HigH TecH:The Next Wave ofchinese investmentin AmericaBY THILO HANeMANN AND DANIeL H. ROSeNSPeciAL RePoRTHIGH TECH:The Next Wave ofChinese Investment in AmericaTHILO HANEMANN AND DANIEL H. ROSENApril 2014SPECIAL REPORTAsiaSociety.org/ChinaHiTechInvestment© 2014 The Asia Society. All rights reserved.Asia Society Northern California500 Washington Street, Suite 350San Francisco, CA 94111Phone: 415-421-8707Fax: 415-421-2465Email: sanfrancisco@asiasociety.orgwww.asiasociety.org/centers/northern-california3 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA ABOUT THE AUTHORSThilo Hanemann is Research Director at Rhodium Group and leads the firm’s cross-borderinvestment work. His research assesses new trends in global capital flows, related policy developments,and the political and commercial dynamics of specific transactions. One of his areas of expertise isthe rise of emerging economies as global investors and the implications for host economies and theglobal economy. His most recent work focuses on the evolution of China’s international investmentposition and the economic and policy implications of this new trend. Mr. Hanemann is a frequentspeaker and commentator on China’s outward investment and has published numerous articles on thetopic. He coauthored Rhodium Group’s authoritative reports on Chinese investment in the UnitedStates (An American Open Door? Maximizing the Benefits of Chinese Foreign Direct Investment, 2011) andEurope (China Invests in Europe: Patterns, Impacts and Policy Implications, 2012) and is responsible formanaging Rhodium Group’s China Investment Monitor.Daniel H. Rosen is cofounder and China Practice Leader at Rhodium Group. Mr. Rosen is aVisiting Fellow at the Peterson Institute for International Economics in Washington, D.C., withwhich he has been affiliated since 1993, and an Adjunct Associate Professor teaching graduatecourses at Columbia University’s School of International and Public Affairs since 2001. From 2000to 2001, he was Senior Advisor for International Economic Policy to the White House NationalEconomic Council and National Security Council, where he played a key role in completing China’saccession to the World Trade Organization. Mr. Rosen is a Member of the Council on ForeignRelations and serves on the Board of the National Committee on U.S.–China Relations.Rhodium Group combines policy experience, quantitative economic tools, and on-the-groundresearch to analyze disruptive global trends. Its work supports the investment management,strategic planning, and policy needs of the financial, corporate, government, and not-for-profitsectors. Rhodium Group has offices in New York and California and associates in Washington,Shanghai, and New Delhi. (http://www.rhg.com)The China Investment Monitor is an interactive online tool developed by Rhodium Group thatallows users to track Chinese direct investment transactions in the United States by state and byindustry. It is updated on a quarterly basis, along with public notes discussing the most importantdeals and policy trends. (http://rhg.com/interactive/china-investment-monitor) 4 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA Supported by:Jack WadsworthCONTENTSFOREWORD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6AUTHORS’ ACKNOWLEDGMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9INTRODUCTION: FOREIGN INVESTMENT AND U.S. INNOVATION . . . . . . . . . . . . 15I. PATTERNS: CHINESE FDI IN U.S. HIGH-TECH SECTORS . . . . . . . . . . . . . . . . . 18Annual Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Industry Breakdown . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Geographic Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investor Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19252732II. MOTIVATIONS: WHAT IS DRIVING CHINESE FDI IN U.S. HIGH TECH? . . . . . . . 35Access to the U.S. Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38Acquisistion of Strategic Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41Improving the Efficiency of Global Operations . . . . . . . . . . . . . . . . . . . . . . . . 44III. IMPACTS: SHOULD WE WELCOME CHINESE FDI IN TECH? . . . . . . . . . . . . . . 47Productive Competition or Threat to Competitive Markets? . . . . . . . . . . . . . . . 48Greater Innovative Capacity or Technology Transfer? . . . . . . . . . . . . . . . . . . . . 51Peace Dividend or National Security Threat? . . . . . . . . . . . . . . . . . . . . . . . . . 59IV. IMPEDIMENTS: TOWARD A PRODUCTIVE U.S.–CHINA INVESTMENT RELATIONSHIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62Managing National Security Risks Appropriately . . . . . . . . . . . . . . . . . . . . . . 62Strengthening the Consensus for a Market-Driven System . . . . . . . . . . . . . . . . 66Building and Sustaining Comparative Advantages . . . . . . . . . . . . . . . . . . . . . 68V. CONCLUSIONS AND RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 70Recommendations for U.S. Policy Makers and Businesses . . . . . . . . . . . . . . . 70Recommendations for Chinese Policy Makers and Businesses . . . . . . . . . . . . . 72REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74DATA APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 836 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA FOREWORDSEVERAL YEARS AGO, it became evident that the world was on the cusp of a significant shiftin patterns of global foreign direct investment (FDI). China, which had been a major recipientof inflows from the developed world, was poised to become a more active investor in mergers,acquisitions, and greenfield projects abroad. Therefore, the Asia Society undertook the first of aseries of studies to map this shift and to suggest how these new investment flows, might benefitthe United States while also enhancing U.S.–China relations.The first study, An American Open Door? Maximizing the Benefits of Chinese Foreign Direct Investment(2011), was written by Rhodium Group’s Daniel H. Rosen and Thilo Hanemann (as were subsequentjoint efforts). It examined Chinese investments in the United States, prospects for their growth,potential benefits and risks, and obstructions to even greater flows in the future. Our conclusionwas that flows of Chinese capital into the United States—the most open and vibrant economyin the world—were on the precipice of growing dramatically. We also concluded that in spite ofpolitical concerns, the United States had much to gain by encouraging even greater inflows fromChina.The second study, Chinese Direct Investment in California (2012), was premised on the recognitionthat because the West Coast of the United States has a long tradition of involvement with Chinaand the Pacific, it has a much greater at stake in how future patterns of Chinese investmentmove around the world. With that in mind, we focused on the current state of Chinese FDI inCalifornia, the risks and benefits of such investment, and recommendations for encouraging evenlarger flows in the future. The report helped the state of California reconsider how to enhance itsrelations with China and, ultimately, paved the way for Governor Edmund G. Brown, Jr., to lead asuccessful delegation to China in March 2013. His trip catalyzed not only new investment projectsbut also a series of important subnational exchanges and collaborations.Drilling even more deeply into the U.S.-China relationship, the Asia Society’s Northern CaliforniaCenter is pleased to present a third report, High Tech: The Next Wave of Chinese Investment inAmerica, which examines Chinese direct investment in America’s high-tech sector—an areathat is particularly interesting to Chinese investors because of its distinctively innovative spirit,dynamism, and extraordinary success. The challenge of this study was to analyze the currentlevel of Chinese involvement in U.S. high-tech sectors and to make recommendations on how toimprove the investment climate and pave the way for mutual gains by both economies.7 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA Although there are some cases in which Chinese investments poses national security challenges,this is not the case in the vast majority of transactions. It is our hope that this survey will helpdelineate not only areas where caution is advised but also others where more activity will benefitboth countries. In this way, America’s high-tech sectors—particularly in states such as California,which has always been a pace-setter—can become a model for closer two-way U.S. investmentlinks with China.Orville SchellArthur Ross Director, Center on U.S. China RelationsAsia SocietyJack WadsworthAdvisory Director, Morgan StanleyCo-Chair, Advisory Board, Asia Society Northern CaliforniaN. Bruce PickeringVice President of Global Programs, Asia SocietyExecutive Director, Asia Society Northern California8 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA AUTHORS’ ACKNOWLEDGMENTSTHIS REPORT IS THE THIRD COLLABORATION between Rhodium Group and the Asia Societyon Chinese investment in the United States. We are grateful to the Asia Society for its enthusiasm,encouragement, and support of our work on Chinese outbound investment, especially to OrvilleSchell at the Center on U.S.–China Relations and President Josette Sheeran. We owe particularthanks to Jack Wadsworth, who, in addition to his involvement as a board member of the AsiaSociety and a cheerleader for research on U.S.–China investment flows, continues to share hisongoing experience, contacts, and wisdom, as well as his warmth and encouragement.For this study, we would especially like to thank Bruce Pickering of the Asia Society NorthernCalifornia (ASNC) Center, who initiated this project and supported us throughout. We are indebtedto Robert W. Hsu, Robert Bullock, Maria Scarzella-Thorpe, Wendy Soone-Broder, and the rest ofthe ASNC team for their administrative support and useful feedback on our drafts. We also wantto thank the sponsors of the report: Deloitte, Silicon Valley Bank, Wells Fargo, Jack Wadsworth,Blank Rome LLP, and East West Bank.The participants in three study groups in San Jose (December 10, 2013), San Francisco (December11, 2013), and Washington, D.C. (December 13, 2013), provided useful reactions and comments onearly drafts of the report. We benefited greatly from discussions with a wide range of individuals inthe United States and China in the private sector, government organizations, and academia.We owe a debt of gratitude to a number of fellow economists at the Peterson Institute forInternational Economics who have worked on the larger topic of foreign direct investment inthe past, including Ted Moran and Monty Graham (1944–2007). Finally, special thanks go toour colleagues at Rhodium Group in New York City for their superb research and administrativesupport.While all of these people improved our work, imperfections surely remain, which are solely theresponsibility of the authors.Thilo Hanemann, Daniel H. RosenNew York, March 20149 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA EXECUTIVE SUMMARYWHILE CHINA STARTED INVESTING AROUND THE WORLD in the early 2000s, the first waves ofChinese overseas investment targeted mostly extractive mining activities in developing countriesand 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 largelyresponded to opportunities in energy and real estate, but access to technology and innovation isnow becoming an important driver. In the first quarter of 2014 alone, Chinese investors announcedhigh-tech deals worth more than $6 billion, including the takeovers of Motorola Mobility, IBM’sx86 server unit, and electric carmaker Fisker.China’s arrival as a technology investor brings benefits to the United States, but it also reinforcesconcerns, particularly at a time of difficult U.S.–China relations in technology. The United Statesblames China for technology theft and failed international trade negotiations; China, for its part,still follows discriminatory industrial policies and is contemplating a more nationalistic approachto 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 toprovide an objective starting point for debate about this nascent trend. We use a unique dataseton Chinese FDI transactions in the United States to describe the patterns of Chinese FDI inU.S. high-tech sectors, elaborate on the firm-level drivers of those investments, and present aninitial assessment of the impacts from a U.S. perspective. We then identify the most importantimpediments to two-way U.S.–China high-tech investment flows and present recommendations forpolicy makers and businesses on both sides to address these stumbling blocks.We believe that growing Chinese outbound high-tech investment is an important determinant ofthe path forward for U.S.–China relations in general. Successful Chinese investments will makeAmericans recognize the potential benefits of greater economic integration with China throughtwo-way investment flows and remind Chinese leaders that openness and convergence with amarket-based innovation approach is in China’s own interest. A negative U.S. response to growingChinese investment will aggravate existing tensions and give encouragement to proponents of amore nationalistic and discriminatory approach to technology, triggering a backlash against foreignfirms in China and risking a protectionist downward spiral.10 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA PatternsChinese FDI in the United States has evolved from trade facilitation (in the 1990s) and resourceextraction (starting in the mid-2000s) to investment in high-tech manufacturing and advancedservices. Using a broad subset of 15 high-tech industries, we show that Chinese interest in theseindustries was minimal before 2010, with the exception of Lenovo’s acquisition of the IBM personalcomputing unit in 2005. Since 2010, annual deal value has topped $1 billion every year. In 2012 and2013, growth stalled, along with a general drop in number of FDI transactions, but 2014 will be abreakthrough year, with deals worth more than $6 billion pending in the first quarter alone.Despite this recent surge, cumulative investment from China in U.S. high tech remains modest byany measure. By the end of 2013, cumulative Chinese investment in these 15 industries amountedto $9.1 billion—about one-fourth of total Chinese FDI in America in this period, or about half ofwhat Facebook offered to pay for the acquisition of messaging start-up WhatsApp in February 2014.Within the high-tech industries, the trend has shifted from mostly electronic equipment, machinery,and auto parts in earlier years to a much broader mix of industries, including new energy, aviation,and biotechnology. Chinese high-tech investments are spread across 37 states, with California andstates with particular innovation clusters receiving the most investment. Chinese firms investing inU.S. high-tech sectors are mostly private enterprises that have a global footprint and are located inChina’s most developed provinces.MotivationsChina’s recent OFDI boom is driven by a mix of policy liberalization and changing commercialrealities in the Chinese marketplace, which are forcing firms to expand beyond China’s borders.To illustrate the changing motivations for such investments at the firm level, we reviewed all 518transactions in our sample of high-tech deals. We find that trade facilitation was initially the mostimportant driver of Chinese FDI in technology-intensive industries, mostly in the form of smallerscale projects such as sales offices. As their goods become more technologically advanced, firms arenow investing in more sophisticated and expensive projects aimed at demonstrating capabilities andproviding after-sales services. In addition to export facilitation, an increasingly important driver ofChinese high-tech FDI is the acquisition of technology, brands, distribution channels, and otherstrategic assets to improve long-term competitiveness. A second, newly emerging driver is the desireof Chinese firms to increase the efficiency of their global operations by tapping the talent base andadvanced institutions in the United States – assets which cannot be uprooted and removed to China.ImpactsThe impact of Chinese investment in high-tech industries is the subject of intense debate. The trackrecord of Chinese firms in the United States is too short to fully assess the validity of concerns, butour research allows us to present some important data points and anecdotal evidence.11 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA The first major concern is that China’s economic size, combined with nonmarket advantages itsfirms sometimes possess, could threaten the healthy functioning of competitive markets in thelong-term. We find that the impact of Chinese FDI on competition in high-tech industries is stillsmall but largely positive to date. Chinese firms such as Haier, Lenovo, Tencent, and Alibaba areincreasing choices and lowering prices for consumers. Greater Chinese FDI also increases thecompetition for assets, thus allowing U.S. producers to divest unwanted assets at a higher price,as the examples of IBM’s x86 server unit and Google’s Motorola unit illustrate. Concerns aboutthe distortion of asset prices in the aggregate by new Chinese investment entrants are for thetime being unwarranted, given the small market share of these firms. However, the concerns ofindividual firms about the subsidies and other nonmarket advantages enjoyed by Chinese firms nowentering the competition for global technology assets or overseas market share are understandableand legitimate, and need to be addressed.A second concern is that China’s industrial policies and state controls could incentivize its firmsto acquire U.S. assets in order to move innovation-intensive activities back to China, hollowingout American capabilities. Analyzing our sample of Chinese investments, we find no signs thatindustrial policy goals or patriotic doctrines are forcing firms to move innovation operations backto China against commercial logic. To the contrary, Chinese high-tech investors have created orsustained 25,000 jobs in the United States and are becoming significant contributors to researchand development investment. The primary value proposition for most Chinese investors is not aquick grab of patents or other removable physical assets but intangible and non-removable assetssuch as the skills and know-how of staff, management experience, brands, and proximity to localcustomers.Third, Chinese FDI does evoke particular concerns about national security impacts because ofChina’s size, its role as geopolitical competitor, and its troubled track record in the proliferation ofsensitive technologies to hostile regimes such as North Korea. These concerns are also legitimateand warranted. At the same time, the existing screening system of the Committee on ForeignInvestment in the United States (CFIUS) allows the United States to sufficiently mitigate risks orblock investments with potential negative impacts on security.ImpedimentsConcerns in the United States about Chinese high-tech OFDI and existing distrust and calls forde-Westernization of technology in China could contribute to a dangerous turn toward technonationalism. We identify three areas where policy makers and private sector players—both in Chinaand the United States—must work to sustain healthy and open two-way U.S.