China’s venture capital Trojan Horse helps it access US tech

A recently published article in the Wall Street Journal highlighted the way Chinese entities have increasingly utilized venture capital investments in the United States as a vehicle to access new and emergent technologies.

The article was based on the findings published by the Rhodium Group, a New York-based advisory firm focused on U.S.–China trade and investment. 

{mosads}Acceleration of Chinese investment in U.S. venture capital as a limited partner is seen as means to bypass the stringent rules imposed by Committee on Foreign Investment in the United States (CFIUS) governing the purchase and acquisition of American companies by Chinese entities.

A blindspot within CFIUS has been identified that enables Chinese entities to act as venture investors without triggering CFIUS review of such investments.

Security hawks have trumpeted the dangers inherent in the potential transfer of American technology to China, citing this as a Trojan Horse or stealthy way of gaining access to high-potential technologies and start-ups with limited scrutiny.

The report goes on to cite the following data: From January to May 2018 Chinese investment in new U.S. venture capital deals totaled $2.4 billion dollars.

From 2000 to May 2018, more than 1,300 funding rounds were identified that involved at least one Chinese-controlled investor representing $11 billion in cumulative investment. Three-quarters of this $11 billion total occurred since 2014. 

This trend is noteworthy as it comes at a time where U.S.–China relations have deteriorated with China being viewed both as an economic and military rival by President Donald Trump. Conversely, China has pushed back, citing the ensuing trade war as the latest move by the U.S. to contain its growth.

Under the leadership of President Xi Jinping, China has laid a roadmap by the name of “China 2025” that envisions an innovation and technology-led economic transformation. China recognizes that there are diminishing returns associated with the manufacture of clothes, shoes and toys as labor costs escalate within.

In order to ascend the value chain and restructure its economy, China will have to place greater reliance on innovation and technology. There are several ways they can do this, they can either build it, buy it or as some have said, steal it.

The recent episode surrounding telecom hardware giant ZTE is symbolic of the challenges China faces in developing home-grown technologies critical to its technological ambitions.

The embargo placed on ZTE by the U.S. Department of Commerce brought the company’s assembly lines to an immediate halt laying bare China’s dependence on foreign suppliers for critical technologies and parts. 

Realizing this, China’s policymakers have redoubled their efforts to create the conditions and incentives toward the development of critical technologies such as semiconductors and advanced materials.

To close the gap on technology acquisition via the venture capital route, legislative efforts are being devised that will provide added muscle to CFIUS. Rep. Robert Pittenger (R-N.C.) and Senate Majority Whip John Cornyn (R-Texas) have introduced bills to address this concern.

Arthur Dong is a professor at Georgetown University’s McDonough School of Business. He specializes in legal and business engagements between China and the United States.