Posted on April 1, 2014
Chinese investment in U.S. technology is having a breakthrough year, topping $6 billion in the first quarter of 2014 alone, and instead of stripping U.S. companies of intellectual property Chinese investors appear to be sustaining and adding more U.S.-based jobs, according to a newly released study from Asia Society and Rhodium Group, “High Tech: The Next Wave of Chinese Investment in America“.
Fifteen “high-tech” segments were covered in the report, including aerospace, automotive, transportation equipment, chemicals, renewable energy, financial services and insurance, business services, pharmaceuticals and biotechnology, plastic and rubber, healthcare and medical devices, industrial machinery and tools, electronics, IT equipment, software and IT services and semiconductors. Half of the tech investments to date (in terms of value) have been concentrated in three sectors: IT equipment, software and IT services, and automotive equipment and components, with California by far the leading state in attracting investment. Other important states are North Carolina, New York and Michigan, while Washington state – despite its strong tech industry – continues to under-perform.
Besides market access (especially through local manufacturing), other drivers for the growing interest from China in U.S. high-tech are acquisition of technology, brands, distribution channels, and other strategic assets to improve long-term competitiveness. Another increasingly important driver is the desire of Chinese firms to increase the efficiency of their global operations by tapping the talent base and advanced institutions in the United States – assets which cannot be uprooted and removed to China.
In the first quarter of 2014 alone, Chinese investors announced high-tech deals worth more than $6 billion, including the takeovers of Motorola Mobility and IBM’s x86 server unit by Lenovo, and Wanxiang’s acquisition of electric carmaker Fisker. That is more than the previous five years combined, during which annual investment hovered at $1 billion. And while 2014 will set a new high in the technology sector, cumulative investment in technology from China is $9.1 billion from 2000 through the end of 2013, which is just one-fourth of total Chinese investment in the United States during that period. Chinese-owned companies also show a significant increase in R&D spending in the United States, from near zero in 2007 to $31 million in 2009 and to $366 million in 2011.
Concerns over IP stripping by Chinese investors appear to be over-rated, with the report finding that tech investments are “sticky”.
“We find no signs that industrial policy goals or patriotic doctrines are forcing firms to move innovation operations back to China against commercial logic. To the contrary, Chinese high-tech investors have created or sustained 25,000 jobs in the United States and are becoming significant contributors to research and development investment,” the report said. “The primary value proposition for most Chinese investors is not a quick grab of patents or other removable physical assets but intangible and non-removable assets such as the skills and know-how of staff, management experience, brands, and proximity to local customers.”
Although brand acquisition still isn’t a major driver for Chinese investment, the report expected it to grow in importance in the technology sector, especially as more Chinese companies move toward the consumer space. “Firms with highly innovative products are already knocking at the door, for example, Alibaba, with its innovative approach to business-to-business online commerce; Tencent, with its popular WeChat application; and consumer electronics firms such as Huawei, Xiaomi, and Coolpad, with their affordable smartphones,” the report said.
Longer term, the report projected that China’s overseas foreign direct investment will grow from currently $500 billion to $1 trillion to $2 trillion by 2020, and a significant share of this will build global capabilities in innovation and technology.
Despite the upward trend, the report cautions that the current tension in the U.S.–China relationship could interfere. “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”, the report noted.