–China investment flows.First, national security concerns have hampered a number of deals and led to politicization of othersin the US. In China, national security concerns have recently triggered a debate about reducingreliance on foreign technology and spurred certain groups to lobby for a more nationalistic approachto innovation. Therefore, the first and foremost challenge to safeguarding productive and mutually12 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA beneficial U.S.–China investment flows is to ensure that national security concerns are managedappropriately and that regimes are not abused for protectionist or other special interests.A second impediment is debate over the nonmarket elements in China’s economy and asymmetriesin market access. Concerns about the “unfair advantages” enjoyed by Chinese firms in globalcompetition, a lack of reciprocity in market access, and industrial policy biases have been voiced inconnection to almost every Chinese high-tech acquisition in the United States. Such concerns havealready led to new rules in some of China’s partner economies (for example, Canada and Australia),and there are calls in the United States to expand the scope of CFIUS or to erect new regimesto screen for potential economic threats from Chinese investment. Resolving these concerns isessential to a sustainable U.S.–China investment relationship.A third threat to open U.S.–China investment flows and the globalization of innovative activitiesgenerally is uncertainty about the distributional impacts and benefits from such processes. Therefore,it is critical to take the right steps for both countries to be confident about the economic benefitsfrom an internationalist approach, rather than a nationalist approach, to technology value chains.Recommendations for U.S. policy makers and businesses1. Acknowledge China’s arrival as high-tech investor: Many policy makers struggle to imaginethat Chinese firms could become major contributors to local innovation. As our data show, theyalready are. Governors and mayors need to do their homework and craft strategies for attractinginvestments in their local economies. The U.S. business community will also have to carefullyconsider the opportunities and challenges of this shift in Chinese investment interests for theiroperations at home and abroad.2. Ensure that national security screening remains effective: For decades CFIUS has fulfilledits mandate well: screening for narrowly defined national security concerns in inward acquisitionsso as to clear the way for general openness to foreign investment flows. The rise of high-techinvestments from China reinforces the need for a gatekeeper that establishes confidence thatopenness to China entails no unmanageable risks. At the same time, rapid growth in Chinarelated deal flow also raises the risk that deals are politicized and that the narrow standard of whatconstitutes a legitimate national security concern may widen. Such risks should be headed off byclear guidance from the President, greater transparency about technology-related concerns, andbetter disclosure of procedures and results.3. Reassess other investment-relevant elements of U.S. security policy: The emergence ofinvestors from emerging markets and the growing complexity of global innovation value chainshighlight the need to evaluate other elements of U.S. national security policy. One area is the U.S.export controls regime, which has been a drag on the global competitiveness of U.S.-based firmsfor a long time and will put U.S. locations at a disadvantage in competition with European orAsian economies for legitimate greenfield investments from China. A second area is market access13 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA restrictions for Chinese technology goods, which may be necessary and legitimate, but they need tobe narrow, codified, and transparent to avoid retaliation against U.S. companies.4. Utilize domestic frameworks to address economic and commercial concerns: Instead ofexpanding CFIUS reviews to “economic security” questions or erecting a new burdensome at-theborder regime, the U.S. should use its ample domestic regimes—including competition policy ortrade secrets laws— to address economic concerns such as unfair competition. The greater physicalpresence of Chinese firms will also give U.S. companies a greater ability to use the U.S. court systemfor pursuing their interests in technology-related disputes with Chinese firms, such as copyright andintellectual property rights (IPR) violations.5. Push for a bilateral investment treaty and international regimes to incentivize upwardconvergence: A bilateral investment treaty between China and the United States will not levelthe playing field overnight, but it could provide a detailed template for improving China’s inwardFDI regime and testing China’s degree of readiness. At the same time, the United States shouldcontinue its leadership on international agreements addressing market access, IPR protection, andtransparency, such as the Transatlantic Trade and Investment Partnership, the Trade in ServicesAgreement, and the well-advanced Trans-Pacific Partnership. If reforms in China fall short ofexpectations, then such international investment covenants will serve as a safety net for marketeconomies and an incentive for convergence.6. Tackle reforms to ensure long-term U.S. competitiveness in innovation-intensiveactivities: The United States is attractive to Chinese firms because it is the world leader in manycutting-edge technologies and offers firms the right institutional environment and highly qualifiedand educated workers. The way to keep these firms in the United States and attract more of themis to sustain these advantages and make America a more attractive place for knowledge-intensiveactivities than its peer competitors in Europe or Asia. Barriers to foreign investment will do little toimprove American competitiveness—in fact they could easily impair it further.Recommendations for Chinese policy makers and businesses1. Acknowledge foreign concerns: American anxieties about the character of China’s behaviorin the context of global innovation are not surprising, given Beijing’s extensive official indigenousinnovation programs couched in nationalistic terms, talk of “de-Westernizing” Chinese technology,recent setbacks in an expanded Information Technology Agreement as a result of Chinese footdragging, and a history of aggressive technology theft by Chinese firms both at home and abroad.Historically, China is not unique in any of these blemishes, but if Chinese leaders and firms want tooptimize market access abroad today, the onus is on them to change these perceptions.2. Make a down payment on broad market reforms: The aggressive economic reform programlaid out by the Third Plenum of the Communist Party in November 2013 is a big step forward, butuncertainty remains about what path the leadership intends to take on innovation and technology. By14 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA making a “down payment” on reform, Beijing can demonstrate what kind of future foreign partnerscan expect and make it easier to get past current misgivings about high-tech OFDI. Examples ofconfidence-building moves with regard to innovation include lower barriers to foreign participationin technology and service sectors in China or the abolition of nationality-based discrimination intechnology-relevant industrial policies.3. Take bolder steps on China’s inward FDI regime: A prime determinant of foreign appetite forChinese FDI in technology is the treatment of foreign firms in China. The faster China moves fromthe current approval system to a modern FDI regime, the more easily U.S. leaders and businessescan advocate for reciprocal openness. Within this new regime, the list of restricted sectors shouldbe narrow and transparent, and informal barriers should be minimized. A revised and radicallyslimmed down negative list of sectors to be exempted from general openness, both in the context ofthe new Shanghai Free Trade Zone and the US-China BIT negotiations, is the singular indicationof boldness that foreign observers are looking for at this point.4. Unleash the private sector: China has made great strides in the transition from a governmentdominated economy to a market economy, and it is private firms and entrepreneurs that are nowdriving outbound FDI in technology sectors. However, private innovators need a better legalenvironment at home, as well as more freedom to make unfettered decisions about outboundinvestment and global operations. Conversely, China’s private sector needs to step up and do a betterjob educating stakeholders abroad about motives and impacts of investments, and in advocatingopenness and a level playing field for foreign firms in China.5. Provide greater leadership on investment-related international regime building: As theworld’s second-largest economy and now one of the top exporters of FDI globally, China needs totake a greater role in designing and expanding multilateral regimes that promote global investmentopenness. Negotiating bilateral investment agreements with the U.S. and other countries are a firststep, but China could ultimately become a powerful force in the revival of a multilateral agreementon investment. China’s changing global investment interests, combined with changes in thedomestic political economy, should also increase the urgency for China to promote or join relatedinternational agreements, for example, the World Trade Organization’s government procurementagreement and the Information Technology Agreement. 15 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA INTRODUCTION: FOREIGN INVESTMENTAND U.S. INNOVATIONTHE UNITED STATES IS A WORLD LEADER in science, technology, and innovation. From itsbeginnings, America’s status as a high-tech nation has been closely related to the inflow of foreigninvestment.1 Early European innovators were major investors in U.S. high tech, especially as theIndustrial Revolution gained steam, enticed by wide-open market opportunity, rapid demographicgrowth, and favorable regulatory and cultural environments for commercial development. By1900, 13.2% of U.S. patents were granted to foreign citizens. As Mira Wilkins notes in her seminalstudy of foreign direct investment (FDI) in the United States, referring to the period before 1914,There seems no question that foreign direct investors in the United States served asconduits for technology transfer to America. This was true in numerous industries, fromrayon to chemicals to magnetos.2The “going global” strategy of firms seeking to be part of American growth continued throughoutthe twentieth century. Enormous positive technology spillovers for states and localities, more oftenthan not, enhanced profits for the foreign firms as well. America’s technological lead can be attributedboth to the foreign firms and individuals that established operations and to the farsighted policymakers who recognized that keeping the door open to foreign investment incentivizes innovationeven in cases lacking foreign entrants. Creating an attractive place for foreign multinationals tolearn and perform research and development (R&D) is innovation enhancing for its own sake.The United States continues to be the world’s most attractive destination for foreign directinvestment, accounting for around 17% of global FDI inflows over the past two decades anda total inward FDI stock of $2.65 trillion at the end of 2012. Investment in innovation-relatedactivities remains high, with foreign multinationals accounting for 13% to 15% of total corporatespending on R&D in the United States.3Since the mid-2000s, a new group of investors has been knocking at America’s door: firms fromemerging economies, chief among them Chinese enterprises. A major destination for global FDIsince the early 1990s, China has emerged as a major exporter of FDI since the mid-2000s, and itnow accounts for 5% of global outward foreign direct investment (OFDI) flows (2012), behindonly the United States and Japan (Figure 1). While the first wave of Chinese OFDI was directedto trade facilitation and resource extraction, in recent years Chinese capital flows to developedeconomies have grown quickly, increasingly motivated by access to technology and markets forhigher-value-added products.123The following historical review is based on the excellent work by Mira Wilkins (1989, 2004) on the history of FDI in the United States.Wilkins (1989, 177).Data from the National Science Foundation, accessed February 17, 2014, http://www.nsf.gov/statistics/seind12/c4/c4s4.htm#s1.16 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA Figure 1: The World’s Top FDI Exporters, 1981-2012Percent share of global outward FDI flows, three-year moving average Figure 1: The World’s Top FDI Exporters, 1981–2012Share (%) of global outward FDI flows, three-year moving average30%UNITED STATES25%UNITED STATESJAPAN20%Note: Please* X-AXIS (YEAR..[EVERY TWO15%GERMANYFRANCE10%JAPAN5%CHINACHINA2011INDIA198119821983198419851986198719881989199019911992199319941995199619971998199920002001200220032004200520062007200820092010201120120%Source: United Nations Conference on Trade and Development.500400300REDONE200Historically, China has not been a major investor in the United States. For the past two decades,investments from the Middle Kingdom have been mostly small in scale, low key, and exportfacilitation-oriented. However, these flows have recently grown substantially, from an average ofless than $1 billion a year before 2008 to more than $14 billion by 2013. This growth has been2: China’ssectorOutwardFDI Flows andStockby the U.S. unconventional oil and gas boomdriven byFigurenew extractiveopportunitiescreatedUSD billionand by the mounting desire of Chinese institutional investors to find safe-haven investments, suchas real estate and utilities. In recent years, a new set of drivers has evolved: Chinese firms in moreadvanced90manufacturing and services are eager to grow U.S. market share and margins, acquiretechnology, tap theOFDIU.S.Stocktalent(rightbase,axis) and take advantage of the legal and financial environment.50080OFDI Flows (left axis)As with previouswaves of foreign investment, these new investment flows have sparked a debate70about impacts on both the U.S. economy and national security. As the examples of Japan400and South60Korea haveshown, these new flows can help sustain U.S. technology leadership and local jobs andcontributeto productivity enhancement in the U.S. economy. At the same time, investment from50300China generates fears about the loss of U.S. technology leadership, unfair nonmarket practices,40and the transferof dual-use technology to a geopolitical competitor.2003020122010200820062004200220001998199619941992199001988019861019840Recent developments in U.S.–China relations complicate this debate. On the U.S. side, evidenceof Chinese20 state-sponsored cyber espionage, foot-dragging on expansion of the trade-orientedInformation Technology Agreement, and indigenous innovation policies and technology100standards19822012201120102009100200820072012HONG KONGGERMANYFRANCEINDIAHONG KONG017 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA at home have created a negative view of Chinese readiness to further integrate with a market-basedglobal system of technology value chains. On the Chinese side, revelations suggesting systematicU.S. cyber intrusion on foreign countries have heightened awareness of vulnerability and sparkeda backlash against U.S. firms in China. Beijing sees U.S. and European Union efforts to expandglobal technology standards as a veiled attempt to achieve protectionist aims.4 In short, recentdevelopments are undermining the vision of a market-based system of global innovation valuechains and raising the specter of welfare- and innovation-destroying “techno-nationalism.”This report analyzes growing Chinese investment interests in U.S. technology- and innovationintensive industries against this backdrop. Our goal is to provide a current, evidence-baseddepiction of these trends and their significance in order to improve public policy discourse amonginterested parties. Building on this initial assessment of on-the-ground facts, we offer conclusionsand recommendations for both China and the United States for maintaining the benefits fromgrowing cross-border investment-driven innovation.In Part I, we review the patterns of Chinese investment based on a proprietary database and analyzehow much of this capital is targeted toward technology- and innovation-intensive industries. InPart II, we explore the motivations for growing Chinese investment in these industries, focusingon commercial firm-level drivers. Part III turns to the impacts of these investments on theUnited States and analyzes preliminary evidence for the most important questions from a U.S.perspective. In Part IV, we look at the most important roadblocks to a productive U.S.–Chinarelationship in high-tech trade and investment and how to overcome them. The report concludeswith a summary of findings and concrete recommendations for policy makers and private sectorplayers for sustaining U.S.–China collaboration, as opposed to a scenario of techno-nationalism. On the impact of cyber espionage on U.S. firms in China, see Rosen and Bao (2013). On the Transatlantic Trade and InvestmentPartnership and technology standards, see “Remarks for U.S. Trade Representative Michael Froman on the United States, the EuropeanUnion, and the Transatlantic Trade and Investment Partnership,” September 30, 2013, accessed February 17, 2014,http://www.ustr.gov/about-us/press-office/speeches/transcripts/2013/september/froman-us-eu-ttip.4UNITED STATESJAPAN: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA 20%18 | ASIA SOCIETY HIGH TECHNote: Please* X-AXIS (YEAR..