Lai's government has been under US pressure to improve its ability to defend itself against a potential attack by China, which claims the island is part of its territory.
"We will accelerate our building of the T-Dome, establish a rigorous air defence system in Taiwan with multi-layered defence, high-level detection, and effective interception," Lai said during Taiwan's National Day celebrations.
He said Taiwan was determined to "maintain peace through strength" and called on China to "renounce the use of force or coercion to change the status quo across the Taiwan Strait".
His speech followed a bruising year for Lai, a staunch defender of Taiwan's sovereignty who is loathed by Beijing.
A failed effort this year to unseat dozens of opposition lawmakers left the government weakened, while US tariffs on Taiwanese shipments eroded confidence in the key relationship.
Lai reiterated on Friday plans to ramp up defence spending to more than three percent of gross domestic product next year and five percent by 2030.
"We will advance the integration of high-tech and AI technologies to build a smart defence combat system, maximising effective deterrence for our asymmetric strategy," Lai said.
Taiwan will also boost its own defence industry and strengthen domestic supply chains to build a "robust line of defence", he said.
While Taiwan has increased spending on its military in recent years, it would be massively outgunned in a conflict with China and remains heavily reliant on its biggest arms supplier Washington to deter Beijing from attacking.
China's foreign ministry accused Lai on Friday of attempting to "seek independence through force", warning such action would "only drag Taiwan into a dangerous situation of war".
"Maintaining peace and stability in the Taiwan Strait requires adhering to the one-China principle and taking a clear stand against Taiwan independence," spokesman Guo Jiakun told a regular news conference.
"China's firm opposition to US arms sales to Taiwan and US-Taiwan military ties is consistent and clear."
- 'Lessons learned' -
Increasing investment in Taiwan's air defence "reflects an appreciation for the lessons being learned in Ukraine", said Drew Thompson, a senior fellow in international studies at Singapore's Nanyang Technological University.
"Taiwan already has a robust air defence network comprising legacy and new systems... so they are integrating them into a resilient network able to defend against threats ranging from small UAVs to missiles to aircraft," Thompson said.
Friday's celebrations mark the 114th anniversary of the toppling of China's Qing dynasty and the subsequent founding of the Republic of China.
The current dispute between China and Taiwan dates to a civil war between the nationalist forces of Chiang Kai-shek, who retreated to the island, and Mao Zedong's communist fighters.
Beijing launched military drills around Taiwan after Lai's National Day speech last year, sending planes and ships to encircle the island.
A US administration official, speaking on condition of anonymity, said China should not use Lai's remarks as a "pretext for destabilising actions".
China would not need to respond "aggressively" this time because Lai was "suffering right now", said Jonathan Sullivan, a China and Taiwan expert at the University of Nottingham.
Trump is expected to meet his Chinese counterpart Xi Jinping in the coming weeks as the rival superpowers thrash out a trade deal that could affect Taiwan.
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