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Federal agencies are considering new regulations that would prevent American investors from funding Chinese companies that work with sensitive technology like artificial intelligence (AI) and other technologies that have both commercial and military uses.
The Biden administration has been proposing a regulatory framework that would apply to outbound U.S. investment in businesses situated in rival nations like China and be akin to the Committee on Foreign Investment in the U.S. (CFIUS). An expression used to describe the idea is “CFIUS in reverse.”
This spring could see the publication of the proposed regulation to prohibit investments in Chinese companies working with sensitive technologies. National Security Advisor Jake Sullivan said in remarks at the Brookings Institution last month, “We’re making progress in addressing outbound investments in sensitive technologies with a core national security nexus.”
The potential significant economic and geopolitical impact of Chinese enterprises specializing in technology like AI is a source of worry for investors. Ngor Luong, a research analyst with the Center for Security and Emerging Technology (CSET) at Georgetown University, told FOX Business, “There are concerns around U.S. technology going to the Chinese military to help it modernize, to support Beijing’s efforts to leverage technology for human rights violations, or to help China gain a first-mover advantage in AI writ large.”
The United States may impose limitations on foreign investment in companies that use artificial intelligence (AI) and related technologies that have consequences for national security. This is because Chinese AI companies have recently earned billions of dollars from global investors.
Luong and research fellow Emily Weinstein examined the problem and transactions involving Chinese AI firms on Crunchbase, a website that analyses business investment and funding information, from 2015 to 2021 for a recent paper by CSET. The data set’s Chinese AI companies saw a total of $110 billion in funding over that time.
It discovered that 401 deals, or around 17% of the 2,299 global investments in Chinese AI businesses, involved 167 U.S. investors. 251 Chinese AI startups received a combined $40.2 billion from these transactions, or around 37% of the total funds raised by Chinese companies.
However, it’s not clear exactly how much of the $40.2 billion came especially from U.S. investors. Luong explained there are “a number of areas where we still have massive gaps in our understanding of U.S. investment in the Chinese AI market” and added, “We still don’t have a lot of visibility into the exact amount of U.S. investment into Chinese AI companies.”
Since around 71% of the transaction value and 92% of the transactions in the data set had no U.S. participation and only came from Chinese investors, the majority of investment into Chinese AI startups during the 2015–2021 timeframe came from deals that didn’t involve American investors.
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This demonstrates the fact that Chinese AI companies have raised sizeable sums of money from both domestic and international investors outside the United States – transactions that would largely evade any U.S. outbound investment screening mechanism – and the necessity of working with allies to take equivalent action.
Luong said, “The U.S. government needs to be in conversation with allies to address any potential problem of backfilling and to share information on transactions of concern as well as the utility of an outbound investment review.”