[EVERY TWO15%GERMANYFRANCE10%JAPAN2011HONG KONG2012I. PATTERNS: CHINESE FDI IN U.S.HIGH-TECH SECTORS5%CHINACHINAINDIA0%19811982198319841985198619871988198919901991199219931994199519961997199819992000200120022003200420052006200720082009201020112012GERMANYFRANCEINDIAHONG KONGCHINA’S WORLDWIDE OUTWARD FOREIGN DIRECT INVESTMENT has grown quickly over thepast decade, from less than $3 billion in 2004 to more than $20 billion in 2006 and to more than$50 billion in 2008. In the years from 2010 to 2012, in the face of a global decline in FDI levels,China sustained an annual OFDI average of more than $50 billion, making it one of the world’stop exporters of direct investment in the post–financial crisis years. By year-end 2012, China’sglobal OFDI stock had reached $503 billion (Figure 2).5Figure 2: China’s Outward FDI Flows and StockFigure2:billionChina’s Global Outward FDI Flows and StockUSD$US (billions)90500OFDI Stock (right axis)80500OFDI Flows (left axis)704004006030050300REDONE4020020030100010020122010200820062004200220001998199619941992199019880198601984101982201220112010200920200820072010UNITED STATES25%0Sources: People’s Bank of China; State Administration of Foreign Exchange (PRC); External Wealth of Nations Dataset.The initial boom in China’s OFDI was centered on developing countries and a handful of resourcerich advanced economies, including Australia and Canada. For the most part, non-resourcesinvestments in developed economies were few and far between. That situation began to changein 2008, when Chinese direct investment in the United States and other developed countriesFigure 3: Chinese FDI Transactions in the United States, 2000-2013took off significantly. Official statistics have been slow to catch up with this trend because of dataNumber of deals and value of deals in USD million“Line A,Line B,Bar A,Bar B”,5The FDI figures in this paragraph are from the balance of payments statistics published by China’s State Administration of ForeignExchange. For more details on the data sources, see Data Appendix.80706016,000Number of Greenfield Projects (left axis)Number of M&A Deals (left axis)Investment in Greenfield Projects (right axis)14,00012,000Investment in M&A Deals (right axis)REDONE5010,0004006030019 | ASIA SOCIETY HIGH TECH50: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA 300REDONE402002003010020122010200820062004200220001998199619941992199019881986198401982201220112010According to the CIM data, Chinese firms completed 794 deals between 2000 and 2013, worth a totalof $36.1 billion (Figure 3). Before 2008, deal flows typically stood at less than $1 billion annually,with the singular exception of Lenovo’s $1.75 billion acquisition of IBM’s personal computing (PC)division in 2005. Since 2008, inflows have gained momentum, growing to just under $1.7 billion in2009 and to $4.6 billion in 2010. Annual deal flow reached record highs in 2012 ($7.3 billion) and2013 ($14.1 billion), driven largely by greater investment from private sector firms.8Figure 3: Chinese FDI Transactions in the United States, 2000-2013Number of deals and value of deals in USD millionFigure 3: Chinese FDI Transactions in the United States, 2000–2013“Line A,Line B,Bar A,Bar B”,Number of deals and value of deals in $US (millions)8016,000Number of Greenfield Projects (left axis)7014,000Number of M&A Deals (left axis)Investment in Greenfield Projects (right axis)6012,000Investment in M&A Deals (right axis)20132012020112,00020101020094,00020082020076,00020063020058,000200440200310,0002002502001REDONE200020092008200720100collection problems and complicated deal structures.6 However, a transactions-based approachto10data collection helps illustrate the sharp upturn in Chinese acquisitions and greenfield projects inthe0 United States. Rhodium Group’s China Investment Monitor (CIM), which resulted from a 201100undertaking to analyze Chinese investment in the United States, takes such an approach.70Source: Rhodium Group. Numbers are constantly updated and therefore subject to adjustment. A detailed explanation ofsources and methodology can be found at http://rhg.com/interactive/china-investment-monitor.Source: Rhodium Group. Numbers are constantly updated and therefore subject to adjustment. A detailed explanation of sources and methodology can be found at http:ANNUAL FLOWSThere is anecdotal evidence that Chinese investment in technology- and innovation-intensiveindustries is on the rise, but the scope of investment and its growth are difficult to quantify. Thereis no official breakdownfor foreignhigh-techpartlyof theFig ure 4: ChineseFDIinvestmentTransact ioinnsU.S.in 15US Hig hindustries,Tech industries,because2000-2013Number of deals and value of deals in USD millionSee summary in the Data Appendix; for more details, see Hanemann (forthcoming).7See Rosen and Hanemann (2011). Rhodium Group’s China Investment Monitor is available at http://rhg.com/interactive/china-investment-monitor; see Data Appendix for details.8See Hanemann and Gao (2014). 66,000902,500High Tech Investment Value (right axis)802,000REDONENumber of High Tech Deals (left axis)5,00070604,00020 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA lack of a generally accepted definition of what such industries are.9 The U.S. Bureau of EconomicAnalysis provides statistics on R&D spending by U.S. affiliates of foreign enterprises, but thosedata are plagued by a significant time lag (two years) and miss large parts of Chinese flows throughoffshore financial centers.10For this study, we rely on a subset of industries from our CIM dataset to describe Chineseinvestment activity in U.S. high-tech and innovation-intensive sectors. The CIM dataset is basedon 26 industry categories derived from SIC (Standard Industrial Classification) codes.11 After acomprehensive review of the most commonly used definitions for high-tech industries, we dividedthese 26 industries into 15 high-tech and 11 low-tech industries (Table 1). While this is a subjectiveand broad definition, it is largely in line with the system used by the Organization for EconomicCo-operation and Development (OECD) to measure high-tech manufacturing and innovationintensive services.12 The most important caveat of the industry-code-based approach is that itdoes not allow us to distinguish between lower- and higher-value-added activities (e.g., a simplemarketing office is counted the same as a laboratory as long as they are both in industries definedas high tech). We will address this by analyzing motives and activities separately in the next chapter.Table 1: Classification of High-Tech Industries for This ReportIncludedNot IncludedAerospace Equipment and ComponentsFarming, Logging, and HusbandryAutomotive Equipment and ComponentsFood Processing and DistributionOther Transportation EquipmentMetals and MineralsChemicalsConsumer Product and ServicesRenewable EnergyCoal, Oil, and GasFinancial Services and InsuranceUtilitiesBusiness ServicesHospitality and TourismPharmaceuticals and BiotechnologyEntertainment, Media, and PublishingPlastic, Rubber, and Other MaterialsReal EstateHealth Care and Medical DevicesConstruction ServicesIndustrial Machinery and ToolsTransportation ServicesElectronics and Electronics PartsIT EquipmentSoftware and IT ServicesSemiconductorsSource: Rhodium Group. Tertiary sectors marked in blue.For an in-depth discussion of available data on FDI and high-tech definitions, see Data Appendix.U.S. Bureau of Economic Analysis data on R&D spending of foreign firms in the United States are not compiled based on an ultimatebeneficial owner (UBO) basis.11See Data Appendix for CIM data compilation methodology.12See Data Appendix for methodology of classifying high-tech industries.91010Line B,Bar A,Bar B”,8016,000Number of Greenfield Projects (left axis)7021 | ASIA SOCIETY HIGH TECH: THE NEXTOFDealsCHINESENumberWAVEof M&A(left axis)INVESTMENT IN AMERICA 14,000Investment in Greenfield Projects (right axis)6012,000Investment in M&A Deals (right axis)REDONE5010,000408,00020132012201120102009200820072006200520042003200220012000Analyzingthe deal flow in these 15 industries for 2000–2013, we see an increasein both the306,000number of transactions and total investment value since 2009 but a notable stall in the growth20the past two years, 2012 and 2013 (Figure 4). That downturn is all the more4,000trend forsignificant inlight of the sustained growth in overall Chinese FDI in the United States over those years; in other102,000words, there was a marked divergence in pattern between high-tech and non-high-tech ChineseFDI over0 the past two years. While at first blush it is tempting to jump to the conclusionthat the0United States is letting low-tech investment in and shutting down activity in higher-technologyspace, we stress that that likely is not the case, for two reasons. First, we cannot overstate the factthat we are starting from an extremely low base of activity, and even the difference of one or twomid-sized deals stalling for purely commercial reasons can alter the trend line significantly at thisstage. The structural story is one of growing Chinese activity, regardless of the short-term blips.Source: RhodiumNumbers are constantlythereforethatsubjectto adjustment.detailedexplanationof sourcesand methodology can be found at http://rhThis isGroup.demonstratedby our updatedsecondandpoint:2014already Alookssetto becomea breakthroughyear in terms of deal value, with transactions of almost $6 billion announced or completed in justthree months—greater than the combined total for 2009–2013.13Fig ure 4: Chinese FDI Transact io ns in 15 US Hig h Tech indust ries, 2000-2013Figure 4:ChineseFDIandTransactionsU.S.millionHigh-Tech industries, 2000–2013Numberof dealsvalue of deals inin USDNumber of deals and value of deals in $US (millions)*2014 figure based on deals closed and pending in Q1.6,000902,500High Tech Investment Value (right axis)802,000Number of High Tech Deals (left axis)704,00060REDONE5,0001,500501,0003,000402,00030500201,000102011201220130002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*Source: Rhodium Group. Numbers are constantly updated and therefore subject to adjustment. A detailed explanation ofsources and methodology can be found at http://rhg.com/interactive/china-investment-monitor.Source: Rhodium Group. Numbers are constantly updated and therefore subject to adjustment. A detailed explanation of sources and methodology can be fClosed transactions include MicroPort Scientific’s purchase of Wright Medical’s OrthoRecon business for $290 million; pending transactions include Lenovo’s acquisition of IBM’s low-end server business for $2.3 billion, Lenovo’s acquisition of Motorola Mobility assets fromGoogle for $2.9 billion, Shenzhen Hepalink Pharmaceutical’s takeover of Scientific Protein Laboratories for $338 million, and Wanxiang’sacquisition of electric carmaker Fisker for $149 million.1322 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA The level of annual transaction value in high-tech industries was negligible before 2007, except fora spike in 2005, which was entirely attributable to Lenovo’s $1.75 billion acquisition of IBM’s PCunit. Between 2007 and 2009, the number of transactions and total deal value began to rise butstayed below $500 million per year on average. Since 2010, annual deal value has topped $1 billionevery year, peaking at $1.5 billion in 2011. The drop in number of deals in 2012–2013 was in linewith the overall trends in FDI from China, while the larger average value of deals kept annual dealvalue above the $1 billion mark throughout that period.14 As opposed to overall OFDI, large-scaletransactions over $1 billion were notably absent in high-tech industries, with the exception of the2005 Lenovo-IBM PC takeover, until the present 2014 spike.Despite the recent surge, cumulative investment from China in U.S. high tech remains modest byany measure. By the end of 2013, cumulative Chinese investment in these 15 industries amountedto $9.1 billion, or about one-fourth of total Chinese inflows in 2000–2013. To put the cumulativesum in perspective, $9.1 billion is less than half of Twitter’s market capitalization in November2013 or about a quarter of Microsoft’s bid for Yahoo! in 2008. Even if we add the $6 billion intransactions announced in the first quarter of 2014, the total amount of Chinese FDI in U.S. hightech industries is still less than what Facebook offered to pay for the acquisition of messagingstart-up WhatsApp in February 2014.Compared to all Chinese FDI activity in the United States, deals in these 15 industries accountedfor 60% to 70% of total transactions over the most of the past decade (Figure 5). In value terms,though, the share of 15 high-tech industries dropped from more than 70% in the mid-2000s toless than 20% in 2009–2013. This relative decline is attributable to an increase in capital-intensiveinvestment projects in non-high-tech sectors such as resource extraction (unconventional oil andgas), real estate, and non-tech consumer products (such as food). The absolute decline in thepast two years, especially after prior years of growth, demonstrates awareness of the technicalchallenges of operating in an advanced economy like the United States, the hurdles that Chineseprivate sector firms face in financing and approvals for outbound investment, and the potentialnational security complications in the United States that larger-scale transactions face.One important difference between overall FDI activity and FDI in high-tech sectors is that theshare of greenfield projects is higher on average in the sample of high-tech transactions; greenfieldprojects account for 71% of transactions (compared to 66% in the other 11 industries) and 21% oftotal investment value (compared to only 10% in the others). This suggests that higher-value-addedindustries attract more greenfield projects, such as R&D facilities, learning centers, manufacturingand distribution facilities, and headquarters, which are usually seen as more beneficial in terms ofjob creation.14The number of transactions in 2013 will likely be revised upward, as smaller-scale greenfield operations are often identified only with acertain time lag. For updates, see the China Investment Monitor website at http://rhg.com/interactive/china-investment-monitor.y Number of Deals70%23 | ASIA SOCIETY HIGH TECH: THE FigureNEXT WAVEOF CHINESEINVESTMENTIN AMERICA Chinese FDI Transactions in the US, 20005: Shareof 15 High-TechIndustriesin Total60%REDONEPercent share of total, three-year moving average50%40%30%20%Share by Deal ValueShareby Number ofDealsFigure10%5: Share ofHigh-TechIndustriesin Total Chinese FDI Transactions in theUnited0%States, 2000–20132002 200320042005 2006 2007 2008 2009 2010 2011 2012 2013Share (%) of2000total,2001three-yearmovingaverageDeal Value080%201120122013Number of Deals90%80%70%Source: Rhodium Group. Numbers are constantly updated and therefore subject to adjustment. A detailed explanation of sources and methodology can be found at http://rhg.com/interactive/chin60%REDONE50%40%30%20%10%0%201120122013Share by Deal ValueShare by Number of Deals2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Source: Rhodium Group. Numbers are constantly updated and therefore subject to adjustment. A detailed explanation ofsources and methodology can be found at http://rhg.com/interactive/china-investment-monitor.Figure 6: Chinese FDI Transactions in US High-Tech Industries by Entry Mode, 2000-2013Number of deals and value of deals in USD millionSource: Rhodium Group. Numbers are constantly updated and therefore subject to adjustment. A detailed explanation of sources and methodology can be found at http://rhg.com/interactive/chinaFigure 6: Chinese FDI Transactions in U.S. High-Tech Industries by Entry Mode, 2000–2013Number of deals and value of deals in $US (millions)702,500Greenfield Deals (left axis)REDONE60M&A Deals (left axis)50Greenfield Investment Value(right axis)40M&A Investment Value(right axis)2,0001,500301,000Figure 6: Chinese FDI Transactions in US High-Tech Industries by Entry Mode, 2000-2013Number of deals and value of deals in USD million2050010Figure 7: Chinese FD70002,5002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Greenfield Deals (left axis)Number of dealsSource:Group.Numbersare constantly updated and therefore subject to adjustment. A detailed explanation of sources60 RhodiumM&ADeals(left axis)Source: RhodiumNumbersupdated and therefore subject to adjustment. A detailed explanation of sources and methodology can be found at: http:/andGroup.methodologycanarebeconstantlyfound at http://rhg.com/interactive/china-investment-monitor.2,000FIG 7REDONE502,000401,80030Greenfield Investment Value(right axis)M&A Investment Value(right axis)Business ServicesSoftware and IT ServicesREDONE201,6001,500Plastic, Rubber and otherMaterials1,000Electronics and Electronic PartsSemiconductors50024 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA Box 1: Other Channels of Chinese Investment in U.S. High Tech and InnovationThis report focuses on direct investment from China in U.S. innovation-intensive industries. Adirect investment relationship is commonly defined by a long-term investment that gives theinvestor significant control over the invested company. The Rhodium Group dataset used for thisreport assembles information on Chinese greenfield projects, joint ventures, and acquisitionsin the United States with a total value of more than $500,000 and a final ownership stake of10% or more (for more details, see Data Appendix). Other channels for Chinese investment inU.S. high-tech industries are not covered here, but there is anecdotal evidence that these flowsare increasing rapidly as well.Chinese investors have increasing access to smaller equity stakes in U.S. tech companies,either through public markets or privately negotiated transactions. Such portfolio investmenttransactions are impossible to track accurately, unless they are significant investments that areannounced voluntarily or through mandatory regulatory filings. But anecdotal evidence illustratesthat Chinese investors have become more active in recent years. In 2010, for example, ChinaInvestment Corporation disclosed holdings of equity in U.S.