TL;DR:
- Possible restrictions on US foreign investment in AI Firms with national security implications
- Chinese AI firms received $110B from overseas investors from 2015 to 2021
- 167 US investors involved in 17% of global investments in Chinese AI firms
- It’s unclear how much of the $40.2B came from US investors.
- Bulk of investment came from transactions without US investors.
- Need for coordination with allies to address potential backfilling.
- The intangible benefits of investments are difficult to assess
- Curtailing the transfer of intangible expertise may be key to a well-crafted outbound investment review regime.
- The US government lacks effective monitoring, measurement, and regulation of outbound investment flows to Chinese AI companies.
Main AI News:
The US federal government is considering introducing new regulations that would limit American investors from investing in Chinese companies specializing in artificial intelligence (AI) and other sensitive technologies that have commercial and military applications. The Biden administration has been weighing up options for a regulatory regime comparable to the Committee on Foreign Investment in the US (CFIUS) to target US outbound investments in firms based in adversarial countries such as China, referred to as a “CFIUS in reverse.”
The US government is expected to release a proposed rule that would ban investments in Chinese companies engaged in sensitive technology sectors in spring 2021. National Security Advisor Jake Sullivan recently announced, “We’re making progress in addressing outbound investments in sensitive technologies with a core national security nexus.” Investing in Chinese firms focused on technologies such as AI poses significant economic and geopolitical risks.
The potential for US technology to be utilized by the Chinese military, further enabling human rights abuses, or assisting China in gaining an advantage in AI technology more broadly, are primary concerns. Ngor Luong, a research analyst with the Center for Security and Emerging Technology (CSET) at Georgetown University, expressed concerns to FOX Business about US technology supporting China’s military modernization, human rights abuses, and Beijing’s push to gain an AI-first advantage.
Possible restrictions on foreign investment in companies leveraging AI technology with national security implications have become a topic of concern for the US government. This is particularly relevant given the billions of dollars that Chinese AI firms have received from overseas investors in recent years.
According to a recent report by the Center for Security and Emerging Technology (CSET), Chinese AI companies received a total of $110 billion in investment between 2015 and 2021. The report, co-authored by Luong and research fellow Emily Weinstein, analyzed transactions involving Chinese AI firms on Crunchbase, a platform that tracks business investment and funding information.
Of the 2,299 global investments in Chinese AI firms during the period, 167 US investors were involved in 401 transactions, which accounted for approximately 17%. Collectively, these transactions amounted to around $40.2 billion and were directed toward 251 Chinese AI firms, which represents approximately 37% of the total amount raised by Chinese companies.
However, the report noted that it is still unclear how much of the $40.2 billion came from US investors. There are still “massive gaps” in understanding the exact amount of US investment in Chinese AI companies, according to Luong.
Interestingly, the majority of investment into Chinese AI firms during the 2015-2021 period came from transactions that did not involve US investors. About 71% of the transaction value and 92% of the transactions had no US participation and came solely from Chinese investors.
This highlights that Chinese AI firms have raised significant amounts of capital from both domestic and overseas investors outside the US, which would largely avoid any US outbound investment screening mechanism. Therefore, it is essential to coordinate with allies to take similar measures and address any potential problem of backfilling.
In addition to financial investments, US venture capital firms and other investors can offer funding recipients in China intangible benefits such as mentorship, coaching, and greater networking opportunities in the VC community. Such benefits are challenging to assess based on financial transaction data alone. Curtailing the transfer of intangible or tacit expertise that flows to China through these investment relationships may ultimately be a crucial aspect of a well-crafted outbound investment review regime, according to CSET’s report.
In light of the findings, the report urged policymakers to proceed with caution and gain a more in-depth understanding of US financial and technological support to Chinese AI companies. The US government must be in dialogue with its allies to share information on transactions of concern and to consider the utility of an outbound investment review.
Conlcusion:
The findings of the CSET report suggest that the US government must exercise caution in its approach to outbound investment flows to Chinese AI companies. The lack of effective monitoring, measurement, and regulation of such flows makes it challenging to assess the full impact of US financial and technological support on Chinese AI companies.
The report highlights the need for greater coordination with allies to address potential backfilling and to share information on transactions of concern. Ultimately, a well-crafted outbound investment review regime that includes both financial and intangible benefits is crucial to safeguarding national security and ensuring a level playing field in the market.
