Author: Jaroslav Dvorak
Date: 24-02-2026
In Lithuania, there is increasing talk of the need to strengthen defense capabilities, develop local defense industry, and increase participation in international supply chains. However, the qualitative analysis reveals a paradox: current regulation not only does not help this goal, but in some cases systematically restricts it. Interviews with Lithuanian and Czech experts show that the problem lies not in business capabilities or lack of innovation, but in a legal system that allows almost exclusively arms manufacturers to operate.
Limited range of market participants
Currently, the regulation of the Lithuanian defense sector effectively eliminates a large part of potential market participants – intermediaries, component suppliers, logistics partners, technology integrators or even marketing and labeling service providers. Meanwhile, in Western Europe, the modern defense industry functions as a complex ecosystem, in which the value chain is created not only by manufacturers, but also by specialized niche companies.
According to the study, some Lithuanian companies, unable to legally trade in Category A weapons or act as intermediaries in their own country, establish subsidiaries in Latvia, Estonia or Poland. Trade is carried out through these structures, so taxes and profits remain abroad, and Lithuanian businesses incur additional administrative costs. This means that the state not only does not attract investment but also loses part of its budget revenues.
Experts emphasize that one of the key obstacles is the position of security institutions, based on the lack of control capabilities. Instead of strengthening oversight mechanisms and creating an effective risk management system, a simpler solution is chosen to restrict the market and encourage businesses to operate through other EU countries. However, such a model weakens the national defense ecosystem in the long run.
Narrowing of business models and innovation opportunities
Another key issue is the narrowing of business models. The current legal framework stipulates that only companies with production infrastructure and a relevant license can participate in the defense market. This means that technology startups, software developers, artificial intelligence solution providers or research institutions cannot legally operate in this sector unless they are formally recognized as manufacturers.
The respondents to the study note that due to such a model, some companies are forced to artificially create production units just to meet formal requirements. This increases costs, reduces flexibility and distorts the logic of the market. The modern defense industry works differently – most companies specialize in narrow areas: software development, modernization solutions, component integration or testing services. Such specialization allows you to create innovative clusters, promote science and business cooperation and quickly respond to technological changes.
Limited integration into international supply chains
The third problem is integration into international supply chains. Today, participation in EU and NATO projects requires flexibility and specialization. International projects are looking not only for end manufacturers, but also for component suppliers, software developers, logistics partners, certification experts or system integrators. However, if such entities are legally considered “illegal” in Lithuania because they are not manufacturers, they cannot independently conclude contracts with foreign partners. As a result, Lithuanian companies often operate through intermediaries in other countries, losing part of their profits and strategic contacts. Experts note that this reduces Lithuania’s opportunities to participate in NATO or European Defense Fund projects, as foreign partners seek niche competencies rather than formal manufacturer status. In other EU countries, there is a multi-level supply chain structure that allows various types of companies to join major projects. In the case of Lithuania, the too-narrow definition of market participants means that some businesses cannot even apply for export permits, even though their technological solutions would be in demand abroad. This limits not only economic growth, but also the strategic resilience of the state.
What does this mean for Lithuania?
This analysis shows that the problem is not a lack of business initiative or competence. On the contrary, Lithuania has technological potential, innovative start-ups and an academic base. However, the current legal regime fragments the sector, discourages investors and encourages capital flight to neighboring countries. If Lithuania wants to become an active part of the European defense ecosystem, it is necessary to review the regulatory model and move from a restrictive to a risk-management system. Only by creating conditions for various market participants – from manufacturers to technology integrators – will it be possible to create a sustainable, innovative and internationally competitive defense industry.
