The biggest challenges that Chinese investors should be well prepared for when investing in startups overseas is tightened regulations around the world, said Zhu Bin, a former director of Greater China investment advisory, at Business Sweden.
Corporates and investors who are looking to do outbound investment should try to engage or at least touch base with some advisors who are familiar with these regulators and the newest developments as they are constantly changing, Zhu told TechNode’s Emerge 2021 conference in Beijing on Sept. 19.
Chinese companies’ overseas investment activities are facing increasing regulatory pressure recently, especially in high-tech industries like semiconductors and sectors concerning privacy like social media. In late June, the US government halted a Chinese investment firm’s acquisition of South Korean chipmaker Magnachip.
In 2019, The Committee on Foreign Investment in the US (CFIUS) forced Chinese gaming company Beijing Kunlun Tech to sell gay dating app Grindr, which is popular in the US, citing privacy concerns. The sale finally went through in March 2020.
“CFIUS is increasing scrutiny of Chinese investment in the US. European countries are also on their way to produce their own regulations of what can be done and what should not be recommended in terms of investment,” said Zhu.
“These regulations are constantly evolving,” he said. “Unless you are a real expert and you are working on these areas on a daily basis, otherwise, you will be shocked perhaps every three months by how things have changed.”
Recent changes to US laws, including the Foreign Investment Risk Review Modernization Act (FIRRMA), expanded CFIUS’s ability to block investments that it deems a threat to US national security.
Chinese tech giants invested heavily in the US between 2010 and 2018, but quickly scaled back investments in US startups beginning in 2019, TechNode reported last year. The drop-off is partly explained by increased scrutiny in 2018 when CFIUS was given more power to review investments in US companies.
Since then, new Chinese investments in American startups have fallen dramatically. Contributions in the first quarter of 2020 dropped to $400 million, down by more than a third compared to the same period in 2019.
“You have to satisfy governments,” agrees Edison Chen, director of investment at Plum Ventures at the Emerge panel with the theme “Cross-border investment in a global context”. “Entrepreneurs have to understand how America works and how China works.”
“If you can understand both of them[the US and China], you can be very successful in entrepreneurship,” said Chen.