The fundamental problems in economic development in Indonesia are the low level of welfare, unsustainable economic growth, and the inadequate development process of economic sectors. Defense Economics is a branch of science that applies economics to national defense issues. Defense economics as a multidisciplinary study discusses resource allocation, income distribution, economic growth, and political stability as applied to topics related to defense. One of the efforts of the Indonesian government in increasing the capability of the defense industry is to implement a trade-off, local component, and offset policy also known as IDKLO. The Indonesian government in carrying out this mechanism has formed a cooperation with various industrial bodies, locally and internationally such as PT. Pindad (Persero). In carrying out its duties, PT. Pindad (Persero) experienced several obstacles for instance the limitations on the company's high technology mastery in building defense equipment, the availability of funding, and inadequate human resources regarding technical and academic matters. The purpose of this study was to find out how the implementation of the IDKLO policy was carried out by PT. Pindad (Persero) in developing the defense industry. The data collection process is carried out through a literature review method on scientific articles, laws and regulations, as well as PT Pindad's (Persero) annual report related to the IDKLO for the procurement of defense equipment. The results show that the implementation of PT Pindad's (Persero) (IDKLO) is divided into 3 main activities, namely the Ministry of Defense contract with the principal, the principal contract with the defense industry, and the completion of the local component and offsets (KLO) contract. Several variables to support the implementation of PT Pindad’s (Persero) IDKLO are the ability to communicate, its resources, the bureaucracy, and the disposition which could improve the capability of the defense industry of the Republic of Indonesia.