A crack down on foreign spies could stifle investment in Australia's money-making universities and accelerate an unintended brain drain.
A military technology permit regime to regulate the transfer of data such as blueprints, military technology and related services to foreign nationals in Australia has been proposed by the government.
The change aims to streamline transfers between Australia, the US and UK by cutting red tape with the AUKUS partners as they would be exempt from permits.
It also aims to bolster national security and protect Australian secrets.
But this could have unintended consequences, John Byron from the Queensland University of Technology said.
Universities were concerned people would suddenly have to consider defence permits that weren't factored in at the start of programs, he said.
"We have people who are unsure, who will now find themselves unable to participate in full discussions with their research teams," Dr Byron told a parliamentary hearing into the laws on Friday.
There was also fear about the repercussions as the laws didn't necessarily require a person to be in a conspiracy with a foreign government or involved in espionage, he said.
"There will be people who are concerned about conducting what they consider to be quite innocent, routine civil research that may nevertheless be deemed, perhaps after the fact, to have been captured under ... this," he said.
"There are plenty of jurisdictions that will not have these kinds of restrictions, we may be dealing ourselves out of gaining the brainpower of some of the best and brightest in the world that are currently quite attracted to working in Australia."
Zac Smith from national security consultancy Leidos warned clarity was needed about the regime and that there be enough time for small and medium businesses to react.
There also needed to be help for businesses to navigate the new system so they didn't have to cut contracts or deal themselves out, he said.
"Because otherwise, we're going to get to the enforcement period of this and everyone ... are going to stop and they're going to sit there and reconsider what it means to their involvement," he said.
The Department of Defence defended the legislation, saying industry had been calling for less red tape and a permit-free environment with its principal defence partner, the United States.
There would be a reduction in licensing requirements overall, deputy secretary Hugh Jeffry said.
The department also continued to work with stakeholders to avoid unintended consequences "by omitting or including something that is just unworkable in the context of industry or academia", assistant secretary David Nockels said.
Australia was operating in an uncertain strategic and security environment and the department had to look at "the concept of deterrence by denial", Mr Jeffry added.
