PResident Joe Biden’s recent visits to India and Vietnam were among the administration’s latest signals of economic and technological “de-risking” with China. The visit follows an executive order issued by President Biden in August pledging to block U.S. venture capital and private equity investments in Chinese companies working on sensitive technologies such as semiconductors, artificial intelligence and quantum computing. It is something that
The era of global venture capital appears to be coming to an end. But as Washington seeks to restrict cross-border capital flows, the United States may be at risk of losing access to Chinese technology and a longstanding commitment to global investment.
Although the executive order is intended to be narrow in scope, targeting military acquisitions of key technologies, it is emblematic of a broader trend of increased scrutiny of the U.S.-China investment relationship in high-tech ventures. As part of a high-profile rebrand, Sequoia Capital recently spun off its highly successful China division in June. Four U.S. venture companies were notified in July that their China portfolios were being investigated by the House Select Committee on the Chinese Communist Party. These moves are largely driven by growing concerns among policymakers that investment links are a way for China to leapfrog the US’s technological superiority. “The American people do not want American funding or expertise that would enable the Chinese Communist Party to make technological advances that could undermine national security or American values,” said the top Democrat on the Congressional Committee, R-Ill. said Congressman Raja Krishnamoorthi.
These policies, and the anxieties that drive them, assume that investment in the Pacific is one-way, and that U.S. advanced technology only advances Chinese interests. This is far from a clear-cut case. While it is true that China’s development in its early decades relied primarily on technology transfer from international companies, this picture is long outdated.
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Today, China itself is an important source of global innovation, with domestic capabilities that rival or exceed those of the United States in many areas. The United States and China are now each other’s biggest collaborators with the most cited papers in a variety of fields, and a significant portion of high-impact AI research comes from U.S.-China collaboration. In some areas, such as nanoscience and telecommunications, the United States is more dependent on China than vice versa. In such cases, the direction of technology transfer is reversed. The United States benefits from being able to invest in and gain know-how from Chinese industries, which are more sophisticated than domestic ones.
For example, Ford Motor Co. has historically traded its intellectual property to access the Chinese market. The company is currently building a battery factory in Michigan using technology from China-based Hyundai Amperex Technology Limited (CATL), the world’s largest EV battery manufacturer. Virginia Governor Glenn Youngkin called the deal a Chinese “Trojan horse” that undermines U.S. manufacturing.
But ironically, the reluctance to take advantage of off-the-shelf technology is slowing down the development of domestic capabilities and the ability to capture new breakthroughs as they occur. Disengagement could slow Chinese innovation in some areas, but it would also impede U.S. access and influence if Chinese advances inevitably occur.
Indeed, China itself has shown a keen awareness of the threat that the free flow of American capital poses to key technology sectors. President Xi Jinping has repeatedly suggested that developing critical technologies requires a national effort to overcome challenges and that the government should prioritize reducing technology dependence on Western countries. Reducing the influence of US investors is no exception.
China, like the United States, is increasingly framing cross-border investments in terms of national security. In 2021, China’s internet regulator launched a national security and data breach investigation into ride-hailing giant Didi Chuxing shortly after its IPO on the New York Stock Exchange. Stock Exchange; Ant Financial’s IPO was called off after founder Jack Ma criticized regulators. New anti-espionage laws come into effect, raising concerns that certain cross-border businesses will be subject to penalties. During a recent visit to Beijing, U.S. Secretary of Commerce Gina Raimondo said that U.S. companies consider China a “non-investment destination.”
The danger is that the United States engages in competition that restricts the flow of investment, rather than unleashing the global influence of the venture capital sector. U.S. venture capital firms have already slowed funding for Chinese companies, reaching a 10-year low of $1.3 billion last year, from a peak of $14.4 billion in 2018. Georgetown’s Center for Security and Emerging Technologies estimates that it accounts for just 8% of all investment transactions. From 2015 to 2021, Chinese AI companies had no American investors. Chinese companies in the targeted sectors had already noticed trends from previous U.S. export restrictions and were looking elsewhere for capital, including the Middle East.
There is no doubt that potential transfers of military technology have legitimate national security concerns. And we agree that U.S. investors should not support surveillance and facial recognition companies that facilitate well-documented human rights abuses in China and Silicon Valley. However, these should serve as limited exceptions rather than general rules of geopolitical competition.
American values of openness, free trade, and the power of global markets remain a good guide to victory in the 21st century. As China becomes increasingly suspicious of foreign investment, the key to increasing America’s technological advantage is not to help China close the door. We should leverage the power of American capital to gain influence in cutting-edge innovation in China and around the world. Rather than adopting regulations that would ultimately promote China’s independence, the U.S. government looks to a long-term strategy to ensure U.S. access to Chinese technology and protect economic freedom around the world. Should.
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