Congress has directed the Pentagon's Defense Innovation Unit to establish operations in Israel, marking a significant expansion of the United States' defense technology partnership with the country. The directive, included in the Fiscal Year 2026 National Defense Authorization Act, reflects broader congressional intent to deepen collaboration in defense innovation—even as the regulatory landscape for such partnerships remains intricate and demanding.
The move comes as the Trump administration has unveiled an unprecedented $1.5 trillion proposed defense budget, with key details about US military spending for the 2027 fiscal year expected to be released on April 21. Israel's defense technology sector has grown exponentially in recent years, positioning itself to capitalize on significant increases in US defense spending that are generating procurement opportunities and driving private sector investment in military-focused technologies.
The Strategic Partnership
Israel's defense establishment and startup ecosystem maintain what observers describe as a relatively intimate relationship. Reservists with firsthand battlefield experience often drive new ventures, the Israel Defense Ministry's procurement pipeline remains accessible to innovators, and regulatory approval cycles operate on a national scale that allows close dialogue between innovators and end-users. This contrasts sharply with the United States, where a continental-scale bureaucracy maintains a strong institutional bias toward developing and maintaining technologies domestically.
Israel's innovation ecosystem in advanced manufacturing, missile defense, cybersecurity, artificial intelligence, and autonomous systems positions it as a strategically significant partner. The Defense Innovation Unit, which serves as the Pentagon's primary conduit for accelerating the adoption of commercial and dual-use technologies, has historically maintained only a domestic footprint. The new mandate represents a departure from that tradition.
Navigating Complex Regulatory Barriers
However, Israeli defense technology companies seeking to enter the US market face substantial regulatory hurdles that reflect the layered nature of American defense procurement oversight. The world's largest defense market is highly regulated, presenting significant challenges to navigate.
Companies must contend with two pillars of US export control law. The International Traffic in Arms Regulations, administered by the State Department's Directorate of Defense Trade Controls, govern the export of defense articles, technical data, and defense services listed on the US Munitions List. The Export Administration Regulations, administered by the Commerce Department's Bureau of Industry and Security, control dual-use items, commercial technologies with potential military applications, and certain military items removed from the ITAR list. Violations of either regime can result in civil or criminal offenses carrying severe penalties, including substantial fines and imprisonment.
Any company manufacturing defense articles in the United States must register with the State Department's Directorate of Defense Trade Controls, even if it never exports a single product. Products purchased or developed in the US that fall under ITAR are subject to strict controls on reexport and retransfer—meaning that sending technology or data back to Israel requires prior authorization. Companies must implement documented compliance programs, train employees regularly, obtain export licenses when required, and conduct thorough due diligence on all parties in any transaction.
Israeli companies face what amounts to a dual regulatory burden. Israel's own Defense Export Controls Agency exercises extraterritorial reach, meaning Israeli defense export regulations can apply regardless of where business activity physically takes place. As operations in the US deepen, affiliated US entities may become subject to concurrent regulatory regimes from both countries. The Israel Innovation Authority imposes its own restrictions: technology and knowledge developed with IIA grants cannot be transferred outside Israel without approval and, in some cases, payment of fees.
Foreign Investment and Security Clearance Requirements
Companies must also navigate the Committee on Foreign Investment in the United States, which reviews transactions including mergers, acquisitions, and certain investments that could result in foreign control of or certain rights in a US business affecting national security. Any non-US ownership stake and investment may eventually impact regulatory reviews, and government-backed stakes can prompt stricter scrutiny for companies seeking defense contracts.
The Foreign Ownership, Control, or Influence framework applies whenever a foreign interest has the power to direct or decide matters affecting a company's management or operations in a manner that could result in unauthorized access to classified information or adversely affect performance of classified contracts. A company under FOCI cannot obtain a facility security clearance until FOCI factors have been favorably resolved through mitigation instruments such as board resolutions, security control agreements, special security agreements, or proxy agreements and voting trusts. Significantly, FOCI requirements are now expanding beyond classified contracts under new rules that will apply FOCI assessments to unclassified defense contracts, subcontracts, and research awards valued at or above $5 million.
Cybersecurity and Procurement Pathways
Companies seeking direct defense procurement or working via a US prime contractor must register in the System for Award Management, the US government's centralized platform for entity registration, contract opportunities, and federal procurement eligibility. Another critical requirement is compliance with the Cybersecurity Maturity Model Certification 2.0 program, designed to strengthen the defense industrial base cybersecurity and better protect defense information.
