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Small Businesses Aren’t Getting Enough Defense Work. Here’s How to Help Them.

State and local economic development organizations can ease barriers to defense contracting for local businesses, benefiting both companies and communities.

A U.S. fighter jet
Department of Defense
Rebuilding the arsenal of democracy is not easy. As the United States has sought to respond to a growing demand for military assistance from allies and partners around the world, its national defense industrial base has strained to keep up. Not coincidentally, this follows a dramatic decline in the ranks of small-business defense contractors in recent years. According to data from the Small Business Administration, the number of small businesses participating in defense contracting fell by 32 percent between fiscal years 2014 and 2023.

This national challenge offers state and local economic developers an attractive opportunity. In this new era of defense buildup, joining the defense supply chain can bring new revenues to companies and their regional communities. Economic developers can serve both local and national interests by implementing strategies that reduce the barriers to entry for small businesses into the defense industrial base.

Recent surveys of defense suppliers illuminate some of the most significant barriers. In the National Defense Industrial Association’s 2024 Vital Signs survey, for example, 66 percent of small-business respondents identified the complexity of federal acquisition processes as a major challenge to bidding on defense contracts. Writing in the Texas National Security Review, defense technology entrepreneurship researchers Jeff Decker and Noah Sheinbaum reported similar findings from their survey of defense technology innovators. They found that pluralities want better assistance with meeting Department of Defense (DoD) program managers, achieving compliance with licensing and certification requirements, and obtaining access to secure facilities and personnel.

Economic development organizations (EDOs) can help lower barriers to local firms’ participation in defense contracting through targeted assistance. For example, setting up meetings between prospective suppliers and defense program managers, who are key decision-makers on contract awards, can help the suppliers better understand DoD’s contracting needs, identify awards to bid on and provide program managers with insight on the implications of project specifications.

Additionally, EDOs can help companies connect with a broad network of support services for new entrants into defense contracting, including the regional APEX Accelerators managed by DoD, Small Business Development Centers and other local business-assistance organizations.

EDOs can also help with compliance costs. Defense suppliers face an expanding set of contract requirements pertaining to matters such as internal business systems, information security, insurance and supplier nationality. Achieving compliance often involves absorbing significant upfront costs without reimbursement, or in some cases without guarantee of an award. EDOs can reduce the time and risk involved by instituting efforts to identify and screen suitable service providers who can help prospective contractors. EDOs may also work with local service providers to negotiate reduced rates for groups of companies referred by the EDO.

Another useful role for EDOs is connecting companies with local military veterans. In addition to their transferrable technical and management skills, veterans can be desirable hires because they often have easier times obtaining security clearances. Having cleared or clearance-ready personnel on staff can improve the competitiveness of contractor bids for awards by establishing their ability to access classified information or super-secured installations such as Sensitive Compartmented Information Facilities.

Adopting these assistance measures could help EDOs address the problem of federal contracting “leakage.” Take my state, for instance. Mississippi’s economy is one of the nation’s most defense-intensive, ranking it in the top 10 states in defense expenditures as a share of state GDP. But in fiscal 2023, according to my analysis of federal contracting data, 71 percent of the value of defense contracts awarded to small businesses for performance in Mississippi went to firms headquartered outside of the state. Although some of these awards may have involved subcontracts, this suggests that Mississippi is missing a chance to keep some of those award dollars home. Of course, Mississippi is not alone in this problem.

As the nation works to rebuild the arsenal of democracy, small businesses have an important role to play. EDOs should adopt strategies to ease their path to joining the fight.

Christopher Smith is an assistant professor of economic development in the University of Southern Mississippi's College of Business and Economic Development.

Governing’s opinion columns reflect the views of their authors and not necessarily those of Governing’s editors or management.
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