The United States and China have spent several years and tens of billions of dollars investing in each other’s technology sectors. Now, after months of escalating moves targeting semiconductors, social media apps, and more, Washington is trying to cut the cord at both ends.
Even as U.S. Secretary of State Antony Blinken is set to travel to China later this month in an effort to cool down simmering tensions between the two geopolitical rivals, the Biden administration is drafting an executive order that would put in place much more stringent rules on U.S. companies looking to invest in China’s technology sector. Curbing China’s ability to use foreign investment—particularly in critical and emerging technologies such as artificial intelligence, quantum computing, and electronics—has become an increasing focus of Washington’s effort to decouple from Beijing amid a growing bipartisan hawkishness on China.
The United States was the leading national recipient of Chinese investment between 2005 and 2022, taking in more than $190 billion across different sectors, according to the China Global Investment Tracker published by the American Enterprise Institute (AEI). The technology sector accounted for more than $23 billion during that period, behind only real estate and transportation. Although big-ticket Chinese investment in the United States has dropped in recent years, spurred by a more adversarial approach to China under successive administrations and a pandemic-induced slowdown due to Beijing’s zero-COVID policies, several gaps and avenues for China to steal critical technology still remain unplugged, experts and officials say.
“I think that [investment] is coming down for different reasons, but in tech they’ve been as active as ever,” said Michael Brown, a venture partner at the investment firm Shield Capital who previously served as the director of the U.S. Defense Department’s Defense Innovation Unit. “I think the venture capital community is a lot more savvy to the fact that if they take Chinese capital, it’s going to severely limit their market options if they want to sell to the U.S. government.”
U.S. companies have also invested heavily in China’s technology sector over the last decade, with a report this week from Georgetown University’s Center for Security and Emerging Technology saying that U.S. investors participated in investments worth more than $40 billion in 251 Chinese AI companies from 2015 to 2021. American venture capitalists also poured billions of dollars into Chinese tech start-ups in the last decade, according to data from the Rhodium Group and the National Committee on U.S.-China Relations, with the communications and biotechnology sectors among the leading recipients.
But as with many of the existing curbs on Chinese investment, an executive order on outbound deals could have limited impact.
“It may have a very short life, since there may be phase-in periods and [Joe] Biden may not be president in 2025,” said Derek Scissors, a senior fellow at AEI who tracks global Chinese investment. “The tech industry would much prefer an [executive order] than a much more durable new law from Congress, especially since any [order] will be quite narrow. Industry prefers nothing at all, but an [order] to be implemented in 2024 might come as a relief.”
The Biden administration went after inbound Chinese investment with another executive order last September, expanding the scope of the interagency Committee on Foreign Investment in the United States (CFIUS) to include transactions “outside of the defense industrial base” and including fields such as AI, quantum computing, and biotechnology. But rooting out Chinese investment is easier said than done and requires a great deal of coordination among myriad agencies spanning all the branches of government against an adversary that has shown itself to be incredibly adaptable. And as the concerns around TikTok’s data collection have illustrated, defining which technologies could pose a potential threat to national security is not always straightforward.
“The definition of critical and emerging technology is inherently amorphous,” said Akhil Iyer, a vice president at Shield Capital. “It’s just really hard to define what will or will not be, now and in the future, of relevance to national security.”
There remains a fear among some U.S. officials and congressional aides that CFIUS doesn’t have broad enough authority to stop nefarious Chinese investment, particularly when it’s aimed at emerging technologies. CFIUS reviews remain largely voluntary, and even when mandated by legislation, they often don’t cover early-stage investments in more nascent emerging technologies.
“The Bureau of Industry and Security’s inability to identify emerging and foundational technologies means that CFIUS isn’t getting these sorts of notifications through the front door,” said a House Foreign Affairs Committee aide, referring to the bureau within the U.S. Commerce Department. “Acquisitions of emerging technologies may be flying under the radar of CFIUS, resulting in potentially dangerous transfers to adversarial countries.”
In Silicon Valley and the broader U.S. tech community, there has been a concerted government effort to raise awareness about the dangers of adversarial capital. The Pentagon has particularly focused its efforts on hardware start-ups, which tend to receive less venture capital funding than their software counterparts and are more likely to produce the types of technologies that can also be used by the defense sector—making them ripe targets for China. Defense Department initiatives such as the recently formed Office of Strategic Capital and National Security Innovation Capital (NSIC) aim to fund emerging companies whose technology has potential defense uses.
“There is an inadequate amount of private venture capital in the U.S. that flows into very early-stage hardware start-ups,” NSIC Director Tex Schenkkan said. NSIC estimates that less than 30 percent of private U.S. venture capital is invested in hardware companies, and less than 10 percent of that is invested at early stages.
“So you’ve got early-stage hardware companies that are starving for that capital—they need to get to the next major milestone, and like good entrepreneurs, they want to build their company and achieve their dreams,” he added. “And they often get approached by investors that they may not even know where the capital is coming from but they’re very willing to put the money in, and then it turns out it’s really just a pathway to get access to the technology.”
But those initiatives have been plagued by a lack of funding. NSIC currently comprises Schenkkan, three contractors, and a part-time special government employee and has received $20 million in funding in the last two fiscal years that it has invested in 12 start-ups. For the current fiscal year, it received $15 million.
Meanwhile, the Office of Strategic Capital has yet to receive congressional funding.
“We really need that to be more significant,” Schenkkan said.
