they are used to inspect wind turbines and pipelines, in precision agriculture to monitor crops, and in search and rescue operations after natural disasters. In the military context, they have revolutionized the battlefield. They are used for discreet intelligence, surveillance, and reconnaissance – ISR), conduct precision strikes, transport supplies to the front line, and can be used to defuse explosive devices. The ability to operate drones in networked swarms opens up entirely new tactical possibilities that are relevant for both civilian logistics and military saturation attacks.

Space technology and satellites

Space technologies are inherently dual-use. The Global Positioning System (GPS), originally a purely military system, is now the basis for countless civilian applications, from car navigation to logistics control. Satellites provide data for weather forecasting and climate research, but also enable military reconnaissance and serve as early warning systems for missile attacks. Satellite communications are essential for the global internet and media transmission, as well as for secure communications and control of military units worldwide.

Biotechnology and Synthetic Biology

Biotechnology holds enormous potential for human health and agriculture, for example, through gene-editing tools like CRISPR-Cas9 for treating genetic diseases or developing new medicines. At the same time, it raises significant security concerns. The same techniques used to create cures could theoretically also be misused to develop novel, highly dangerous biological weapons. Synthetic biology, which allows organisms to be engineered from scratch, exacerbates this dilemma, as it could facilitate the manufacture of known pathogens or the creation of entirely new ones.

Quantum technology

Quantum technology is on the cusp of practical application and promises to revolutionize the fields of computing, communications, and sensing. Quantum computers could solve complex problems intractable for today's supercomputers, potentially leading to breakthroughs in materials science and drug development. At the same time, their immense computing power poses an existential threat to current cryptography, as they would be capable of breaking common encryption standards. Quantum communication, on the other hand, promises essentially secure data transmission through methods such as quantum key distribution (QKD). Quantum sensors could enable navigation without GPS or drastically improve the tracking of submarines, which would change the strategic balance on the world's oceans.

Prominent Players: The German Dual-Use Landscape in Detail

The German and European dual-use landscape is characterized by a two-tiered ecosystem. On the one hand, there are new, highly specialized, software-driven startups that are shaking up the market with agile solutions. On the other hand, there are established industrial giants that provide the fundamental underlying technologies and platforms that make many of these new applications possible.

The new challengers: software and AI-driven start-ups

Helsing

Founded in Munich in 2021, the company has quickly become one of the most prominent players in defense AI in Europe. Helsing pursues a consistent "software-first" approach. Instead of primarily developing new hardware, the company focuses on enhancing existing military platforms such as the Eurofighter fighter jet with AI-powered software and equipping new unmanned systems with superior intelligence. Its core products include Centaur, an AI system for autonomous air combat that has already successfully flown a Gripen jet; Cirra, an AI software for analyzing radar signals for electronic warfare; Altra, a networked reconnaissance and response platform that fuses data from drones and ground sensors to accelerate targeting; and the HX-2, a software-defined attack drone capable of operating precisely even in environments without GPS reception and under severe electronic interference. With a valuation of over €12 billion following a €600 million financing round in 2025 and strategic partnerships, such as with the French AI company Mistral AI, Helsing is positioning itself as a European champion for technological sovereignty in the AI field.

Quantum Systems

Also based near Munich, Quantum Systems is a leading manufacturer of unmanned aerial systems (UAS) that pursues a clear dual-use model. The company develops and produces electrically powered vertical take-off and landing (eVTOL) drones designed for both military and civilian customers. Its flagship, the Vector drone, has proven itself in service in Ukraine as a robust reconnaissance system that, thanks to AI support, can navigate and identify targets even in GPS-denied environments. At the same time, the company's drones are used by commercial customers in agriculture to monitor fields, in mining for volume calculations, and by energy suppliers to inspect power lines. This dual focus allows Quantum Systems to leverage innovations from both markets and achieve economies of scale.

ARX Robotics

This company specializes in unmanned ground vehicles – UGVs) and impressively demonstrates the dual-use potential of land robotics. The GEREON platforms are modular and can be configured for a variety of missions. In a military context, they are used to transport supplies and injured soldiers (MedEvac), for reconnaissance and surveillance, or as mobile weapons platforms. Their robustness and autonomous capabilities were also demonstrated in the Ukraine war. However, the same robots can be seamlessly deployed in civilian and humanitarian scenarios, such as delivering relief supplies to disaster areas, fighting fires, or conducting search and rescue operations.