-listed companies valued at a total of$9.63 billion, including small stakes in American International Group, Apple, Pfizer, and NewsCorp.15 There are also Chinese firms buying smaller equity stakes for investment diversification,strategic learning, or preparation for a more significant stake. Chinese e-commerce giant Alibaba,for example, recently acquired minority stakes in several U.S. e-commerce companies.16 Thereare also signs of increasing activity by Chinese private equity firms in the United States, whichdoes not count as FDI if the stakes are below the 10% level. In California, recent investmentshave been focused on venture capital in high-tech start-ups. China’s ZPark Venture Fund, forexample, recently invested in two California technology firms, health care IT firm HealthCrowdand mobile security company Trustlook.com.17Another channel is the purchase of debt instruments and the provision of loans by Chineseentities to U.S. tech companies. Chinese banks have recently stepped up their cross-borderlending activities and have begun to provide loans to projects and firms in the United States.For example, Bank of China took part in a $1.4 billion syndicated loan to Zimmer Holdings, amedical device company. China Construction Bank has lent to General Electric, and Industrialand Commercial Bank of China has provided credit to Walmart, UPS, Pfizer, and Dell. In 2012,two Chinese banks, China Merchant Bank and Bank of China, participated in a $6 billionsyndicated loan to Duke Energy, a North Carolina–based energy group.1815Dinny McMahon, “CIC Offers Glimpse Into U.S. Holding,” Wall Street Journal, February 9, 2010, accessed February 17, 2014, http://online.wsj.com/news/articles/SB10001424052748703427704575052303975503216.16Arash Massoudi and Paul J. Davies, “Alibaba Extends Further into US Ecommerce,” Financial Times, August 16, 2013.17Chao Deng, “China’s ZPark Venture Fund Invests in Silicon Valley Startups,” Dow Jones, April 24, 2013, accessed February 17, 2014,http://pevc.dowjones.com/Article?an=DJFVW00020130424e94oakujc&ReturnUrl=http%3a%2f%2fpevc.dowjones.com%2fArticle%3fan%3dDJFVW00020130424e94oakujc.18Kandy Wong, “Chinese Banks Step Up Lending in the US,” Financial Times, August 28, 2012.25 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA INDUSTRY BREAKDOWNHalf of Chinese high-tech investment by value is concentrated in just three of the 15 industries includedin our sample: IT equipment, software and IT services, and automotive equipment and components(Table 2). However, the mix over time shows a clear evolution from a handful of core manufacturingindustries in the early 2000s to a much broader set of industries and interests (Figure 7).Table 2: Chinese FDI in U.S. High Tech by Industry, 2000–2013Number of Deals$US (millions)IT Equipment461,997Software and IT Services811,470Automotive Equipment and Components711,238Renewable Energy50699Aerospace Equipment and Components13652Industrial Machinery and Tools61545Business Services39538Healthcare and Medical Devices17491Pharmaceuticals and Biotechnology32474Electronics and Electronic Parts49273Semiconductors6213Financial Services and Insurance12205Plastic, Rubber, and Other Materials21179Other Transportation Equipment11569485189,079ChemicalsTotalSource: Rhodium Group. Secondary sectors marked in grey and tertiary sectors in blue. Numbers are constantly updated andtherefore subject to adjustment. A detailed explanation of sources and methodology can be found at http://rhg.com/interactive/china-investment-monitor.In the first half of the 2000s, high-tech investments remained small in scale across all sectors. Thefirst large transaction occurred in the IT equipment industry, with Lenovo’s acquisition of IBM’sPC unit in 2005. In 2006–2009, transactions by Chinese firms in other manufacturing sectors alsogrew in size, for example, automotive parts, machinery, medical devices, and renewable energy.The average size of manufacturing investments increased further in 2010 and in the followingyears, as firms became more confident with mergers and acquisitions (M&As) and new sectorscame to the attention of Chinese investors. Examples are the acquisitions of Complete Genomics,MicroPort, Datascope, AppTec, and ZONARE Medical Systems in the health care and medicaldevices industry; the acquisitions of MiaSolé, Ascent Solar Technology, and Global Solar Energyin the renewable energy industry; and the acquisitions of Cirrus Industries, Teledyne Technologies,Enstrom Helicopter, Epic Air, and Glasair Aviation in the aerospace components and equipmentindustry.301,000: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA 26 | ASIA SOCIETY HIGH TECH2050010Figure 7: Chinese F020002001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130Number of dealsSource: Rhodium Group. Numbers are constantly updated and therefore subject to adjustment. A detailed explanation of sources and methodology can be found at: http:Figure 7: Chinese FDI Transactions in U.S. High-Tech Industries by Sector, 2000–2013FIG 7$US (millions)2,000Plastic, Rubber and otherMaterials1,800Business ServicesSoftware and IT ServicesREDONE1,600Electronics and Electronic PartsSemiconductors1,400IT EquipmentIndustrial Machinery and Tools1,2001,000800Healthcare and Medical DevicesPharmaceuticals andBiotechnologyFinancial Services andInsuranceRenewable EnergyChemicalsOther Transportation Equipment600400Automotive Equipment andComponentsAerospace Equipment andComponents20002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Source: Rhodium Group. Numbers are constantly updated and therefore subject to adjustment. A detailed explanation ofPaper, Rubberand OtherMaterialsPharmaceuticals and Biotechnologysources and methodologycan be foundat http://rhg.com/interactive/china-investment-monitor.Business ServicesFinancial Services and InsuranceSoftware and IT ServicesRenewable EnergyElectronics and Electronic PartsChemicalsThe second trend driving greater FDI inflows after 2010 is increased Chinese interest in modernSemiconductorsOther Transportation Equipmentand knowledge-intensive service industries, including software, finance, and business services.IT EquipmentAutomotive Equipment and ComponentsDeals and total investment in these sectors have taken off since 2010, as Chinese service providersIndustrial Machinery and ToolsAerospace Equipment and Componentshave followed theircustomersabroad,asillustratedby the acquisition of Bank of East Asia’s U.S.Healthcare and Medical Devicesoperations by Industrial and Commercial Bank of China and the U.S. market entry by ChineseSource:Rhodium Group.areAnotherconstantly updatedthereforeto adjustment.A detailedexplanation of sources and methodollaw firms suchas DachengandNumbersYingke.majoranddriverof subjectgreaterinvestmentin high-valueadded services is that Chinese service firms are increasingly trying to tap foreign talent, technology,and brands to increase their competitiveness at home and globally. This is evident, for example, inthe recent surge in takeovers in the software and IT services industry, including the acquisitionsof Epic Games, Riot Games, Auctiva, Echo Lane, and Vendio.27 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA Looking ahead to the boom year that 2014 is shaping up to be, we can already say that IT equipmentwill more than make up for the recent pause, mostly driven by opportunities arising from U.S.firms divesting assets that do not fit their business strategies. Renewable energy has also increasedsince 2013, as industry consolidation has opened up opportunities for Chinese investors to snapup distressed solar firms. Health care and pharmaceuticals have emerged as important sectorsin 2013, and two significant transactions in the first quarter of 2014 signal that this trend willcontinue. The automotive industry is perhaps the most interesting swing case. It has shaped upto be one of the signature sectors for Chinese OFDI in Europe, with not just parts makers butwhole platforms, including Volvo, Manganese Bronze, and Peugeot, embracing Chinese suitors.In the United States, Chinese investors have not taken FDI stakes in any of the major carmakers,partly because it is unclear how ambitious Chinese players could be without awakening Americananxieties. As with Japan in the 1980s, large-scale Chinese greenfield investments to establish abeachhead are likely in the future, but thus far only niche players such as BYD have entered theU.S. market with their vehicles.GEOGRAPHIC DISTRIBUTIONThe geographic distribution of Chinese high-tech FDI in the United States follows from theindustry pattern, and states with industrial clusters that match Chinese interests attract the mostcapital (Figure 8). California is at the forefront of Chinese high-tech investment in the UnitedStates, with the greatest number of deals (148) and the second-largest investment value ($1.82billion). High-tech investment in California is concentrated in the software and IT equipmentindustry, as well as in pharmaceuticals and biotechnology (for details, see Box 2).North Carolina is a major recipient of Chinese FDI, registering 32 deals worth more than $625million. In fact, the Tar Heel State would have ranked first in total investment if we were notregistering acquisitions by the state in which the target is headquartered (in the case of Lenovo’s$1.75 billion acquisition of IBM’s PC unit, this was New York, even though most employees andassets are located in Raleigh, North Carolina). In addition to Lenovo, North Carolina is home toa diverse group of Chinese companies that have set up manufacturing facilities, research centers,and sales offices, such as software and IT companies Lenovo, Huawei, and Pactera Technology;renewable energy companies Jetion Solar and Ming Yang wind power; and industrial machinerycompanies Masterwork, TSP Precision Tooling, Positec Tool, and Todaytec. It is notable thatNorth Carolina almost exclusively hosts greenfield high-tech investments, which partly reflectsthe efforts of the state government and private organizations to promote investment and othereconomic and cultural ties.Illinois and Michigan also take top spots in terms of both the number of investments (31 and50, respectively) and total deal value ($220.8 million and $1.03 billion, respectively). In Michigan,investments from China focus almost exclusively on the automotive equipment industry. Themajority (80%) of high-tech deals take the form of greenfield investments, such as factories, offices,or research centers, amid a handful of prominent acquisitions, including Nexteer Automotive andmillions)YorkrniaganCarolinasotachusettserseysylvaniamaCarolinaaandianngtonauriasdoaasseeColumbiackysippiHampshireskaIslandnsincticutanaomaasasarenaMexicoDakotaDakotantVirginiaing28 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA Figure 8: Geographic Distribution of Chinese High-Tech FDI in the United States, 2000–2013Accumulated deal value for 2000–2013, number of transactionsValue of Deals (in $million)2031.41822.71033.8625.3502.8489.6476.5322.2220.8218.4193.5173.9162.8121.599.395.261.558.755.552.451.046.837.328.618.016.213.613.210.010.08.02.52.01.51.01.01.00.00.00.00.00.00.00.00.00.00.00.00.00.00.01 – 10100 – 50010 – 50500 – 150050 – 1001500+X = Number of DealsWA16NHMNOR 3MAWI 1MINY50NV 5PANE 1COCA 148IL4KS 4AZ 231MO 3INOH1LA 1CT 1NJSC421427197TN 3MS821KY 1OK 1TX1RI 26AL 4GAVA12NC32MD 13DC 1915FL7HI 2Source: Rhodium Group. Numbers are constantly updated and therefore subject to adjustment. A detailed explanation of sourcesand methodology can be found at http://rhg.com/interactive/china-investment-monitor.Delphi Corporation’s global suspension business. Investments in Illinois are also dominated bygreenfield projects (77%) but exhibit a wider mix of industry distribution. Besides the automotiveindustry, Illinois has also attracted significant Chinese investment in industrial machinery (such asthe acquisition of Goss International by Shanghai Electric) and business services (such as YingkeLaw Firm’s Chicago office and Bank of China’s Chicago branch). Ohio is the third Rust Belt statewith a significant level of Chinese high-tech investment, with most investments concentrated inthe auto parts and machinery industries.Texas has become a major host of Chinese investment in recent years, driven by growing Chineseinterest in oil and gas opportunities. However, Chinese firms have also begun to invest in hightech industries through both M&A activity and greenfield projects. Some of these investmentsare targeting companies in oil-related manufacturing and services, for example, engineeringfirms Friede Goldman or ION Geophysical. The state is also hosting offices and R&D facilities29 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA by firms such as Huawei, ZTE, and Neusoft and has attracted acquisitions in healthcare (MDAnderson Cancer Center) and software (Catapult Systems).New York is the top recipient of Chinese capital, not just because Lenovo’s first IBM transactionwas registered there, but also because it has attracted a high number of service sector transactions.Financial and business services make up one-half of all high-tech deals in the state, as many firmschose New York as a location for their North American headquarters and look for proximity toNew York’s financial markets. Notable Chinese companies that have set up shop in New Yorkinclude Bank of East Asia, China Telecom, China Construction Bank, Industrial and CommercialBank of China, China International Capital Corporation, and China Merchants Bank.Massachusetts is a notable state because it has attracted Chinese investments in firms that possesscutting-edge technology. Examples include Wanxiang’s investments in Great Point Energy andA123 Systems and the acquisition of Luminus Devices by Lightera Corporation. States includingAlabama or Minnesota have received a significant amount of capital from China, but mostly relatedto one or two major transactions (Cirrus Aircraft, Continental Motors).Some states still punch below their weight when it comes to attracting Chinese FDI. One exampleis Washington State, which hosts major U.S. innovation clusters (biotechnology, IT, and aerospace),but Chinese high-tech investment flows into Washington are relatively small both in number andvalue. Companies such as ZTE, Huawei, iSoftStone, and Mindray Medical USA Corp all haveoperations in Washington, but they remain comparably small. Box 2: Chinese High-Tech Investment in CaliforniaCalifornia is by far the most important recipient of Chinese high-tech investment, both in termsof the number of deals (148 transactions) and investment value ($1.82 billion). The stateaccounts for one-fourth of all Chinese investment in our sample of 15 high-tech industries.Conversely, high-tech industries account for a much greater share of total Chinese investmentin California compared to the national average. The 15 technology- and innovation-intensiveindustries make up 70% of all investments in California, counted by number of transactions.High-tech investment activity in California began to take off earlier than in other states, witharound 10 transactions every year from 2006 to 2009. The years 2010 and 2011 saw stronggrowth in the number of investments and total investment amount, with 29 investments in 2011worth more than $600 million. After a temporary drop in 2012, deal flow picked again in 2013,with 13 deals totaling $537 million. When broken down by entry mode, greenfield projects makeup the majority of Chinese high-tech investments in California (70% of transactions), which isconsistent with overall Chinese FDI in U.S. high-tech industries. The majority of greenfieldprojects in California are R&D centers with significant potential benefits such as employmentcreation and technology spillovers. It is remarkable that high-tech investments in Californiaalmost entirely come from private Chinese firms, while state-related companies account for lessthan 10% of total deal value.30 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA FigureB-1:ChineseCaliforniaEntryMode,2000–2013FigureB-1:ChineseHigh-TechHigh-Tech FDIFDI ininCaliforniaby byEntryMode,2000-2013Numberanddealdealvaluein$US(millions)by Entry Mode, 2000-2013Numberofdealsdealsandvaluein USDmillionFigureofB-1:ChineseHigh-TechFDIin CaliforniaNumber of deals and deal value in USD million18181616141412REDONE1210REDONE700Greenfield Deals (left axis)700M&A DealsDeals(left axis)Greenfield(left axis)600GreenfieldM&ADealsInvestment(left axis) Value(right axis)Greenfield Investment ValueM&A InvestmentValue(rightaxis)(right axis)M&A Investment Value(right axis)600500Greenfield Deals (left a500M&A DealsDeals(left axis)Greenfield(left a400GreenfieldM&A DealsInvestments(left axis)108400M&AInvestments(righGreenfieldInvestments30086M&A Investments (righ30020064200421001002002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013002000Group.2001200220032004 200520062007 subject20082010A 201120122013Source:RhodiumGroup.Numbersareconstantlyconstantlyupdatedandto2009adjustment.detailedexplanationof sourcesofand methodology can be found at:Source:RhodiumNumbersareupdatedandthereforethereforesubjectto adjustment.A detailedexplanationsources and methodology can be found at http://rhg.com/interactive/china-investment-monitor.Source: Rhodium Group. Numbers are constantly updated and therefore subject to adjustment. A detailed explanation of sources and methodology can be found at:Figure B-2: Chinese High-Tech FDI in California by Ownership, 2000-2013Number of deals and deal value in USD millionFigureB-2:ChineseHigh-TechHigh-Tech FDIby byOwnership,2000-2013FigureB-2:ChineseFDIininCaliforniaCaliforniaOwnership,2000–2013Number of deals and deal value in USD millionNumberof deals and deal value in $US (millions)2020181816REDONEREDONE700State-Owned Investment Projects (left axis)700PrivateInvestmentProjects(left axis)State-OwnedInvestmentProjects(left axis)600State-OwnedInvestmentValuePrivateInvestmentProjects(left(rightaxis) axis)6001614Private InvestmentValue Value(right (rightaxis) axis)State-OwnedInvestment5001412Private Investment Value (right axis)500400121040010830030086200642004210010020002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 201302000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Source: Rhodium Group. Numbers are constantly updated and therefore subject to adjustment. A detailed explanation of sources and methodology can be found at http://rhgSource: Rhodium Group. Numbers are constantly updated and therefore subject to adjustment. A detailed explanation ofSource:Rhodium Group.Numbersare atconstantlyupdated and therefore subject to adjustment. A detailed explanation of sources and methodology can be found at http://rhgsourcesand methodologycanbe foundhttp://rhg.com/interactive/china-investment-monitor.Figure B-3: Chinese High-Tech FDI in California by Industry, 2000-2013Numberof dealsFigure B-3:Chinese High-Tech FDI in California by Industry, 2000-2013Number of deals31 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA Figure B-3: Chinese High-Tech FDI in California by Industry, 2000-2013Number of dealsFigure B-3: Chinese High-Tech FDI in California by Industry, 2000–2013$US (millions)700Plastic, Rubber and other MaterialsBusiness Services600Software and IT ServicesElectronics and Electronic PartsSemiconductors500IT EquipmentIndustrial Machinery and ToolsREDONEHealthcare and Medical Devices400Pharmaceuticals and BiotechnologyFinancial Services and InsuranceRenewable Energy300ChemicalsOther Transportation EquipmentAutomotive Equipment and Components200Aerospace Equipment and Components10002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Source: Rhodium Group. Numbers are constantly updated and therefore subject to adjustment. A detailed explanation ofsources and methodology can be found at http://rhg.com/interactive/china-investment-monitor.Within California, the San Francisco Bay Area is the most attractive location for high-techinvestors, making up 40% of all high-tech investments in California. Los Angeles is the secondmajor hub for Chinese high-tech FDI. Not surprisingly, the software and IT industry is thenumber-one attraction for Chinese firms in California. Investments in this industry make upone-quarter of all transactions, with a total of 35 deals and $694 million in total investment.In M&A transactions, Chinese gaming companies have been major buyers in the software andFigure9: ChineseFDIasTransactionsin High Games,Tech by andOwnershipInvestor,IT industry,suchTencent, ShandaPerfectofWorld.In 2000-2013greenfield investments,Numberof deals and deal valuein USD milliontelecommunicationscompaniessuch as China Telecom, China United Network CommunicationGroup, and China Mobile were early investors in California. The next generation of Internetcompaniesfollowed these pioneers, and today, most of China’s big Internet firms, such2,500as Baidu70and Tencent, have R&D centers and other operations in California.60REDONE504030State-Owned InvestmentProjects (left axis)Private InvestmentProjects (left axis)State-Owned InvestmentValue (right axis)Private InvestmentValue (right axis)2,0001,500State-Owned Investment VPrivate Investment Value (1,000Private Investment Projec2050010State-Owned Investment HPlastic, Rubber and other MaterialsBusiness ServicesSoftware and IT Services60032 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA Electronics and Electronic PartsSemiconductors500IT EquipmentIndustrial Machinery and ToolsREDONEHealthcare and Medical Devices400Pharmaceuticals