The relationship between China and the US has never been easy. While there have been times of relative ease, much of the relationship has been tense as both countries throw their weight around.
The relationship currently between the two counties is much like it has been for the past decades: areas of cooperation and mutual interest coupled with incompatible values and fear of interference. The flow of goods, services, and labor between the two states has helped to stabilize the relationship. No matter how bad things may get in policy or diplomacy, the mutual benefits of trade make sure that both sides stay reasonable even when the rhetoric gets provocative. Direct investment, however, is an even more powerful form of relationship.
Unlike commercial trading partners, where businesses develop contractual relationships with suppliers, distributors, and merchants, investment requires both parties (investor and investee) to form a close relationship. Whereas a commercial partnership sees terms negotiated and partnerships shift, investment ensures a long-term and intimate commitment from both parties. And creates more disincentive for conflict.
A lot of ink has been spilled recently about the troubles that Chinese tech companies are facing in the US. These cases, however, represent only a fraction of total Chinese tech activity in the States and overlooks the role that FDI is playing in China-US relations.
Why was the FDI Gateway project started? What attracted you to this area?
MacroPolo as a think tank focuses on US-China bilateral relations. Among many ties these two countries share, Foreign Direct Investment (FDI) is one of the fastest growing areas in the past decade, simply because the booming volume of Chinese investors and companies coming to invest in the US. A decade ago, Chinese investments in America was merely in millions, while today, we are looking at more than $40 billion capital invested annually.
Besides the sheer volume, it fascinates me because of how complex it is. Unlike trade, which takes place at a country’s border, investment is tied directly to the specific location where an investor chooses to build a factory, hire a worker, or acquire an asset. Investors of any type need to operate within the confines of the local environment and must work with or hire local workers.
There is so much information asymmetry when it comes to FDI. That’s essentially why we wanted to start the FDI Gateway project, a free and accessible knowledge hub to decode the complexity embedded in FDI for both U.S. communities & companies and potential Chinese investors.
What are some of the biggest trends in tech investment from China?
There are three trends in tech investments from China. First of all, sectors. The recently enriched middle class in China demand better life quality. Tech investments respond to such demand. It is not only in “traditional” tech sectors such as internet software, telecom, and electronics, but also technologies applied in healthcare, food, automobile, etc. Tech investments touch upon almost every aspect of Chinese consumers’ life.
The second trend is the identity of acquirers. Besides technology companies themselves, we see more and more financial players in the field, including private equity, venture capital, and some angel investors. They are often able to move at a very fast speed and generate synergies from their portfolio companies.
The third trend is the motivation of tech investments. It is no longer only about technology acquisition but talent acquisition too. We see many technology companies and traditional industry giants setting up their R&D divisions in the Valley in recent years.
Why is the US so attractive for Chinese tech companies?
Talent, challenge, and market. When you are already the best in a domestic market, the only way to find new challenges and grow organically is to expand to a developed market, and compete with global brands and cutting-edge technology side by side.
What are some of the biggest challenges you think stakeholders from both sides are facing? Culture? Regulation?
Foreign Direct Investment is hard. Unlike trade where goods change hands without counterparties meeting with each other, in FDI investors and investees have face-to-face interactions. And that brings challenges. Many “culture shocks” can very quickly get escalated into legal issues, especially when you enter a foreign market with strong labor unions and environmental regulations. There has been a steep learning curve for many foreign investors including the newly arrived Chinese companies.
Will recent actions against Chinese tech companies have a chilling effect on investment activity?
Absolutely. In fact, we have already seen a downward trend in recent deal flows. Cross-border investments are now under double pressure from both China’s clampdown on mega-deal makers and potential US policy change on The Committee on Foreign Investment in the United States (CFIUS).
Can you make any predictions for 2018?
We will see fewer and fewer mega-deals, especially in sectors that are discouraged by the Chinese authority, namely entertainment, real estate, etc. But this does not mean Chinese investment is going to come to a sudden end. In fact, a rising class of investors, namely PE and VC, are picking up the slack. They are well-equipped with knowledge and experiences in both tech and capital market. As I put in a blog recently, Winter is Coming for Chinese Mega Deals, But Chinese FDI Isn’t Going Away.