Hanemann & Rosen: High Tech – The Next Wave of Chinese Investment in America

From the Executive Summary:

WHILE CHINA STARTED INVESTING AROUND THE WORLD in the early 2000s, the first waves of Chinese overseas investment targeted mostly extractive mining activities in developing countries and resource-rich advanced economies such as Australia and Canada. Over the past five years, however, Chinese capital has begun to flow into non-extractive sectors in advanced economies, increasingly targeting technology- and innovation-intensive industries.

Initially, the surge of Chinese outward foreign direct investment (OFDI) in the United States largely responded to opportunities in energy and real estate, but access to technology and innovation is now becoming an important driver. In the first quarter of 2014 alone, Chinese investors announced high-tech deals worth more than $6 billion, including the takeovers of Motorola Mobility, IBM’s x86 server unit, and electric carmaker Fisker.

China’s arrival as a technology investor brings benefits to the United States, but it also reinforces concerns, particularly at a time of difficult U.S.–China relations in technology. The United States blames China for technology theft and failed international trade negotiations; China, for its part, still follows discriminatory industrial policies and is contemplating a more nationalistic approach to technology in light of recent electronic surveillance revelations.

In this report, we explore the advent of Chinese investment in U.S. high-tech sectors in order to provide an objective starting point for debate about this nascent trend. We use a unique dataset on Chinese FDI transactions in the United States to describe the patterns of Chinese FDI in U.S. high-tech sectors, elaborate on the firm-level drivers of those investments, and present an initial assessment of the impacts from a U.S. perspective. We then identify the most important impediments to two-way U.S.–China high-tech investment flows and present recommendations for policy makers and businesses on both sides to address these stumbling blocks.

We believe that growing Chinese outbound high-tech investment is an important determinant of the path forward for U.S.–China relations in general. Successful Chinese investments will make Americans recognize the potential benefits of greater economic integration with China through two-way investment flows and remind Chinese leaders that openness and convergence with a market-based innovation approach is in China’s own interest. A negative U.S. response to growing Chinese investment will aggravate existing tensions and give encouragement to proponents of a more nationalistic and discriminatory approach to technology, triggering a backlash against foreign firms in China and risking a protectionist downward spiral.

 

Available for download here.

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