Amid growing concerns that China is creeping closer to becoming competitive with the US tech industry, a new pilot program will grant the government increased ability to intervene into lucrative foreign investments in Silicon Valley.
While it’s unclear how drastically they will be applied, the new rules are causing concerns among industry insiders. They fear that it could cool a US tech market fueled by foreign investment, and that the president will use them as political leverage in his ongoing trade war.
Following calls from intelligence agencies to crack down on predatory investment strategies, Congress passed the Foreign Investment Risk Review Modernization Act (Firrma), legislation in August. The program expands governmental oversight on any foreign investments into vaguely defined, “emerging technologies” and the power to block deals if they are deemed to be unfavorable to US security interests.
The new rules will affect financing from around the world, but are intended to curb predatory strategies China has used to extract information out of the companies they invest in.
“There’s know-how, there’s knowledge, there’s secret sauces, and the way you get that is by buying companies,” said James Andrew, a senior vice-president at the Center for International Studies, who worked at both the state and treasury Department. “The Chinese shifted their strategy a couple years ago, to ‘let’s just buy companies and we don’t have to go through all this.’ That’s what the bill is intended to block.”
Over the past decade, China has invested more than $35bn into US tech, largely to gather insights into how to build its own. In 2015, China launched Made in China 2025, a state-led 10-year plan that seeks to develop and build a better tech industry with a focus on new energy, cars, IT, telecoms, robotics, and AI. As the line between consumer and military technology becomes increasingly blurred, the Trump administration and other advocates have raised the alarm, framing China’s plan as a threat to the economy and national security.
“It’s a strategic plan designed to acquire advanced research and technologies that will allow China not just to challenge the US but to supplant the United States as the single dominant world power,” congressman Chris Stewart, who chairs a defense department subcommittee, wrote in an Op-Ed in the Hill in August, defending the urgency of newly signed bill.
Firrma expands the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS), an agency founded in 1975. From today, the committee will require documentation from any foreign investor who has access to nonpublic information from companies that produce so-called “critical technology”.
In the past, less than half of filings resulted in investigations and it was rare that the president would block a deal. US presidents have blocked five transactions since CFIUS was launched, two of which were under Trump.
As the numbers of companies required to file increase, so could the decisions to block deals – especially as the Trump administration continues to look for ways to curb Chinese economic growth.
“Certainly the Trump administration has shown that it is willing to use its national security authority in the trade area to generate economic leverage,” says Alan Sykes, a Stanford law professor and senior fellow at the Stanford Institute for Economic Policy Research, citing Trump’s use of national security rational to impose steep steel and aluminum tariffs. “It would be surprising if the new rules, at least in this administration were not used to promote US technological superiority in areas that don’t have major security implications.”
While the rules will likely slow Chinese tech innovation, some are worried it will also hurt Silicon Valley.
“The impact ultimately on the companies is not known – but is certainly likely to inhibit them in many ways,” said Jeff Farrah, the general council for the National Venture Capital Association. He explained there are still a lot of questions about how the regulations will be applied and how difficult and expensive the process could become, and whether that would scare away investors.
According to an analysis by the Congressional Research Service, firms will have to pay a filing fee of up to $300,000, along with the mandatory declarations. The three-step evaluation could also slow the turnaround time on deals, in a fast-moving market.
Over the last two decades, there has been an increase in foreign investment into the US tech industry and, while it’s unclear exactly how much money has flowed into Silicon Valley from abroad – due to the layered and often secretive way capital comes into new companies – Farrah says the influx of foreign capital has powered development.
While he agrees that it’s important to ensure the safe-keeping of American IP – especially when it comes to emerging technologies –he questioned the bill’s ability to achieve its goals without causing unintended harm.
“If [the legislation] can be scaled that gets after that concern, then it could be a benefit. But if it is used to significantly chill investment from China into the United States or – even worse – chill it from a lot of friendly countries into the United States, then it is going to be extremely harmful and counter-productive.”