A new regional dataset

As Europe raises defence spending, the geography of where that money ultimately lands may matter almost as much as the total amount. In a recent paper (de Mello et al. 2026), we build a new measure of defence-industrial presence using plant-level information from the Military Balance+ platform  and the subsidiary structure of identified firms from ORBIS, mapping a significant share of their supply-chain activity (de Mello et al. 2026). The dataset identifies 347 defence production plants and 3,888 firms linked to defence-related activity across 15 European countries, then matches them to OECD regional data on GDP, patenting, manufacturing employment and population. The result is a detailed map of Europe’s defence footprint (Figure 1).

Defence production is highly uneven across territory, with some countries showing strong concentration in a handful of regions and others displaying a more dispersed pattern. Regions with defence establishments are, on average, richer, more populous and more innovative than regions without them, even within the same broader administrative area (TL2-level region).

That pattern already hints at a broader point: defence activity is not randomly distributed. It tends to cluster where industrial capacity, skilled labour and knowledge networks are already stronger. In other words, defence production is embedded in local ecosystems rather than spread evenly across space.

Figure 1 Defence production plants in TL3 regions in Europe  

Source: de Mello et al. (2026).

Income and productivity

The central empirical result is that defence-industrial presence is positively associated with long-run regional income. In our preferred dynamic panel specification, we find a statistically significant positive relationship between the presence of defence production and per capita GDP, conditional on population, manufacturing employment, patenting and TL2-year fixed effects. The finding is not just a reflection of richer localities: it remains visible after comparing places within the same higher-level region and controlling for size, industrial activity and innovation.

This result should not be read as a clean causal multiplier as in the empirical literature on the local effects of defence purchases (Nakamura and Steinsson 2014, Dupor and Guerrero 2017, Auerbach et al. 2019, van Gemert et al. 2022). This is because our dataset does not allow us to observe the euro value of procurement at the regional level, so the estimates are best interpreted as conditional associations rather than treatment effects. Still, the result is informative, because it survives a demanding set of controls and a specification designed to handle persistent regional variables.

Most importantly, the logic behind the association is plausible. Defence production creates local demand for labour and inputs, supports high-skill manufacturing jobs, and may encourage complementary investment in logistics, research and supplier networks. A defence plant also brings wage income into the local economy, which then circulates through local consumption and services.

Agglomeration makes it easier for workers to change jobs within the same geographic area, facilitating the diffusion of knowledge and skills across firms. There are several industrial defence clusters in Europe, such as Toulouse or Munich, where such agglomeration spillovers take place (Hospers 2025).

Innovation as a complement

A particularly interesting result is that the income premium is larger in more innovative regions. The paper tests this by interacting defence presence with patenting activity and finds that the association between defence activity and income is stronger where local innovation capacity is higher.

That fits a familiar regional economics story. Defence production may generate benefits through knowledge spillovers, worker mobility and supply chain linkages, but those benefits are more likely to be absorbed where the local economy already has some research intensity and industrial depth. Put simply, places that can use new knowledge well are better able to turn defence production into broader productivity gains.

This has an important policy implication. If governments want defence spending to support domestic industrial capacity rather than simply reinforcing old clusters, they need to pay attention to the complementary assets that make regional ecosystems work: skills, engineering capacity, universities, R&D, and the ability of firms to collaborate across the local value chain.

Shedding light on causality: After Crimea

We also ask whether defence regions behaved differently after the 2014 annexation of Crimea, which marked a turning point in European defence policy. The idea is not that Crimea directly affected local economic performance everywhere in Europe, but that it changed the broader defence-spending environment in a way that could favour regions already hosting defence production.

Using local projections, we find that defence regions experienced stronger cumulative GDP growth than non-defence regions in the years after 2014. By horizon four, the differential reaches about 0.6% (Figure 2). The pattern is consistent with the view that defence-industrial regions were better positioned to benefit from a positive defence spending shock across Europe.

The post-2014 evidence should still be interpreted carefully. The paper does not claim that the Crimea shock was itself an exogenous treatment at the regional level, and the event-study design is used as complementary evidence rather than a standalone causal estimate. Even so, the dynamic pattern supports the main finding and strengthens the case that defence activity has persistent local economic effects.

Figure 2 Responses to a defence spending shock: Local projections

Why regions matter

The broader lesson is that defence is also a place-based industrial policy. Countries that expand defence budgets should expect the gains to be unevenly distributed across space, because production plants, subcontractors, and innovation networks are already concentrated in particular regions.

That has three implications. First, defence procurement can shape regional inequality, especially if industrial capacity is already concentrated in richer and more innovative areas. Second, regional policy and defence policy are connected: spreading the gains from rearmament requires investment in local capabilities, not just procurement contracts. Third, governments may need to invest not only in equipment but also in the local skills and research systems that allow defence activity to generate wider productivity spillovers.

Our paper also speaks to an older debate in regional economics: whether large public demand shocks generate broad-based growth or mostly reinforce existing agglomeration patterns. The evidence here suggests the latter is at least part of the story. Defence production seems to amplify the advantages of places that already have industrial depth, rather than creating economic strength from scratch in lagging regions.

What this adds

A key contribution of our paper is methodological. In Europe, subnational defence procurement data is sparse, which makes standard multiplier analysis difficult. By focusing instead on the regional presence of defence production and its subsidiary structure, the paper offers a way to study the economic footprint of defence policy using the best harmonized data currently available.

That choice matters because it shifts the question from “how large is the economy-wide defence multiplier?” to “where are the gains likely to accrue within countries?” For policy, that is often the more relevant question. Most of the empirical analysis nevertheless centres on country-level evidence (García‐Serrador et al. 2025, Ben Zeev et al. 2025, Croitorov et al. 2025, Conigrave and Shin 2026).

The policy upshot is therefore not simply that defence spending raises output. It is that defence production has a distinctly regional footprint, this footprint is stronger in innovative places, and Europe’s defence build-up will have local development consequences that deserve explicit policy attention.

Authors’ note: The opinions expressed and arguments employed above are solely those of the authors and do not necessarily reflect the official views of the OECD or its member countries.

References

Auerbach, A, Y Gorodnichenko and D Murphy (2019), “Local fiscal multipliers and fiscal spillovers in the United States”, NBER Working Paper.

Ben Zeev, N, E Pappa and E Scola Gagliardi (2025), “The offensive power of defense news in Europe”, paper presented at an ECB-IMF Conference, Frankfurt.

Conigrave, B and Y-H Shin (2026), “Defence spending – no free lunch”, VoxEU.org, 19 April. 

Croitorov, O, R Felke, R Krämer and M Licchetta (2025), “Macroeconomic impacts of defence spending”, VoxEU.org, 22 December. 

de Mello, L, I Dezcallar and S Dougherty (2026), “The footprint of defence production: Economic implications”, OECD Working Papers on Fiscal Federalism 54, OECD Publishing.

Dupor, B and R Guerrero (2017), “Local and aggregate fiscal policy multipliers”, Journal of Monetary Economics 92: 16–30.

García-Serrador, A, D Sarasa and C Ulloa (2025), Buy Guns or Buy Roses? EU Defense Spending Fiscal Multipliers, Elsevier BV.

Hospers, G (2025), “Serving the region? The role of the defense sector in Europe’s regional development”, EconPol Forum 26(4): 68–75.

Nakamura, E and J Steinsson (2014), “Fiscal stimulus in a monetary union: Evidence from US regions”, American Economic Review 104(3): 753–792.

van Gemert, T, L Lieb and T Treibich (2022), “Local fiscal multipliers of different government spending categories”, Empirical Economics 63(5): 2551–2575.