Under the phased rollout, Level 1 and Level 2 self-assessment requirements are already being included in new contract awards. Beginning in November 2026, third-party certification assessments by an accredited CMMC Third-Party Assessment Organization will become mandatory for contracts involving Controlled Unclassified Information. CMMC applies to any organization that handles Federal Contract Information or Controlled Unclassified Information.
Multiple funding and procurement pathways exist for Israeli companies. US federal research and development funding awards provide validation and relationship-building opportunities with program managers. The Small Business Innovation Research and Small Business Technology Transfer programs offer one funding pathway. The Defense Advanced Research Projects Agency, with an annual budget of approximately $4.9 billion, focuses on high-risk, high-reward projects to maintain technological advantage for the US, typically involving teams of industry and academic partners with hands-on involvement by program managers.
The Defense Innovation Unit itself solicits proposals through its Commercial Solutions Opening process, which awards prototype agreements and is, in most cases, open to any individual or commercial entity. Vendors that successfully complete a prototype project are awarded a Success Memo, typically enabling any federal agency to procure the solution without recompeting.
For companies with fully developed, production-ready solutions, various procurement pathways exist, including partnering with prime contractors. Israeli defense tech companies have a successful track record as subcontractors and technology suppliers to major US aerospace and defense primes. Success in this channel requires building relationships with prime contractors, demonstrating interoperability with existing platforms, and ensuring full regulatory compliance. The more lucrative and long-term strategy is direct procurement through the existing US defense acquisition system, which requires both strategic positioning and sustained relationship building.
Open solicitations can be found on SAM.gov, and companies should establish automated alerts to monitor new solicitations aligned with their capabilities. Companies should also be proactive in raising their profiles among the Pentagon's policy makers, including the offices of the secretary and deputy secretary, and under secretaries for acquisition and sustainment, and research and engineering, as well as developing relationships with program executive offices and each military service's acquisition and sustainment offices. These officials control acquisition funding and shape requirements, and engaging them early can help align a company's solution with identified operational needs.
Industry days, vendor outreach sessions, and high-profile conferences provide opportunities to meet with contracting officers and program managers, showcase capabilities, and learn about upcoming requirements. Working with seasoned government relations advisors can provide a significant strategic advantage for Israeli defense tech companies navigating the Pentagon and US Congress, as such professionals have established relationships with Pentagon policy makers, members of Congress, and congressional defense committee staff that can take years for companies to build independently. They can also help secure substantial funding via the annual Defense Appropriations and NDAA bills, often through congressional plus-ups.
Congressional Funding Authority
Every year the president submits a budget request to Congress outlining proposed defense spending priorities, but Congress is under no obligation to accept the president's request. The House and Senate Appropriations Committees independently review, modify, and ultimately determine how defense dollars are allocated. A plus-up occurs when Congress adds funding above what the president requested for a specific program or appropriates money for an activity for which the Pentagon did not request funding.
In the 2026 Defense Appropriations bill, Congress added approximately $18.3 billion for acquisition programs above the budget level, split between $14.4 billion for procurement and $3.9 billion for research, development, test, and evaluation. This congressional activism in defense spending demonstrates the legislative branch's willingness to shape defense priorities independently of executive branch recommendations.
Why This Matters:
The expansion of US-Israel defense technology partnership reflects a strategic decision to deepen collaboration in a critical sector. However, the regulatory complexity surrounding such partnerships—encompassing export controls, foreign investment review, cybersecurity standards, and dual regulatory regimes—creates substantial barriers for Israeli companies seeking to participate. The DIU's establishment in Israel signals congressional recognition that innovation ecosystems outside the United States merit direct Pentagon engagement, potentially reshaping how the defense establishment sources advanced technologies. Simultaneously, the layered regulatory requirements mean that Israeli companies must navigate systems designed to protect national security but which also create significant compliance burdens. The congressional plus-ups in the 2026 Defense Appropriations bill demonstrate that Congress actively shapes defense procurement priorities, suggesting that Israeli companies with strong political and regulatory support may find pathways to US defense contracts. The mandatory expansion of FOCI assessments to unclassified contracts valued at $5 million or above beginning in 2026, combined with CMMC certification requirements becoming mandatory in November 2026, will substantially increase compliance costs and complexity for any Israeli entity seeking substantial US defense business. These developments underscore both the opportunity and the institutional challenges inherent in deepening defense technology partnerships across national borders.