and BiotechnologyFinancial Services and InsuranceElectronics, semiconductors, and IT equipment sectors are also a significant draw for ChineseRenewable Energycapital, with a combined 37 investments and a cumulative deal value of $318 million. Electronics300Chemicalsand IT equipment investments in California are overwhelmingly greenfield projects—partlyOther Transportation Equipmentreflecting the human capital needs of Chinese firms. For example, Huawei built an R&D centerAutomotive Equipment and Componentsin the Bay Area in 2012. Since 2010, we also register strong growth in the number and value200Aerospace Equipment and Componentsof renewable energy investments from China, with 27 deals and a total investment of $252million. Renewable energy investment in California is most concentrated on research operationsand headquarters, for example, Yingli Green Energy’s offices and lab facilities in San Francisco.100The latest trend is growing investment interest in biotechnology, pharmaceuticals, and medicaldevices industries since 2010. We record 13 deals totaling $280 million Chinese investmentin these industries, the majority of which are concentrated in Northern California. Examples0are the acquisitionZONAREMedicaland 2008Completein2000 2001 of20022003 20042005Systems2006 20072009 Genomics,2010 2011 both2012 located2013Mountain View.INVESTOR CHARACTERISTICSAs with overall Chinese FDI transactions in the United States, the majority of deals in the 15 hightech sectors were made by private firms (76% of total deals compared to 72% of all inward FDIdeals). Half of the total investment value in high-tech industries (50%) came from private firmsFigure 9: Chinese FDI Transactions in High Tech by Ownership of Investor, 2000-2013Figureof 9:ChineseNumberdealsand deal FDIvalue Transactionsin USD millionin High Tech by Ownership of Investor, 2000–2013Number of deals and deal value in $US (millions)2,5007060REDONE5040State-Owned InvestmentProjects (left axis)2,000Private InvestmentProjects (left axis)State-Owned InvestmentValue (right axis)1,500Private InvestmentValue (right axis)State-Owned InvestmentPrivate Investment Value301,000State-Owned InvestmentPrivate Investment Proje205001002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130Source: Rhodium Group. Numbers are constantly updated and therefore subject to adjustment. A detailed explanation of sourcesand methodology can be found at http://rhg.com/interactive/china-investment-monitor.Source: Rhodium Group. Numbers are constantly updated and therefore subject to adjustment. A detailed explanation of sources and methodology can be found at http://rhFigure 10: Chinese FDI Transactions in High Tech by Ownership and Ind5001033 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA 02000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130Source: Rhodium Group. Numbers are constantly updated and therefore subject to adjustment. A detailed explanation of sources and methodology can be found at http://rh(which we define as being 80% or more controlled by private investors), and in 2013, this shareincreased to almost 90% (Figure 9). Within high-tech industries, state firms have the highest sharein chemicals, aviation, financial services, and IT equipment.19 Deals in other industries, such aspharmaceuticals, medical devices, semiconductors, and software, are almost exclusively pursuedby privately owned companies (Figure 10).Figure 10: Chinese FDI Transactions in High Tech by Ownership and IndFigure 10: Chinese FDI Transactionsin High Tech, Ownership and Industry, 2000-2013Number of DealsShare (%) in total high tech deal valueState-Owned InvestmentPrivate Investment100%90%80%REDONE70%Healthcare and Medical DevicesSemiconductorsPharmaceuticals and BiotechnologyRenewable EnergySoftware and IT ServicesPaper, Rubber and Other MaterialsElectronics and Electronic PartsOther Transportation EquipmentBusiness Services0%Industrial Machinery and Tools10%Automotive Equipment & Components20%Chemicals30%IT Equipment40%Financial Services and Insurance50%Aerospace Equipment & Components60%Source: Rhodium Group. Numbers are constantly updated and therefore subject to adjustment. A detailed explanation of sourcesAerospaceAutomotiveOtherRenewableFinancial Pharmaceuticals Healthcare and Industrial IT Equipment Semiconductors Electronics and Software and IT Business Paper, Rubberand methodologycanbe foundat Chemicalshttp://rhg.com/interactive/china-investment-monitor.Equipment and Equipment and TransportationEnergyServices andandMedical Devices Machinery andElectronic Parts ServicesServicesand OtherComponents Components EquipmentInsurance BiotechnologyToolsMaterialsNot surprisingly, most Chinese firms investing in U.S. high-tech industries are headquarteredin the most developed parts of China (Figure 11). A major source of high-tech OFDI is Beijing,which is home not only to many state-owned firms but also to most of China’s major IT andsoftware firms. Provinces with high per-capita income and a vibrant private sector, includingZhejiang, Guangdong, Shanghai, and Jiangsu, are other major sources of money flowing into U.S.high tech. Notable exceptions include provinces with low per-capita incomes but industry clustersFigure 12: Chinese FDI in US High-Tech Industries by Motivation, 2000-2013that have an interest in U.S. investments, for example, renewable energy firms from Xinjiang.Number of DealsAnother common characteristic of Chinese firms investing in U.S. high-tech sectors is that mostof them already have overseas operations elsewhere, mainly in neighboring Asia or in Europe. Inshort, it is mostly private firms with global vision that are investing in U.S. high-tech sectors.19Lenovo’s acquisition of IBM’s personal computer division is counted as a state-owned enterprise acquisition, as the state controlledmore than 20%80 of the company in 2005. In the fall of 2009, the Chinese Academy of Sciences sold 29% of its stake in Lenovo to FanhaiMarket-SeekingGroup for 2.8 billion yuan (US$434 million). Subsequently, Lenovo became a private enterprise under our definition.70REDONE60Strategic-Asset-SeekingNatural-Resource-SeekingEfficiency-SeekingReturn-Seeking504034 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA igure 11: Chinese FDI Transactions in High Tech by Headquarter Location of InvestingFFirm, 2000–2013Value of Deals (in $million)1 – 50500 – 150050 – 1001500 – 2000100 – 5003000+X = Number of DealsHeilongjiangJilin2XinjiangLiaoning219Inner MongoliaBeijing Municipality 129Tianjin Municipality 4HebeiNingxia9ShanxiShandong2Qinghai18GansuShaanxiHenan65Tibet57735ChongqingMunicipalityShanghaiMunicipality 67AnhuiHubeiSichuan5JiangsuZhejiangHunan14Guizhou66JiangxiFujian12YunnanGuangxiGuangdong93Macau1Hainan1Source: Rhodium Group. Numbers are constantly updated and therefore subject to adjustment. A detailed explanation ofsources and methodology can be found at http://rhg.com/interactive/china-investment-monitor.35 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA II. MOTIVATIONS: WHAT IS DRIVINGCHINESE FDI IN U.S. HIGH TECH?AFTER SKETCHING OUT THE GROWTH AND PATTERNS of Chinese FDI flows to U.S. high-techindustries, we now turn to a detailed analysis of the drivers of this trend. Understanding whyChinese firms are becoming interested in such investments overseas is critical for assessing theimpacts of those investments on the U.S. economy and for discussing related policy questions. Inthis chapter, we analyze the motives for Chinese high-tech investments in the United States froma firm-level perspective. We find that the recent increase in Chinese high-tech OFDI in the UnitedStates was driven by a diverse set of motives that go well beyond the existing perception of merely“grabbing” foreign technology.Many observers assume that the surge in China’s outward FDI since the mid-2000s is attributableto a government campaign to promote overseas investment. China’s outward FDI regime hasindeed loosened up, especially since the government promulgated its “Going Out” campaignin 2000.20 Analysts have combed through the patterns of outbound Chinese investment eversince, from early investments in natural resources to more recent acquisitions of advanced foreigntechnology, seeking a strategic rationale.21 We recognize that political drivers are an important partof China’s OFDI boom: the liberalization of the OFDI approval framework was a prerequisitefor greater outflows; the government has enacted policies to support firms going abroad; andcertain government policies are crucial in setting incentives (as well as disincentives) for firms tointernationalize. However, we believe the recent growth in Chinese OFDI has been driven mostlyby changing commercial realities in the Chinese marketplace, which are forcing firms to expandbeyond China’s borders.Because of a lack of coherent theoretical frameworks for emerging-economy OFDI and the shorttrack record of Chinese firms in overseas markets, most assessments of the drivers of ChineseOFDI have been limited to a qualitative discussion or to case studies of individual firms.22 Forour assessment, we take the novel approach of coding all of the 518 transactions in our high-techsample using a taxonomy of firm-level FDI drivers. The taxonomy is derived from the work of JohnH. Dunning, who distinguished among four major motivations for firms’ overseas investments:accessing natural resources, facilitating access to new markets, acquiring strategic assets to increasecompetitiveness, and improving the efficiency of their global operations. Dunning’s work has beenaugmented and refined by others, but this basic taxonomy still provides a useful framework forFor an overview of China’s outward FDI framework and its liberalization, see Rosen and Hanemann (2009).The allegation that Chinese firms are “syphoning” technology out of the United States through acquisitions has become a common theme;see “US Lawmakers Concerned by Huawei Deal,” Agence France-Presse, February 10, 2011, accessed February 17, 2014, http://www.google.com/hostednews/afp/article/ALeqM5gfEkF3WfzaXI635GOEk8qrWD-eZw?docId=CNG.6b096ac0cdcfce7a0f599fbbb1c85c27.da1.22For a comprehensive qualitative discussion of commercial and political drivers of Chinese outbound FDI in advanced economies, see Rosenand Hanemann (2009, 2011, forthcoming). For case studies, see, e.g., http://hbr.org/product/Wanxiang-Group—A-Chinese/an/308058-PDFENG or http://csis.org/files/publication/130215_competitiveness_Huawei_casestudy_Web.pdf, accessed February 17, 2014.202136 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA understanding what is driving Chinese firms to invest in U.S. high-tech sectors. In order to accountfor the increasing importance of passive quasi-portfolio stakes in global FDI, we added a fifthcategory of return-seeking FDI (see overview in Table 3).23Table 3: Taxonomy of FDI MotivesNatural-Resources-Seeking FDIInvestments to gain access to particular resources that are not available or abundant at home or diversifysupply of these resources.Example: Suntech Power’s acquisition of a stake in polysilicon supplier Hoku Scientific. Market-Seeking FDIInvestments to facilitate access to overseas markets for goods or services.Example: The establishment of operations by China Telecom Americas in New York or California to serve localcustomers.Strategic-Asset-Seeking FDIInvestments to acquire or build strategically important assets that strengthen a firm’s long-termcompetitiveness such as technology, brands, and distribution channels.Example: Sanan Optoelectronics’ acquisition of Luminus Devices, a firm with leading LED technology. Efficiency-Seeking FDIInvestments that allows firms to reorganize their global operations to take advantage of different factorendowments, market structures, and institutional environments.Example: The establishment of a Baidu artificial intelligence lab in California’s Silicon Valley. Return-Seeking FDIInvestments that are primarily made for financial returns but exceed the 10% threshold for FDI.Example: Chengwei Capital’s stake in Novasentis.Source: Authors’ compilation based on Dunning (1993). See Data Appendix for details on definitions and coding.Coding each individual transaction gives us a snapshot of the firm-level drivers of Chineseinvestment in U.S. high-tech industries from 2000 to 2013 (Figure 12). The coding was basedon company information and our professional judgment and does not include an assessment ofpotential noncommercial motivations. The five categories are not exclusive, meaning that one FDItransaction can be motivated by a mix of these factors.24We find that the major motivation for Chinese firms to invest in U.S. high-tech industries is to seekmarkets, that is, to increase their local market share or find new markets for products and services.A total of 419 transactions, or 81%, have a market-seeking component to them. This is very similarto overall Chinese investment into the United States, starting from trade-facilitating investmentssuch as sales offices to more sophisticated operations, recently including the provision of after-salesservices.2324For a detailed description of taxonomy, definitions, and coding, see Data Appendix.For more details on coding, see the Data Appendix.37 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA Figure 12: Chinese FDI in US High-Tech Industries by Motivation, 2000-2013Number of DealsFigure 12: Chinese FDI in U.S. High-Tech Industries by Motivation, 2000–2013Number of deals8070REDONE60Market-SeekingStrategic-Asset-SeekingNatural-Resource-SeekingEfficiency-SeekingReturn-Seeking504030201002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Source: Rhodium Group. The five categories are not exclusive, and therefore single deals were often coded for a mix of motives.For more information on coding, see the Data Appendix. Numbers are constantly updated and therefore subject to adjustment.A detailed explanation of sources and methodology can be found at http://rhg.com/interactive/china-investment-monitor.A second important driver of overall Chinese investment in the United States, access to naturalresources, is not a major driver in high-tech industries. Chinese firms invested more than $10 billionin U.S. oil and gas assets alone from 2000 to 2013 with the goal of diversifying their global upstreamassets and gaining exposure to new extraction processes. However, there are only a handful ofdeals in our sample of 15 innovation-intensive industries motivated by securing input materials, forexample, Suntech’s 2008 acquisition of a minority stake in upstream supplier Hoku Scientific tosecure high-quality and low-cost polysilicon and silicon wafers.A third major driver of overall Chinese FDI in the United States is investments that aim at long-termfinancial return. Usually, such transactions would be counted as portfolio investment, but in somecases, the equity stake exceeds 10%, which puts them in the FDI category. Examples are stakes byChina’s sovereign wealth fund in U.S. utility companies (AES and Intergen) and the recent increasein purchases of commercial real estate in the United States by Chinese institutional investors orconglomerates. Given the well-developed venture capital sector, such passive stakes for financialreturns are an important feature of many U.S. high-tech industries, but they are not yet a significantdriver of Chinese activity. While we identify an increase in Chinese interest in venture capitalinvestments in U.S. high-tech firms, these stakes only rarely surpass the 10% threshold for FDI.One example is Alibaba’s stake in U.S. e-commerce firm ShopRunner.FIG 132,00060Greenfield Deals (left axis)50M&A Deals (left axis)Greenfield Investment1,8001,60038 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA The most notable trend for Chinese FDI in U.S. high-tech industries (also visible in the overallU.S. picture) is the increasing importance of two new drivers: the acquisition of strategic assets toenhance firms’ long-term competitiveness (e.g., technology, distribution channels, and brands) andinvestments to achieve greater efficiency of global operations by taking advantage of different factorendowments, market structures, and institutional environments. The share of transactions with astrategic-asset-seeking or efficiency-seeking component increased from 28% in 2003 to an averageof 45% in 2009–2013.In short, Chinese firms invest in U.S. high-tech sectors mostly because they want better access tothe U.S. market for their products and services. However, the acquisition of technology and knowhow and the utilization of local U.S. advantages such as human talent and the regulatory systemhave become important drivers in recent years. We look into each of these motivations in detail next.ACCESS TO THE U.S. MARKETImproving access to the U.S. market for Chinese goods was the dominant motive for Chinese FDI inthe past decade, and it is also the most important driver of investment in the 15 innovation-intensiveindustries: 419 of 518 high-tech deals have some kind of market-seeking motive. Market seekingis an important driver across all 15 industries; transactions with a market-seeking component areoften greenfield projects (83%), dominated by private investors (76%), and relatively small in size(average size of $15.1 million and median of $2 million) (Figure 13).The majority of market-seeking deals still come in the form of small-scale operations to facilitateexports of Chinese-made goods, such as rep offices and distribution channels. Most of these productsare labor intensive but relatively low tech, such as consumer electronics and auto parts. Examples areregional sales offices of Huawei in Texas and other locations; sales operations by Guansheng AutoParts in South Carolina; and offices of solar manufacturers Trina and Yingli in California.In recent years, as the Chinese economy has matured, we have seen market-seeking investmentsevolving beyond just trade offices. Investing in larger-scale service operations is necessary to enternew product segments that require greater local presence, and it allows firms to overcome theirfocus on the low-margin manufacturing process and capture margins in other parts of the valuechain. These investments still largely take the form of organic expansion through new greenfieldoperations. Examples are Huawei’s investments in customer operations for its smartphones andother devices in Texas, California, Kansas, New Jersey, Washington, Georgia, and Illinois; Sany’snew facilities in Georgia to help sell construction equipment and heavy machinery; and theoperations of Haier America in South Carolina and Hisense USA in Georgia.A second trend within market-seeking investments is that Chinese firms have begun to invest inlocal manufacturing as they recognize the advantages of localized production. Some firms seeadvantages in being closer to their U.S. customers, for example, auto supplier Nexteer in Saginaw,Michigan; Jinko Solar in California; and Lenovo in North Carolina. Others build local manufacturing39 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA FIG 13operations because they bet on the “Made in the USA” branding: for example, Haier and TopEastern Group in South Carolina. In some states, firms