The boss of the Australian Industry and Defence Network is urging the defence department to overhaul the way it does business.
Chief executive Mike Johnson said the Defence Department should be required to give a certain percentage of contracts to Australian companies, before looking overseas.
While embracing the AUKUS nuclear submarine agreement with the US and UK, Mr Johnson questioned the billions of dollars the federal government is pouring into the program, saying local defence businesses were missing out.
"If government can afford to spend almost $10 billion on US and UK industry, and surely can find the dollars to adequately fund Australian defence industry and the capabilities Australia needs," he told the National Press Club on Wednesday.
Mr Johnson said arcane processes in the Australian Defence Force meant many companies were taking their innovative technologies overseas.
"There are simply too many barriers to entry to do business with (the defence department)," he said.
Mr Johnson said some small businesses in the defence sector often offer their products to overseas buyers first, because it's easier than dealing with the ADF.
"The attitude by some Australian defence divisions seems to be, go and prove your product overseas, and then we can talk," he said on Wednesday.
At the same time a new report warns Australia could face conflict long before the nuclear-powered submarines arrive, meaning the government would be left without crucial firepower.
Under the AUKUS pact, Australia plans to buy Virginia-class submarines from the United States, starting early next decade, and will eventually build a new design of nuclear submarine at the Osborne shipyard in Adelaide.
But the report released by the Australian Strategic Policy Institute warns there's a risk of conflict involving China, Russia, Iran or North Korea breaking out now, while the ADF is underprepared.
"That's because the first AUKUS submarines - US Virginia-class boats - won't be delivered until 2032, while the purpose-built SSN-AUKUS won't arrive until the early 2040s," the institute said.
"We can't, in effect, solve a 2027 deterrence problem with a 2032 deterrent capability."
The institute urged the Australian government to explore unconventional ways of deterring adversaries from armed aggression.
These methods lie outside of usual military war-fighting and include tactics that operate indirectly against an adversary's vulnerabilities.
It could also involve working with regional partners to resist coercion and political interference while building domestic capability across cyber security, electronic warfare and space technology.
