CEOs not yet ready to take a gamble.

• Author: Erwin, Sandra I.
• Position: Defense Watch

* Where's the payoff?

That's the question for which defense executives don't have clear answers as they weigh investment choices in an uncertain market.

In years past, these decisions would have been relatively straightforward and shaped almost entirely by the Pentagon's five-year research, development and procurement funding plan.

The game has changed dramatically during the Obama presidency as partisan fights derailed the customary budget process and the federal government almost every year has been saved from the brink of shutdown by 11th hour deals.

In this climate, top defense contractors have opted to deploy their cash, repurchasing their stocks and paying out dividends to shareholders. So it comes as no surprise that private investments in new technology by the top firms in the aerospace and defense industry have been on a downward slope, despite the constant pressure for innovation and growth.

New data on the defense and aerospace sector from the consulting firm Deloitte shows that company-funded IRAD, short-hand for independent research and development, has declined from 4.27 percent of revenues in 2009 to 3.14 percent in 2014, a 26.5 percent drop.

The Pentagon has taken a dim view of this trend. The Defense Department's top weapons buyer Frank Kendall has called out defense CEOs for hoarding cash instead of pouring more money into next-generation technology. This is a burning concern for officials like Kendall who worry about keeping the military technologically sharp. It's not just IRAD that is coming down. Federal funding for defense research, development, testing and evaluation dipped from $79.7 billion in 2009 to $62.9 billion in 2014, a 21.08 percent decline. The Defense Department projects a further contraction of 10 percent in RDT&E funding between 2016 and 2020.

"The iconic technological innovations that characterize the sector's history have been largely dependent on funding from the U.S. government, as well as internal company sources," says Deloitte. The upshot is a likely erosion in competitiveness for defense and aerospace, analysts warn, at a time of heightened global tensions, aggressive military actions by America's adversaries and increased competition in commercial markets.

The Pentagon understandably wants contractors to give less money to shareholders and to help foot the bill for new product development. But that might be an unreasonable expectation, especially in today's climate, say Bloomberg Government...