have incentives to build local assembly linesas a result60of existing “buy local” rules and other political dynamics. Examples are the operationsof2,000electric vehicle manufacturerBYDinLosAngeles,whichishopingtosellitsbusesforpublicuse,Greenfield Deals (left axis)1,800and the assemblylinesof Suntech in Arizona.25M&A Deals (left axis)501,600Greenfield InvestmentValue (right axis)FIG 131,40040M&A Investment ValueFigure 13: Market-SeekingFDI in U.S. High-Tech Industries, 2000–2013(right axis)  6030Greenfield Deals (left axis) REDONE50201,2002,0001,0001,800800M&A Deals (left axis)1,600600Greenfield InvestmentValue (right axis)4010300REDONE1,400400M&A Investment Value(right axis)1,2002001,00002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20138002060040010200FIG 1302000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 201350FIG 13REDONE2,00045State-Owned InvestmentProjects (left axis)1,80040Private InvestmentProjects (left axis)1,60035State-Owned InvestmentValue (right axis)1,40030Private InvestmentValue (right axis)1,2005025REDONE2,0001,000State-Owned InvestmentProjects (left axis)1,8008004015Private InvestmentProjects (left axis)1,6006003510State-Owned InvestmentValue (right axis)1,400400305Private InvestmentValue (right axis)1,200200201,00002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 201380015600The Suntech facility was closed in 2013 after Suntech went into bankruptcy.10400520002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013State-Owned InvestmentPrivate Investment ValueState-Owned Investment45202502500Private Investment ProjecState-Owned Investment VaPrivate Investment Value (rState-Owned Investment HPrivate Investment Projects40 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA ategic Asset-Seeking FDI in US High-Tech Industries, 2000-2013oup. Numbers are constantly updated and therefore subject to adjustment. A detailed explanation of sources and methodology can be found at http://rhg.com/interactive/china8080Plastic, Rubber and other MaterialsBusiness Services70Software and IT Services30REDONE601,800M&AInvestmentsIT Equipment(right axis)Industrial Machinery and ToolsGreenfield Investment(rightaxis) and Medical DevicesHealthcare5020401,4001,000Chemicals800Other Transportation Equipment30Automotive Equipment andComponents5501,200Renewable Energy10601,600GreenfieldDeals and BiotechnologyPharmaceuticals(left axis)Financial Services and InsuranceM&A Deals (left axis)152002,000Semiconductors25REDONE70Electronics and Electronic Parts40600400Aerospace Equipment andComponents302002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013020101002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Chart excludes Lenovo-IBM transaction ($1.7bn)Median: 2.0Chart excludes Lenovo-IBMtransaction ($1.7bn)0Figure 13: Market-Seeking FDI in US High-Tech Industries, 2000-2013Source: Rhodium Group. Numbers are constantly updated and therefore subject to adjustment. A detailed explanation of sources andAverage: 15.1050100150RH Notes:200250300$US (millions)* this will be a challenge, but we do need to find a way to squeeze theSource: Rhodium Group. Numbers are constantly updated and therefore subject to adjustment. A detailed explanation ofsources and methodology can be found at http://rhg.com/interactive/china-investment-monitor.Chatran41 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA Third, while market-seeking investments have been dominated by manufacturing firms, we see aclear increase in Chinese services firms trying to expand into the U.S. market. In the past, servicefirm investments were mostly limited to trade-related services such as shipping or air transport. Now,Chinese providers of high-value-added services are following their Chinese customers abroad andpositioning themselves in the U.S. market for future growth. Examples are financial service firms,including Industrial and Commercial Bank of China and China International Capital Corporation;communications providers such as China Telecom and China Unicom; law firms such as Jun He,Yingke, and Dacheng; and software and IT service providers, including Alibaba, HiSoft, and Tencent.ACQUISITION OF STRATEGIC ASSETSAcquiring strategic assets that increase a firm’s global competitiveness has emerged as anotherimportant driver of Chinese FDI in the 15 industries that we identified as innovation intensive.From 2000 to 2012, 149 of 518 high-tech deals were partially or wholly driven by gaining access toassets such as technology, brands, and distribution channels. By definition, strategic-asset-seekinginvestments are almost exclusively acquisitions. They are significantly larger on average than marketseeking investments, with an average value of $54.1 million and a median of $13.1 million (Figure 14).With regard to the type of strategic assets in U.S. high-tech sectors, most Chinese investors targetdistribution channels and technology. Brands are becoming more important in the overall U.S.–China FDI relationship (e.g., Smithfield), but they still play a comparatively small role in technologysectors, with the exception of the Lenovo-IBM transaction in 2005. The Lenovo-Motorolaacquisition and other transactions announced in the first months of 2014 indicate that brands willbecome more relevant in coming years.Access to established distribution channels, customer relations, and market know-how are particularlyimportant in industries in which Chinese firms are highly competitive in manufacturing but lackdownstream capabilities and consumer brand value, such as consumer electronics or software andIT equipment. Examples are Lenovo’s acquisition of IBM’s PC division for its brand and distributionchannels and the recently announced takeover of bankrupt electric vehicle maker Fisker by China’sWanxiang for its design and brand recognition.In addition to distribution channels and customer relationships, Chinese firms are increasinglylooking for knowledge, experience, and products that complement their strengths in low-valueadded manufacturing and that allow them to move to the next stage of their development. Onecommon pattern is that human talent and related knowledge and experience play a key role, reflectinga lack of such assets in China. Often, strategic-asset-seeking acquisitions serve as a starting pointfor greater “efficiency-seeking” FDI in the form of greenfield investments in R&D or designcapabilities outside China (see the next section). More tangible technology assets such as patentportfolios are not yet a major driver of high-tech acquisitions, but recently announced transactionssuch as the Lenovo-Motorola acquisition indicate that such assets will become more important inthe future, as Chinese firms expand beyond China’s borders.42 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA We also find an evolution of industries in which these strategic asset investments happen. In theearly 2000s, it was mostly automotive parts and IT equipment manufacturers that were seeking toinvest in strategic U.S. assets—for example, Wanxiang Group’s acquisitions of Universal AutomotiveIndustries in 2001 and Rockford Powertrain in 2003; Lenovo’s purchase of IBM’s PC unit in 2005;ategic Asset-Seeking FDI in USIndustries,2000-2013andHigh-TechHuawei’s failedtakeoverof 3Com in 2008. Since the mid-2000s, the mix of manufacturingroup. Numbers are constantly updatedand thereforesubjectto adjustment.detailedexplanationsourcesand methodologycan befoundat http://rhg.com/interactive/chinafirmsacquiringstrategicassets inAtheUnitedStates ofhasbecomemore diverse,withtransactionsinnewHigh-Techenergy (Hanergy’sacquisitionof MiaSolé in 2012), aerospace (China Aviation Industry Generalategic Asset-Seeking FDI in USIndustries,2000-2013roup. Numbers are constantly updatedand thereforesubject toofadjustment.detailedmedicalexplanationof sourcesand methodologycan beat http://rhg.com/interactive/chinaAircraft’sacquisitionCirrus inA2011),devices(Mindray’sacquisitionoffoundZONARE),and2,00030Figure 14: Strategic Asset-Seeking FDI in U.S. High-Tech Industries, 2000–2013Greenfield Deals (left axis)3025REDONE2520REDONE201515101055001,8002,0001,600Greenfield InvestmentDeals (left axis)1,800Value (right axis)1,400M&A Deals (left axis)1,600M&A Investment Value1,200Greenfield(right axis) InvestmentValue (right axis)1,4001,000M&A Investment Value1,200(right axis)8001,00060080040060020040002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 200M&A Deals (left axis)2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013252520REDONE2015REDONE151010550002,000State-Owned InvestmentProjects (left axis)1,8002,000Private Investment1,600Projects (left axis)State-OwnedInvestment1,800Projects (left axis)1,400State-Owned InvestmentPrivateInvestment1,600Value (rightaxis)Projects (left axis)1,200Private Investment1,400Value (right axis)State-OwnedInvestment1,000Value (right axis)1,200Private Investment800Value (right axis)1,00060080040060020040002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 201330Paper, Rubber and Other Materials30Business Services25Softwareand ITandServicesPaper,RubberOther MaterialsElectronicsand Electronic PartsBusinessServicesSemiconductorsSoftwareand IT Services0510800200600043 | ASIA SOCIETY HIGH TECH0: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013400520002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013030Paper, Rubber and Other MaterialsChart excludes Lenovo-IBMtransaction ($1.7bn)Business ServicesMedian: 2.0Software and IT Services25Chart excludes Lenovo-IBM transaction ($1.7bn)Electronics and Electronic PartsSemiconductorsIT EquipmentIndustrial Machinery and Tools20Healthcare and Medical DevicesREDONEPharmaceuticals and BiotechnologyFinancial Services and InsuranceAverage: 15.1Renewable Energy150Chemicals50100Other Transportation Equipment150200250300$US (millions)Automotive Equipment and ComponentsAerospace Equipment and Components10502000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Median: 13.1vo-IBM)Chart excludes Lenovo-IBM transaction ($1.7bn)Chart excludes Lenovo-IBtransaction ($1.7bn)Median: 14.2Average: 54.1050100150200250300350400450500$US (millions)Average: 56.6Source: Rhodium Group. Numbers are constantly updated and therefore subject to adjustment. A detailed explanation ofsources and methodology can be found at http://rhg.com/interactive/china-investment-monitor.05010015020025030035040044 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA pharmaceuticals (WuXi PharmaTech’s acquisition of AppTec in 2008). In recent years, we alsorecorded a greater number of Chinese service firms looking to acquire competitiveness-enhancingassets in the United States, including information technology, finance, and business services. Examplesare Alibaba’s purchase of Vendio and Auctiva in 2010, Tencent’s acquisition of Riot Games, andIndustrial and Commercial Bank of China’s acquisition of Bank of East Asia’s U.S. operations in 2012.IMPROVING THE EFFICIENCY OF GLOBAL OPERATIONSIn addition to the acquisition of strategic assets, a second newly emerged driver of Chinese FDIin U.S. high-tech industries is the desire of Chinese firms to increase the efficiency of their globaloperations. We record 219 transactions that partially or wholly aim at improving firms’ operationalefficiency. The annual number of transactions increased from an average of 5 in 2000–2007 to 28in 2008–2013. Almost all of these investments are greenfield projects (93% of deals, 78% of value).Similar to market-seeking investments, they are typically small in size, with an average of $8.7million and a median of $2.0 million from 2000 to 2013 (Figure 15).Greater efficiency-seeking FDI is a result of more global thinking by Chinese firms when it comesto their value chains. After three decades of building up economies of scale at home in mostly lowend manufacturing, firms now face pressure to change their business models, and they increasinglyhave the freedom to rationalize their operations according to global market logic.One of the major shortcomings they face in China is the lack of talented and experienced staff.26Expanding their presence in the United States allows them to tap into a creative, experienced,highly educated, and diverse workforce. Investments by Chinese firms in U.S. R&D, design, andother operations requiring qualified staff have increased substantially in recent years. Prominentexamples are Huawei’s local operations in Silicon Valley, Tempo International Group’s R&D centerin Michigan, China International Capital Corporation’s office in New York, and Baidu’s artificialintelligence lab in California. Most of these investments are greenfield investments or expansionsof existing facilities after the takeover of a U.S. firm in the form of expansion or additional hiring.Examples of post-acquisition expansion are Lenovo’s operations in North Carolina, Nexteer’sfacilities in Michigan, and Cirrus Aviation in Minnesota.The institutional gap between China and the rest of the world is another important driver ofefficiency-seeking investments. For one, investments in the United States give Chinese firmsexposure to a modern regulatory environment and help them prepare for China’s convergencewith such frameworks in the future. The growing expansion of Chinese banks and insurance firmsis partially driven by this learning motive. Second, the sound U.S. legal system in general and thestrong protection of intellectual property rights (IPR) provides an incentive for Chinese firms toinvest in U.S. R&D operations if they possess or develop cutting-edge technologies that could beat risk in China’s subpar IPR regime. Third, many Chinese high-tech firms establish operations in26For an academic perspective on China’s human resources for science and technology problem, see OECD (2008c) and Wang (2012); fora business perspective on the talent shortage, see McKinsey Global Institute, “Addressing China’s Looming Talent Shortage,” October 2005,accessed February 17, 2014, http://www.mckinsey.com/insights/china/addressing_chinas_looming_talent_shortage.45 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA Figure 15: Efficiency-Seeking FDI in US High-Tech Industries, 2000-2013Source: Rhodium Group. Numbers are constantly updated and therefore subject to adjustment. A detailed explanation of sources and methodology can be found at http://rhg.com/inteRH Notes:the UnitedStatesto havebetter2000-2013access to U.S. capital markets. Some of China’s biggest technologyFigure 15: Efficiency-SeekingFDI inUS High-TechIndustries,* this will be a challenge, but we do need to find a way to squeeze the four figure 13 charts onto one page.Source: Rhodium Group.arethemconstantlyupdatedand thereforeadjustment.explanationof sourcesand methodologybe found at http://rhg.com/intefirms,NumbersamongBaidu,Netease,andsubjectSohu,to arelisted Aindetailedthe UnitedStatesbecauseChinesecancapitalmarkets did not allow them the flexibility and depth to raise funds at an early development stage.These listings incentivized some initial U.S. presence that paved the way for bigger operations at alater stage. In short, the United States’ sound legal environment and deep financial markets make itRH Notes:an interestingchoice for private Chinese firms that aim to expand globally but face capital600 controls* this will be a challenge, but 40we do need to find a way to squeeze the four figure 13 charts onto one page.and other administrativehurdlesin China.Greenfield Deals(left axis)35M&A Deals (left axis)30 15:Figure REDONE40253520REDONEGreenfield InvestmentEfficiency-SeekingValue (right axis)500FDI in U.S. High-Tech Industries, 2000–2013M&A Investment Value(right axis)Greenfield Deals (left axis)M&A Deals (left axis)3015Greenfield InvestmentValue (right axis)2510M&A Investment Value(right axis)30050020040010030020515040060002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20010100502000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20136003025REDONE20301525REDONE10205150State-Owned InvestmentProjects (left axis)Private InvestmentProjects (left axis)State-Owned InvestmentValue (right axis)Private InvestmentState-OwnedInvestmentValue(right axis)Projects (left axis)Private InvestmentProjects (left axis)State-Owned InvestmentValue (right axis)Private InvestmentValue (right axis)5004006003005002004001003000010 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 200100502000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 201340Plastic, Rubber and other MaterialsBusiness Services0100546 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA 002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Median: 13.1vo-IBMChart excludes Lenovo-IBM transaction ($1.7bn)40Plastic, Rubber and other MaterialsBusiness Services35Software and IT ServicesElectronics and Electronic PartsSemiconductors3025REDONEIT EquipmentAverage: 54.1Industrial Machinery and ToolsHealthcareand MedicalDevices 20050100150Pharmaceuticals and Biotechnology0250300350400450500$US (millions)Financial Services and Insurance20Renewable EnergyChemicals15Other Transportation EquipmentAutomotive Equipment and ComponentsAerospace Equipment andComponents10502000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Median: 2.0Average: 8.7020406080100120140160$US (millions)120.0140.0160.0 Source: Rhodium Group. Numbers are constantly updated and therefore subject to adjustment. A detailed explanation ofsources and methodology can be found at http://rhg.com/interactive/china-investment-monitor.Median: 2.547 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA III. IMPACTS: SHOULD WE WELCOMECHINESE FDI IN TECH?WE HAVE DESCRIBED THE GROWTH AND DRIVERS of increasing Chinese high-tech investment,but what American workers, consumers, and politicians are most concerned about is the impactof these investments on employment, innovation, and long-term competitiveness. In this chapter,we review the debate about the risks and opportunities of foreign investment, highlight concernsrelated to high-tech FDI from China, and review existing evidence and data to assess the validity ofthose concerns. We find that FDI from China can yield tremendous tangible benefits such as greaterlocal innovative capacity and job creation. Greater levels of bilateral investment in high tech willalso help foster China’s integration into a market-based approach to global innovation, as opposedto the scenario of techno-nationalism. At the same time, existing concerns about the impact ofChinese FDI on national security and potential economic distortions are heightened in the case ofhigh-tech investments.Foreign direct investment is generally understood to be a net positive for recipient countries.27 Forconsumers, foreign investment intensifies the contest for buyers’ attention, leading to more choices,lower prices, and innovation. For firms, FDI opens new markets, increases operating efficiencyacross borders, and reduces production costs, thereby increasing economies of scale and promotingspecialization. It also means better prices for firms looking to divest assets, thanks to a bigger andmore competitive pool of bidders. In local communities, foreign investment brings and/or sustainsjobs, tax revenue, and knowledge spillovers from worker training, technology transfers, and R&Dactivities. For these