Biden’s anti-China investment moves might not deter US VCs

Removing the welcome mat for Chinese investors in US AI

The Biden administration appears to be determined to stall China’s mission to lead AI. However, possible restrictions on U.S. investments in China related to emerging tech that could have military applications might not have a major impact on venture capital flows between the two countries, the former head of the Committee on Foreign Investment in the United States under Obama, Aimen Mir, told me.

While it continues the trend toward creating a “less friendly” environment toward Chinese investors, a September executive order from President Biden directing the Committee on Foreign Investment in the United States to consider reviewing foreign investments with possible national security risks “is not likely to cause bilateral investment flows in VCs to dry up,” said Mir, partner at international law firm Freshfields.

• But Mir said investors looking for U.S.-China synergies might think again.
• Although Mir said the order “is not likely to cause a significant change,” he also said, “Any eventual outbound investment rules could have a significant impact on U.S. investment in China, depending on how it is scoped.”
• “For example, if you are an investor in AI companies in both the U.S. and China and your investment strategy is based on encouraging cross-border operational synergies among your portfolio companies, you would probably want to take a fresh look at the impact of this strategy on your CFIUS risk profile,” Mir said.
• Earlier today, a complaint against two Chinese intelligence officers accused of attempting to "obstruct, influence, and impede a criminal prosecution" of a China-based global telecommunications company was unsealed in a U.S. district court.

The administration is keeping its foot on the gas when it comes to moving toward more concrete restrictions.

• Last week, CFIUS identified the types of conduct it might consider in relation to possible new foreign investment limits.
• The guidelines noted that CFIUS violations could include failure to notify CFIUS about an investment that could violate rules, failure to comply with the agency’s requirements for mitigating a violation, and misstating, omitting, or lying about information during the CFIUS process.
• The guidance did not mention investments in specific types of technology or specific countries.

There’s also pending legislation that casts a very wide net.

• The National Critical Capabilities Defense Act , a bill sponsored by Pennsylvania Democrat Sen. Robert Casey, would restrict a variety of emerging tech investment areas.
• If passed, it would require reviews of U.S. investment in foreign countries that may threaten national critical capabilities or the long-term strategic economic, national security, and crisis preparedness interests of the U.S.
• The legislation lists a broad array of industries that could be affected, including artificial intelligence, energy, medical, robotics, and semiconductors.

This isn’t just about venture capital funding. Businesses investing in their own operations in China could be affected depending on how rules are written.

• Companies might need to adjust how they do business in China as a result, Mir told me. That could mean making sure they don’t locate any sensitive intellectual property in China, as well as scrutinizing vendors in China more stringently than they may have in the past.
• U.S. companies doing business in China are “absolutely addicted to the Chinese market,” said Alex Capri, a consultant studying U.S.-China trade flows and tech competition who teaches at the National University of Singapore Business School.
• “It is very, very difficult to grasp and admit what is happening to the Sino-U.S. and on the larger scale China-Western relations,” Capri told me earlier this year. “It is going through a major correction and we are in the early stages of it.”

— Kate Kaye ( email | twitter )

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