The established giants: Fundamental enabling technologies

Siemens

As a global technology group, Siemens is not a traditional defense company, but a fundamental pioneer for the dual-use sector. Its core competence lies in the provision of industrial software and digitalization solutions. The concept of the digital twin is central to this. It enables complex physical systems – from a single machine to an entire factory, aircraft, or ship – to be virtually mapped, simulated, and optimized before they are actually built. This technology is used to increase efficiency in civilian manufacturing as well as to modernize entire US Navy shipyards, the largest known industrial digital twin project. With its Product Lifecycle Management (PLM) software such as NX and Teamcenter, Siemens provides the digital backbone for the development of complex products in the aerospace and defense industries.

Bosch

Similar to Siemens, Bosch is a key supplier of basic technologies with inherent dual-use characteristics. MEMS (microelectromechanical systems) sensors play a key role here. These tiny sensors, which measure acceleration, angular rates, or pressure, are now ubiquitous in automotive electronics (e.g., for airbags and ESP) and consumer electronics (e.g., in smartphones for image stabilization). However, these same high-precision and robust sensors are also essential components in military systems. They are used for the navigation and stabilization of drones, in the guidance of missiles and smart munitions, and in avionics systems. Even though Bosch does not primarily develop its MEMS sensors for military purposes, their performance and reliability are crucial for the defense sector.

airbus

As one of the world's largest aerospace companies, Airbus is a prime example of a company strategically implementing dual-use in its platforms. A prominent example is the Airbus A330 MRTT (Multi-Role Tanker Transport), which is based on the civilian A330 passenger aircraft and is being converted into a versatile military aircraft for aerial refueling, troop and cargo transport, and medical evacuations. Airbus is pursuing a similar strategy in the space sector. The high-resolution Earth observation satellites of the Pléiades Neo constellation provide imagery with a resolution of 30 cm. This data is used by commercial customers for applications such as urban planning, agriculture, and disaster management, as well as by governments and defense ministries for intelligence gathering and mission planning.

Profile of selected German dual-use companies

Profile of selected German dual-use companies – Image: Xpert.Digital

Dual-use logistics expert – Image: Xpert.digital

The global economy is currently experiencing a fundamental change, a broken epoch that shakes the cornerstones of global logistics. The era of hyper-globalization, which was characterized by the unshakable striving for maximum efficiency and the “just-in-time” principle, gives way to a new reality. This is characterized by profound structural breaks, geopolitical shifts and progressive economic political fragmentation. The planning of international markets and supply chains, which was once assumed as a matter of course, dissolves and is replaced by a phase of growing uncertainty.

Suitable for:

• Strategic resilience in a fragmented world through intelligent infrastructure and automation – The requirements profile of the dual-use logistics expert

Economic and social dimensions

The growing dual-use sector is not only a technological and security policy phenomenon, but also has profound economic and societal implications. In Germany in particular, a complex dynamic is unfolding between economic opportunities, structural challenges for new companies, and deep-rooted public skepticism.

The dual-use sector as an economic factor for Germany

The German security and defense industry, which also includes many dual-use companies, is a significant economic factor. In 2024, the German aerospace industry, a core segment of the sector, generated revenue of €52 billion and employed 120,000 people. The entire German defense industry generated revenues of just under €11.3 billion in 2020. Studies, such as those by the Kiel Institute for the World Economy, suggest that increased and targeted defense spending can have significant positive effects on gross domestic product. Particularly when investments are made in domestic, high-tech defense equipment, so-called "spillover" effects can occur: Technological advances from defense research diffuse into other sectors of the economy and increase productivity there. An increase in military spending of 1% of GDP could therefore increase long-term productivity by a quarter of a percent. This economic perspective is a central argument for the politically driven expansion of national and European defense capabilities.

The “Valley of Death”: Challenges for startups

Despite increased investment and the sector's strategic importance, innovative startups in particular face significant hurdles. The so-called "Valley of Death" describes the critical phase in which a startup, after successful pilot projects and initial financing, struggles to secure long-term, large-scale contracts and transition to series production. The reasons for this are manifold:

Lengthy procurement processes: Government procurement cycles are often slow, bureaucratic, and geared toward collaboration with established corporations. This system is difficult to navigate for startups with short innovation cycles and limited financial resources.