reasons, most countries not only keep their doors open to FDI but activelypromote the inflow of foreign capital.At the same time, there are potential negative economic and political impacts from FDI:overdependence on certain industries, threats to competitive markets, and foreign control overassets and technologies that are considered important for national security. Therefore, mostcountries have policies in place to safeguard against distortions of healthy market structures and toscreen for national security threats. Frameworks to screen for national security threats and mergercontrol regimes are internationally accepted as features of open investment regimes.28The recent takeoff in FDI from China has spurred debate in many countries about whetherthese considerations apply in the same way to the case of Chinese capital and whether recipientcountries need new policies to adapt to these new flows.29 A range of special political and economiccharacteristics prompt this anxiety: China’s economic size, which will make it a systemically importantFor a detailed treatment of benefit from FDI, see OECD (2002).For national security practices, see Yannaca-Small (2007); for global merger control and competition policy, see Gerber (2010).29For an overview of these debates in the United States, see Rosen and Hanemann (2011); for an assessment of Europe’s reactions toChinese investment, see Hanemann and Rosen (2012).272848 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA country with enormous leverage and potential for setting standards and influencing global assetprices; the nonmarket features of China’s developmental model, such as state ownership, industrialpolicy, and restrictions on foreign investment; and its authoritarian political system and foreignpolicy strategy. With regard to Chinese investment in high-tech industries, three concerns stick out:(1) a combination of China’s economic size and unfair competitive advantages could crowd outother firms and threaten competitive markets in the longer term; (2) existing industrial policy andstate control could incentivize Chinese firms to move innovation-intensive activities back to China,against commercial logic; and (3) Chinese investment could threaten U.S. national security throughcontrol over critical defense inputs or exporting dual-use technology to hostile regimes.PRODUCTIVE COMPETITION OR THREAT TO COMPETITIVE MARKETS?As shown in the previous chapter, one major motivation for Chinese firms to invest in U.S. hightech sectors is to expand their market share in the United States. As a major vehicle for multinationalfirms to expand their presence in overseas markets, FDI will enable Chinese firms to further expandtheir U.S. market share. For example, it will help them compete in product markets that requirelocal service operations, such as machinery or cars. Acquiring U.S. firms with existing clients andproducts will also allow them to enter new markets quicker than before, such as general aviation.The question for American firms and consumers is whether this new competition borne of greaterChinese market share—and, potentially, market power—is good for them and what distributionalconsequences it will have.In economic theory, one of the major benefits from FDI is that it fosters market competition, whichis good for consumers and producers alike. For consumers, the results of increased competition areusually lower prices and better value, as well as greater choice. China’s integration into global valuechains as a goods exporter has already yielded significant benefits to U.S. consumers, and greaterChinese investment in the United States creates an opportunity to extend these gains to other productsegments that require a more active presence in consumer markets and, especially, to services. Theexamples of other Asian economies illustrate these benefits—think of Samsung’s role as a competitorto Apple’s smartphone dominance or the importance of Japanese and Korean carmakers in the U.S.market.Today, relatively few Chinese companies have made the step to consumer brands, particularly intechnologically advanced products. However, despite its low development stage, there already areexamples of firms positively influencing American consumer choices and prices. For instance,the market entrance of Haier fostered greater competition in U.S. white goods markets, bringingAmerican consumers lower prices and more innovative products. Or take Lenovo, which has becomethe world’s second-largest PC maker and is today an important supplier of laptops to U.S. consumers.These examples, of course, are comparatively mature-tech products, but firms with highly innovativeproducts are already knocking at the door, for example, Alibaba, with its innovative approach tobusiness-to-business online commerce; Tencent, with its popular WeChat application; and consumerelectronics firms such as Huawei, Xiaomi, and Coolpad, with their affordable smartphones.49 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA For producers, new competition resulting from FDI is also a good thing, as it forces firms toinnovate and allows them to adjust their business models and maximize shareholder value bydivesting unprofitable segments.30 New market entrants and competition from abroad have beenkey drivers of U.S. technological progress. Competition from China in the past has acceleratedthis kind of structural adjustment mostly through the trade channel, by moving lower-value-addedparts of the value chain overseas. Looking forward, the inward FDI channel will become anotherimportant conduit for structural change, as many Chinese firms look to upgrade their technologyand brands, which offers U.S. firms the opportunity to maximize the value of existing assets. Thedivesture of IBM’s PC unit to Lenovo and the pending sale of business servers manufacturingbetween the same pair illustrate this logic. After pioneering the development of personal computers,IBM’s PC unit performed poorly as the technology matured. By shedding an unpromising area ofits business, IBM was able to focus on more promising and profitable business lines such as serversand IT services. For Lenovo, this transaction was generally a win, too, as it allowed the firm tomove from an unknown Chinese supplier to one of the world’s most well-known household andbusiness brands.While openness to FDI and trade are important drivers of competition in an open economy, theseflows can harm domestic market structures if imports crowd out domestic firms through unfairpractices or if foreign takeovers increase market concentration to an unhealthy degree.31 For hightech sectors, such negative external shocks are considered particularly threatening, as the entrybarriers to markets are relatively high.32 That is why most open economies attempt to safeguardagainst such negative effects with mechanisms such as countervailing duties on subsidized goodsand competition policies to avoid overconcentration of markets.33China’s nonmarket economic policies pose particular thorny questions with respect to impacts onforeign markets. In the past, these concerns mostly surfaced as trade frictions between China andits trading partners. China has become the number-one target of World Trade Organization casesfocusing on subsidies and dumping.34 With regard to FDI from China, two concerns are mostprominent: First, firms are concerned about unfair advantages for their new Chinese competitorswhen competing on their home turf. These concerns arise from existing nonmarket elements inthe Chinese economy such as state ownership, subsidies, discriminatory industrial policies, andasymmetries in formal investment openness between China and the rest of the world (Figure 16).Second, from the perspective of aggregate economic welfare, such unfair competition could crowdout commercially efficient local firms in the long run, which would be detrimental to consumerwelfare, innovation, and long-term competitiveness of the host economy.35See Aghion et al. (2006).The idea that monopolistic market structures cause economic inefficiencies goes back to Chamberlin (1933) and Robinson (1933). Forbackground on U.S. competition policy, see Fox and Pitofsky (1997).32See the concept of “dynamic efficiency” in Motta (2004).33For background on global competition policy, see Graham and Richardson (1997) and Gerber (2010).34World Trade Organization’s number of antidumping disputes by exporting country, December 2012, accessed February 17, 2014, http://www.wto.org/english/tratop_e/adp_e/AD_InitiationsByExpCty.pdf; and WTO number of countervailing disputes by exporting country, December 2012, accessed February 17, 2014, http://www.wto.org/english/tratop_e/scm_e/CV_InitiationsByExpCty.pdf.35For a detailed assessment, see Rosen and Hanemann (forthcoming).303120.040.060.080.0Figure 16: Formal FDI Restrictiveness, 2012Figure 16: Formal FDI Restrictiveness,20120 means completely unrestricted market access; 1 means completely restricted.0 means completely unrestricted market access; 1 means completely restricted.0.450.400.350.30REDONE0.250.200.150.10EU Average*OECD AverageUnited StatesAustraliaKoreaCanadaMexicoJapanArgentinaSouth AfricaBrazilNON-OECD averageRussiaIndia0.00China0.05Source: OECD, Rhodium Group. Calculated based on available OECD data for 24 of 27 European Union member countries.Source: OECD, Rhodium Group. Calculated based on available OECD data for 24 of 27 EU member countries.Aggregate welfare concerns are not an immediate threat but a longer-term consideration. Thereare few, if any, examples of high-tech industries in which Chinese firms already have a substantialmarket share and are substantially ramping up overseas investments at the same time. One industrythat provides a useful case study to monitor such concerns is solar photovoltaic, where Chinesefirms dominate global production at the low end, largely because of government subsidies and otherartificial cost advantages such as low-cost financing, and are now acquiring U.S. and other foreignsolar firms with advanced technology.36 However, the industry was a foster child of subsidies inthe first place and is now in the midst of a global consolidation process with uncertain outcomes,so it is too early to draw conclusions. In general, most product markets currently dominated by17: Foreign low-techMNC U.S. Affiliates'as afiercePercentageof Domestic U.S.BusinessR&D In the case ofChinese suppliersFigureare relativelygoodsR&DwithcompetitioninsideChina.Percentage,USDthebillionadvanced products,most ofhigh-tech components are still imported from elsewhere in Asia.Once Chinese firms reach a potentially dangerous market share, U.S. competition authorities haveeffective instruments for both controlling inbound acquisitions and policing post-market-entry4516%behavior.R&D by Foreign MNCs' U.S. Affiliates (right axis)4015%of Foreign MNCs inhowever,totalindividualPercentagefirm perspective,U.S. Business R&D (left axis)From anconcerns about unfair competition are more35immediate. The nonmarket elements of China’s economy have become a real concern for many14%competing head to head with Chinese firms globally. In the high-tech space in30particular,companies2513%For an assessmentof the cost advantages for Chinese solar photovoltaic manufacturers, see Goodrich et al. (2013). Chinese acquisitions20 Holdingin the U.S. solar industry grew from $27 million in 2008 to $122 million in 2012. The most prominent examples are HanergyGroup’s acquisition of MiaSolé and Global Solar Energy Inc.; Zongyi Solar’s acquisition of Clean Jersey Solar; and LDK Solar’s acquisition of15Solar Power,12%Inc.361011%200820072006200520042003200220012000199919981997199610%199551994K0.050 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA 051 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA Beijing and the provinces are pursuing an extraordinary range of policies to help China catchup in innovation. These formal and informal policies may give some favored firms advantagesthat allow them to outcompete otherwise more competitive firms at home and abroad. Perhapsthe best illustration of the validity of foreign concerns about unfair advantages by state-ownedand state-supported enterprises is the ferocious debate inside China over the threat to the nation’snascent private sector posed by these firms and the aggressive reform agenda announced in 2013that promises to eliminate many such distortions in favor of a greater role for market forces.37 Thebehavior of China’s state enterprises may be even harder to discipline abroad than it is at home,since they are out of Beijing’s regulatory and inspection grip once offshore.GREATER INNOVATIVE CAPACITY OR TECHNOLOGY TRANSFER?Our data show that upgrading technology and operational efficiency is a second major driver ofChinese FDI in the United States. This leads to another important question: does foreign investmentincrease U.S. innovative capacity or accelerate the leak of U.S. technology overseas to the detrimentof long-term innovative capacity and related jobs?The logic of globalization is that countries specialize in whatever they can do best in globalcomparison.38 For decades, the United States has been one of the most—if not the most—attractiveplace for innovation-intensive activities in global value chains.39 Commonly cited reasons for thisare abundant human talent, access to the world’s largest market, a unique financial system adept atfunding innovation, and a supportive legal system with strong patent and IPR protection.40 Foreignfirms have become an important source of investment in U.S. innovative capacity, and most majorfirms with global operates have R&D activities in the United States. Today, affiliates of foreignenterprises spend more than $40 billion on R&D in the United States annually—around 14% oftotal U.S. R&D expenditure (Figure 17).With a maturing economy and greater freedom for its firms to invest overseas, China presents theUnited States with a unique opportunity to leverage its comparative advantages and strengthenits innovative capacity. For the past 20 years, FDI was a one-way street from the United Statesto China, accelerating the offshoring of labor-intensive manufacturing and the transformation ofthe U.S. economy toward services. The next phase of China’s growth will foster new economicactivities that flow the other way as well. Structural change is forcing Chinese firms to adjust theirbusiness models, and greater freedom to invest overseas for the first time allows them to rationalizevalue chains across borders instead of merely ramping up economies of scale in local manufacturing.We project that China’s OFDI stock will grow from currently $500 billion to $1 trillion to $2 trillionby 2020, and a significant share of this will build global capabilities in innovation and technology.37See the “Central Committee of the Communist Party of China Decisions Regarding Key Questions On Fully Deepening Reform” report published during the Third Plenary Session of the 18th Central Committee, accessed March 3, 2014, http://news.xinhuanet.com/politics/201311/15/c_118164235.htm.38The idea of comparative advantage and international trade goes back to the work of David Ricardo (1817).39For a historical perspective on foreign investment in U.S. technology, see Wilkins (1989, 2004).40OECD (2012).52 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA Figure 17: Foreign MNC U.S. Affiliates' R&D as a Percentage of Domestic U.S. Business R&DPercentage, USD billionFigure 17: R&DSpending by Foreign Affiliates in the United States, 1994–2008Total spending in $US (billions), share (%) of total U.S. corporate R&D spending4516%15%R&D by Foreign MNCs' U.S. Affiliates (right axis)40Percentage of Foreign MNCs in totalU.S. Business R&D (left axis)353014%K2513%201512%1011%2008200720062005200420032002200120001999199819971996199410%199550Source: Authors’ compilation based on data from the National Science Foundation.Source: National Science Foundation, RHGThe United States is well positioned to be a recipient of these flows, as it offers what the nextgeneration of Chinese investors is lookingfor:USstrongbrands,a highlyFigure 18:High-TechExports toworld-classChina by Producttechnology,Category, 2003-2012skilled workforce, a legal environment supportive of innovation, and modern corporate governanceUSD million hub for Chinese firms, the United States wouldand management structures. As an innovationbenefit from greater local R&D capacity and high-skill job creation. Investments would likely yieldpositive 25,000spillover effects for local economies through worker training and the introduction of newTechnologyleadership.technologies and production techniques as Chinese firms move closer toNucleartechnologyGreater Chinese presence, in combination with rationalized export controlWeaponsrules, could also boost20,000AerospaceU.S. high-tech exports to China (Figure 18), contributing to more balanced trade patterns.41 GrowingChinese FDI in the United States could also help boost royalty and license feepaymentsfrom ChinaAdvancedMaterialsto the United15,000 States through intra-company payments and accelerate China’sFlexible convergence withManufacturingglobal norms of IPR protection (Figure 19).NEElectronics10,000The example of Japanese and Korean firms illustrates the opportunitiesInformationbrought& by structuralCommunicationsadjustment combined with an opening up to outward FDI. When these economies matured,Opto-Electronicsstructural5,000reforms at home and greater freedom to invest overseas led to a wave of outward FDI,Life Sciencepartly aimed at upgrading technology and expanding R&D capacities globally. When JapaneseBiotechnologyfirms arrived in the United States, they were dismissed as primitive. Today, they are at the forefront02003 2004 2005 2006 2007 2008 2009 2010 2011 2012High-tech exports to China have doubled in the past decade, but the overall trade balance remains imbalanced. In 2012, the UnitedStates exported high-tech goods worth $22 billion to China while importing $141 billion, with the majority of the deficit in electronics andIT equipment.41Source: US Census Bureau, http://www.census.gov/foreign-trade/statistics/product/atp/select-atpctry.htmlFigure 192008200853 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA Source: National Science Foundation, RHGSource: National Science Foundation, RHG20072007200620062005200520042004200320032002200220012001200020001999199919981998199719971996199610%199519951994199410%00Figure 18: US High-Tech Exports to China by Product Category, 2003-2012Figure 18: US High-Tech Exports to China by Product Category, 2003-2012USD millionUSDChinamillion by Product Category, 2003–2012Figure 18: U.S. High-Tech Exports to$US (millions)25,00025,000Nuclear Technology20,000WeaponsAerospaceNuclear TechnologyWeapons20,000NE15,000NE15,000Aerospace MaterialsAdvancedAdvancedFlexible MaterialsManufacturingFlexibleManufacturingElectronics10,000Electronics &InformationCommunicationsInformation &CommunicationsOpto-Electronics10,0005,000Opto-ElectronicsLifeScience5,000Life ScienceBiotechnologyBiotechnology02003 2004 2005 2006 2007 2008 2009 2010 2011 201202003 2004 2005 2006 2007 2008 2009 2010 2011 2012Source: U.S. Census