The article explores the issues of defense spending optimization in Armenia from the point of view of possible positive externalities of the production of high-tech weapons. It attempts to answer the question of how to solve the well-known dilemma of “guns versus butter” for Armenia amid the current geopolitical and geoeconomic challenges.

To achieve the objectives, the differences between the concepts of effectiveness and efficiency of defense spending were considered. The potential impact of the production of high-tech weapons on the economy and the military sector was discussed through the prism of the “exploration-exploitation” dilemma. Such an approach is aimed to emphasize the differences between the economic efficiency at different stages of new military technologies’ life cycle and the opportunity cost of military spending. As for possible positive externalities of the high-tech weapons production, an improvement in the balance of payments, relieving the public debt-servicing burden, developing human capital, increasing employment, creating and deepening bilateral and multilateral military-political and military-technical cooperation are presented as such in the article. However, peace and transfer of technology to other sectors of the economy, in defiance of the accepted approaches, have not been considered to the externalities of the high-tech weapons production.

The study concluded that the redistribution of a part of defense spending to the high-tech sector, the ultimate goal of which is to gradually ease the burden of military spending for the state, can be the beginning of qualitative changes in terms of economic development and security duo to the positive externalities of innovation and mastery of high-tech industries.