DIUx, China's Technology Transfer Strategy, January 2018

The full report is available at the link below.

Executive Summary

This report explores China’s participation in venture deals1 financing early-stage technology companies to assess: how large the overall investment is, whether it is growing, and what technologies are the focus of investment. Chinese participation in venture-backed startups is at a record level of 10-16% of all venture deals (2015-2017) and has grown quite rapidly in the past seven years. The technologies where China is investing are the same ones where U.S. firms are investing and that will be foundational to future innovation: artificial intelligence, autonomous vehicles, augmented/virtual reality, robotics and blockchain technology. Moreover, these are some of the same technologies of interest to the U.S. Defense Department to build on the technological superiority of the U.S. military today. The rapidity at which dual-use technologies are developed in the commercial sector has significant impact on the nature of warfare; mastering them ahead of competitors will “ensure that we will be able win the wars of the future”.2

Because the U.S. economy is open, foreign investors, including those from China, are able to invest in the newest and most relevant technologies gaining experience with those technologies at the same rate as the U.S. does. The U.S. government does not currently monitor or restrict venture investing nor the potential transfer of early-stage technology. The primary tool the government has to block or mitigate foreign investment is the Committee on Foreign Investment in the United States (CFIUS); however, since CFIUS reviews specific deals on a case-by-case basis (rather than systematic assessments of acquisitions or acquirers) and only deals that involve a controlling interest by foreign investors (usually mergers and acquisitions), CFIUS is only partially effective in protecting national security since its jurisdiction is limited. The other principal tool to inhibit technology transfer is the U.S. export control regime. Export controls are effective at deterring exports of products to undesirable countries and can be used to prevent the loss of advanced technologies but controls were not designed to govern early-stage technologies or investment activity. Importantly, to be effective, export controls require collaboration with international allies, a long process where cooperation is not assured.

Further, venture investing is only a small part of China’s investment in the U.S.--which includes all forms of investment and investor types. Investing is itself only a piece of a larger story of massive technology transfer from the U.S. to China which has been ongoing for decades. This report places venture investing within the larger context of China’s long-term, systematic effort to attain global leadership in many industries, partly by transferring leading edge technologies from around the world.

U.S. military superiority since World War II has relied on both U.S. economic scale and technological superiority. U.S. technological pre-eminence enabled the series of offset strategies which included being first with nuclear weapons (the First Offset) and the electronics-enabled weapons of night vision, laser-guided bombs, stealth and jamming technologies as well as spaced-based military communications and navigation enabling the U.S. to dominate the battlefield (the Second Offset). Much of this technology came from research sponsored by the U.S. government and the Defense Department specifically. However, the technologies which will create the Third Offset are to a large extent being developed by early-stage technology companies with significant commercial markets. If we allow China access to these same technologies concurrently, then not only may we lose our technological superiority but we may even be facilitating China’s technological superiority.

That China will grow to be an economy as large as ours may be inevitable; that we aid their mercantilist strategy through free trade and open investment in our technology sector is a choice. As a result, while strategic competition3 with China is a long-term threat rather than a short-term crisis, preserving our technological superiority and economic capacity are important issues for national focus today.

Notes
1 A venture deal is a financing that provides startup or growth equity capital provided by private investors, usually venture capitalists.

2 The 2018 National Defense Strategy recognizes the critical role of technology development in the commercial sector for national security purposes: “The drive to
develop new technologies is relentless, expanding to more actors with lower barriers of entry, and moving at accelerating speed. New technologies include advanced
computing, “big data” analytics, artificial intelligence, autonomy, robotics, directed energy, hypersonics, and biotechnology—the very technologies that ensure we will
be able to fight and win the wars of the future. The fact that many technological developments will come from the commercial sector means that state competitors
and non-state actors will also have access to them, a fact that risks eroding the conventional overmatch to which our nation has grown accustomed. Maintaining the
department’s technological advantage will require changes to industry culture, investment sources, and protection across the National Security Innovation Base.” p. 3

3 As discussed in the National Defense Strategy 2018.