Risk aversion: Military clients are often risk-averse and reluctant to rely on young, financially less stable companies, even if their technology is superior.

Scaling issues: Most startups lack the infrastructure for mass production of hardware. The step from prototype development to manufacturing thousands of units represents a massive financial and logistical challenge.

These structural problems mean that promising innovations often do not find their way into widespread use in the armed forces and companies fail before they can realize their full potential.

Public perception and the German debate

Germany's strategic realignment, often discussed under the slogan "Zeitenwende," is encountering a society in which the arms industry traditionally has a negative image. Surveys reveal deep-rooted skepticism among the population, particularly toward arms exports. A 2018 YouGov survey found that almost two-thirds of Germans support a complete ban on all arms exports. Even though public opinion has become more nuanced since the attack on Ukraine, fundamental opposition remains widespread.

This societal attitude also has institutional consequences. A striking example is the debate surrounding so-called "civilian clauses" at German universities. Over 70 publicly funded universities have committed themselves in their constitutions to conduct research exclusively for civilian purposes and to reject any military-related research. This "strong wall" between civilian and military research, which is increasingly being questioned by some politicians, such as the Federal Minister of Education and Research, stands in stark contrast to the innovation model in countries such as the USA or Israel, where close collaboration between universities, start-ups, and the defense sector is a key driver of technological progress. This gap between political ambition and social and institutional reality represents a significant hurdle for the development of a dynamic dual-use ecosystem in Germany. The success of this "turning point" thus depends not only on financial resources and technological expertise, but also on the ability to overcome this deep-seated cultural and institutional inertia.

Future developments and strategic challenges

The dynamics in the dual-use sector will continue to accelerate in the coming years. The convergence of disruptive technologies, the associated ethical issues, and the overarching struggle for strategic sovereignty will significantly shape the political, economic, and societal agenda.

The convergence of technologies: AI, quantum and biology

The future of dual-use technology lies not in the isolated development of individual fields, but in their increasing merging. The combination of artificial intelligence, quantum computing, and synthetic biology will produce capabilities whose potential and risks can only be partially foreseen today. Imagine autonomous drone swarms whose collective behavior is optimized by quantum algorithms to solve complex tasks in logistics or on the battlefield. Or the combination of synthetic biology with AI to develop biosensors that can detect diseases early or track down chemical warfare agents. This convergence will push the boundaries of what is possible, but also create new, complex threat scenarios that require forward-looking and interdisciplinary regulation.

The ethical dilemma: responsibility in innovation

With the growing power of these technologies, the "dual-use dilemma" is moving to the center of the ethical debate. It describes the irresolvable contradiction that research and innovation aimed at achieving good – such as curing diseases or increasing efficiency – simultaneously carry the potential for catastrophic misuse. This paradox presents researchers, companies, and governments with difficult decisions.

Ethical challenges are becoming particularly acute in the field of artificial intelligence. The use of commercial data collected online to train AI systems that are later used for military target acquisition raises fundamental questions of data protection and human dignity. Algorithms can inherit biases from their training data and make discriminatory decisions. A faulty AI system on the battlefield could lead to devastating civilian casualties. The call for transparency, accountability, and robust governance structures is therefore growing louder. It's about ensuring that humans retain control over critical decisions even in highly automated systems and that ethical principles are firmly embedded in the technology.

Strategic sovereignty in the 21st century

Ultimately, the debate about dual-use technologies boils down to the overarching question of strategic sovereignty. For Germany and Europe, the ability to develop, produce, and deploy critical technologies themselves has become a matter of survival in global competition. It's about reducing dependence on geopolitical rivals and securing one's own ability to act in an uncertain world.

Promoting a strong and innovative dual-use sector is a key component of this. However, this requires a challenging balancing act: Innovation must be fostered without neglecting security risks. Economic growth must be reconciled with ethical responsibility. And the strategic imperative must be debated in an open society and legitimized through public acceptance. The path to the technological future requires not only engineering skill and capital, but also political foresight, regulatory wisdom, and a broad societal dialogue about the two faces of innovation.

Markus Becker

I would be happy to serve as your personal advisor.

Head of Business Development

Chairman SME Connect Defense Working Group

LinkedIn

Konrad Wolfenstein

I would be happy to serve as your personal advisor.

contact me under Wolfenstein ∂ Xpert.digital

call me under +49 89 674 804 (Munich)

LinkedIn