Bureau, http://www.census.gov/foreign-trade/statistics/product/atp/select-atpctry.html. igure 19: Royalty andSource:FLicenseFee Payments between China and the United States,US Census Bureau, http://www.census.gov/foreign-trade/statistics/product/atp/select-atpctry.html1999–2012Source: US Census Bureau, http://www.census.gov/foreign-trade/statistics/product/atp/select-atpctry.htmlFigure 19$US (millions)Figure 196000Figure 19: Royalty and License Fee Payments between China and the United States, 16000Figuremillion19: Royalty and License Fee Payments between China and the United States, 1USDChinese Royalty and License Fee Payments to the USUSD millionChinese Royalty and License Fee Payments to the USUS Royalty and License Fee Payments to China500050004000US Royalty and License Fee Payments to ChinaBalance4000Balance30003000200020001000100000-1000-10001999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20121999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Source: U.S. Bureau of Economic Analysis, International Accounts.Figure 20: Japanese FDI in the United States and Related Economic Flows, 1960-2012Figure 20: Japanese FDI in the United States and Related Economic Flows, 1960-2012USD millionUSD million2525Royalty and License Fee Payments3502535025Royalty54 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA Source: US Census Bureau, http://www.census.gov/foreign-trade/statistics/product/atp/select-atpctry.htmlFigure 19of cutting-edge R&D and production, management techniques. The R&D spending of JapaneseRoyaltyand LicensePaymentsChina and the United States,6000United States increased from virtually zero Figurefirms in thein the19:early1980sto $7Feebillionin between2011; highUSD milliontech exports from the ChineseUnitedRoyaltyStatesJapanFeetodaytotal$20USbillion per year, and royalty and licenseandtoLicensePaymentsto the5000 from Japan to the United States grew to $10 billion (Figure 20).fee paymentsUS Royalty and License Fee Payments to ChinaBalance4000 pessimisticThe opposite,view is that growing Chinese investment in the United States will damageU.S. long-term innovative capacity as it allows China to catch up quicker and move high-value3000activity backto China. This view presents two questions: First, should we allow Chinese firms tobuy U.S. technology despite China’s record of IPR violations, corporate espionage, theft of trade2000secrets, and forced technology transfers? Second, do Chinese firms behave differently from otheremerging market players in these regards, or will they have a higher propensity to move innovation1000related activities back to China because of industrial policies and a techno-nationalistic gestalt?0With regard to the first question, the reflex to call for restrictions on acquisitions of U.S. technologyis understandable,given China’s IPR infringement record.42 Understandable—but not sensible. As-100019992001technological2002 2003 20042005 is20062007 20082009that20102011 2012for Japan or Korea,2000China’scatch-upa naturalprocessunilateralrestrictionswill do little to slow, while poisoning the upsides of transition. Moreover, we believe that FDI isexactly the channel through which this catch-up should happen: transparent transactions in whichFigure 20: JapaneseFDIownerin the Unitedand RelatedEconomicFlows,theof a Statestechnologysetsa pricefor 1960-2012assets. In this sense, we should welcome growing ChineseUSD millionFigure 20: Japanese FDI in the United States and Related Economic Flows, 1960–2012$US (billions)25350Royalty and License Fee Paymentsto the US from Japan (left axis)20Royaltto the30020US High Tech Exports to Japan (left axis)1525R&D Spending of Japanese Firmsin the US* (left axis)250Japanese FDI Stock in theUnited States** (right axis)20015010US HigR&D Sin the15JapaneUnited1010055019820198020122010200820062004200220001998199619941992199019881986198419820198050Source: U.S. Bureau of Economic Analysis; U.S. Census Bureau. *Before 2007, data include only nonbank affiliates.** Historical cost basis.Source: US Bureau of Economic Analysis, US Census Bureau; before 2007 data only for non-bank affiliates; historical cost basis.42For a summary of Chinese intellectual property rights infringements and estimated costs to the U.S. economy, see USITC (2010).Figure 21: Full-Time US Jobs Provided by Majority Chinese-Owned Firms in 15 High-Tech Industries, 2000-2013Number of Jobs55 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA FDI as recognition of the value of innovation and a sign of readiness to pay for it. Embracing theFDI trend will also accelerate compliance with law-based innovation protections. The greater thevalue of IPR and other intangible assets on the balance sheets of Chinese firms, the more thesefirms will pressure Beijing for better protection of these assets in China and globally. A largerChinese investment footprint in U.S. technology also permits U.S. agencies to “reach” Chineseassets in the case of legal enforcement actions. The failed U.S. expansion of one of China’s windenergy champions, Sinovel, illustrates this point. Sinovel thrived on the back of Chinese policies toboost homegrown clean energy producers and the alleged theft of intellectual property from U.S.based supplier AMSC.43 When the firm tried to expand into the U.S. market, charges by the U.S.Department of Justice against Sinovel and its executives for trade secret theft stymied their plans,creating a sense of consequences for other Chinese firms with global ambitions.Second, the “headquarters effect” argument that investors might shift value-added economic activityback to China is more complicated. It is a fact that the Chinese government pursues active industrialpolicies to increase local high-value-added economic activity and that it tries to reach these goals notjust through improving local conditions for innovation but also through political requirements thatinterfere with local and foreign firms’ choice of location decisions and partner choices. Examplesinclude joint venture rules in specific industries and indigenous innovation policies.44 It is also truethat micro-management of the financial system, the lack of rule of law, and regulatory regimes forcross-border capital flows give the Chinese government significant de facto influence over firms’domestic and overseas investment decisions.45 These special characteristics of the Chinese economyraise concerns that firms might not follow commercial logic and comparative advantage in buildingout global value chains but might instead follow government guidance and industrial policy goals.These concerns are valid, and it is important to monitor firms’ behavior overseas in light of theparticular Chinese political economy, as well as the changes in that system triggered by announcedeconomic reforms. An empirical assessment of Chinese firms’ behavior overall and in high-tech inparticular is difficult because of the short track record. However, our CIM dataset allows us to trackthe behavior of Chinese firms in the United States since the early 2000s; these insights, combinedwith other data points, help us draw some preliminary conclusions about the behavior of Chinesehigh-tech investors. We find that Chinese investment in U.S. high-tech industries is generally “sticky”(does not get folded up shortly after initiation) and creates local R&D spending and employment.Similarly, we do not find evidence of Chinese firms systematically acquiring technology assets andthen moving capacities to China or other countries.For a variety of reasons, official statistics do not provide good data on employment by U.S. affiliates ofChinese firms.46 The CIM dataset allows us to track employment related to each transaction and thus43See U.S. Department of Justice, “Sinovel Corporation and Three Individuals Charged in Wisconsin with Theft of AMSC Trade Secrets,”news release, June 27, 2013, accessed March 3, 2014, http://www.justice.gov/opa/pr/2013/June/13-crm-730.html.44See, e.g., James McGregor, “China’s Drive for ‘Indigenous Innovation’: A Web of Industrial Policies,” accessed February 17, 2014, https://www.uschamber.com/sites/default/files/legacy/reports/100728chinareport_0.pdf.45In fact, key industrial policy players such as the National Development and Reform Commission or the Ministry of Industry and Information Technology are actively involved in approving the outbound investments by Chinese firms in technology sectors. 46These problems are discussed in detail in Hanemann (forthcoming).Source: US Bureau of Economic Analysis, US Census Bureau; before 2007 data only for non-bank affiliates; historical cost basis.56 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA Figure 21: Full-Time US Jobs Provided by Majority Chinese-Owned Firms in 15 High-Tech Industries, 2000-2013Number of JobsFigure 21: Full-Time U.S. Jobs Provided by Majority Chinese-Owned Firms in 15 HighTech Industries, 2000–2013Number of jobs30000Acquisitions25000Greenfield Projects20000NE15000100005000201020112012201302000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Source: Rhodium Group. Numbers are constantly updated and therefore subject to adjustment. A detailed explanation ofsources and methodology can be found at http://rhg.com/interactive/china-investment-monitor.Source: Rhodium Group. Numbers are constantly updated and therefore subject to adjustment. A detailed explanation of sources and methodology can be found at htprovides an aggregate estimate for the jobs impact of Chinese FDI in the United States.47 Analyzingthe 518 high-tech transactions in our sample, we find that these investments have created or sustainedabout 25,000 full-time jobs sinceFigure200021).by AroundjobsEconomyhave Firms,been 2007-2011newly created22: (FigureR&D SpendingUS Affiliates6,000of Emergingthrough greenfield projects, and morethan19,000employeesinhigh-techindustrieshavecome underUSD millionthe payrolls of Chinese firms through acquisitions. The total number of Americans employed bysubsidiaries of Chinese high-tech firms, of course, is small compared with the jobs provided by firmsfrom Japan or major European countries, but the trend is strongly positive in recent years.Job creation400 through greenfield investments was small initially, but it has grown stronger in the pastthree years as the natureof greenfield projects has changed. For most of the past decade, greenfieldChina350projects were smalland mostly focused on export facilitation. In the last five years, Chinese firmsIndia300 to build more expansive greenfield operations, including headquarters, R&D and designhave begunRussiacenters, 250after-sales service operations, and small-scale manufacturing facilities. Among the mostBrazilprominent greenfield investors are Wanxiang, which entered the U.S. market in 1994 and grew into aMexico200 businessdiversifiedemploying 6,000 Americans; Haier, which established its first production facilityin South150Carolina in the late 1990s and today employs about 350 people; Huawei, which employsaround 1,900 people at its R&D centers and other facilities in California, Texas, New Jersey, and other100locations; and Sany, which runs a manufacturing facility employing more than 130 people in Georgia.5047For more background, see Data Appendix and Hanemann and Lysenko (2012).020072008200920102011Source: BEA, R&D spending by affiliates of foreign multinational companies; data for Brazil 2007-2011, Mexico (2008 and 2010) and Russia 2007-2010 not available o57 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA Compared to greenfield projects, the job impact of acquisitions is less clear in academic literature.M&A deals can be positive for local employment if the investor saves the target from bankruptcy orhires additional staff after the acquisition, but negative if the post-merger integration or restructuringresults in the downsizing of local employment or if the investor chooses to extract valuable assetsand shut down local operations. Analyzing 150 Chinese takeovers of U.S. firms that we classify astechnology or innovation intensive, we find that the jobs impact is overwhelmingly positive. We findmany instances in which Chinese firms have saved U.S. technology companies from bankruptcyby providing capital, for example, in the case of auto battery manufacturer A123, auto componentsmaker Nexteer, and general aviation firms Cirrus and Mooney. In most of these cases, Chinese buyersinjected additional capital after the acquisition to maintain or increase local staffing (see Table 4).The few exceptions to these patterns have typically occurred in sunset industries in which theloss of employment can be primarily attributed not to Chinese ownership but to an industry-widedecline in that sector.48 Thus, while China’s new multinationals are not immune to the commercialTable 4: Selected Acquisitions by Chinese Firms in High-Tech ManufacturingFirmTarget (Year)Job ImpactPacific Century MotorsNexteerAutomotive (2010)After plans by General Motors to shut down Nexteercompletely, new owner Pacific Century Motors committedto keeping operations in Saginaw and has added morethan 600 factory jobs to its original employment base ofaround 3,000.Top Eastern DrillKennametal assets(2009)After acquiring steeling drill assets from strugglingtoolmaker Kennametal, new owner Top Eastern Drillinvested millions in new machinery and a logisticscenter and brought back the firm’s old name, GreenfieldIndustries. The expansion led to a substantial increase inlocal staff, including workers that have been laid off bythe previous owner.Wanxiang AmericaNeapco Holdings(2006)Wanxiang acquired a majority interest in Neapco in 2006.Neapco has since then increased revenues five-foldand now employs more than 2,000 people worldwide,including several hundred in the United States.LenovoIBM PC Division(2005)When Lenovo acquired IBM’s PC division in 2005, morethan 2,000 U.S. employees were transferred. Since then,Lenovo has invested millions in new R&D operations,manufacturing operations and a fulfillment center in NorthCarolina. A joint venture with EMC and the acquisitionof Stoneware Inc. in 2012 bring Lenovo’s total U.S.employment to more than 2,800.Source: Authors’ compilation based on company information, media reports, and interviews.48Examples include the relocation of jobs by Wanxiang’s Coupled Products LLC from Indiana to Mexico in 2008 and the downsizing at GossInternational in reaction to slow global demand for printing machinery.Source: Rhodium Group. Numbers are constantly updated and therefore subject to adjustment. A detailed explanation of sources and methodology can be found at h58 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA ,19,22,23,A1-2-3-4.Figure 22: R&D Spending by US Affiliates of Emerging Economy Firms, 2007-2011USD millionFigure 22: R&D Spending by U.S. Affiliates of Emerging-Economy Firms, 2007–2011$US (millions)400350300ChinaIndiaRussia250Brazil200Mexico15010050020072008200920102011Source: U.S. Bureau of Economic Analysis, R&D spending by affiliates of foreign multinational companies; data for Brazil, 2007–2011; Mexico, 2008 and 2010; and Russia, 2007–2010 are not available or have been suppressed for confidentiality reasons.Source: BEA, R&D spending by affiliates of foreign multinational companies; data for Brazil 2007-2011, Mexico (2008 and 2010) and Russia 2007-2010 not availablepressures of rationalizing their global value chains, there are no signs yet that industrial policygoals or patriotic doctrines are forcing them to move operations to China. To the contrary, theyinvest in U.S. greenfield operations and acquire U.S. firms to gain a long-term foothold in one ofthe world’s most innovative economies.The primary value proposition for most Chinese investorsFigure 23: CFIUS-Covered Transactions Led by a Chinese Buyer, 2006-2012is not a quick grab of patents or otherremovable physical assets but intangible and non-removableNumber of transactions and percent share of totalassets such as the skills and know-how of staff, management experience, brands, and proximity tolocal customers.Another dataset supporting the observation that Chinese firms are ramping up innovation-intensiveactivities in the United States is the U.S. Bureau of Economic Analysis’s statistics on R&D spending25 of foreign multinational companies.49 While this dataset is likely to underestimate25%by affiliates20%the presence of Chinesethe U.S.witheconomy,it (leftstillaxis)shows a significant increase in R&DNumber offirmsCoveredinTransactionsChinese BuyerPercentofAllCoveredTransactions(rightaxis)spending20by Chinese-owned firms, from near zero in 2007 to $31 million in 2009 and20% to $366million in 2011 (Figure 22). This is still small in comparison to total R&D spending of foreignaffiliates15in the United States ($47 billion) and to expenses of major foreign investor suchas Japan15%23 to five years ago.($6.95 billion) or Germany ($5.58 billion), but it is a significant increase comparedChinese firms now already match or surpass the R&D spending of 9%firms from smaller developed1010%Asian economies such as Korea ($372 million), Singapore ($255million),and Taiwan ($143 million).6%6%4%Chinese R&D spending is also significantlylarger than local expenditures by any other group of1055%emerging-economy firms in2%the United States.0%4963460 caveats to the Bureau of Economic Analysis data and its comparability to our dataset; see Data Appendix. 0%There are some2006200720082009201020112012Source: CFIUS Annual Report to Congress, Public Version.RH: This is a newly added figure59 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA PEACE DIVIDEND OR NATIONAL SECURITY THREAT?The third major area of American concern is the impact of Chinese high-tech investment on U.S.national security. Concerns about the security implications of foreign ownership of U.S. assetshave come up in connection with many waves of foreign investment in the past. As a geopoliticalcompetitor and the world’s second-largest economy, Chinese investment naturally triggers similarconcerns.Foreign investment can be beneficial to a country’s national security. Cross-border ownership ofassets can stabilize relationships as engagement deepens beyond mere facilitation of goods andservices trade. Firms can stop trading with one another in short order, and short-term investmentscan be withdrawn, but direct factory and warehouse investments cannot be removed overnight.Firms with direct investments are pressed into closer alignment, and FDI promotes understandingon the individual level through multiethnic workforces and collaboration between differentcultures.50 Examples include the role of two-way FDI in sustaining transatlantic political relationsafter World War II and the role of inward FDI in sustaining Japan’s status as an economic partnerand geopolitical ally of the United States. Moreover, inward FDI can also strengthen the nationalsecurity of a country by adding to the innovative and industrial base of its economy.At the same time, FDI can in theory pose risks to national security. First, FDI can be used tomanipulate a country’s domestic or foreign policy. This applies particularly to smaller economies withlow levels of foreign investment, a situation that makes them vulnerable to political demands by majorinvestor countries. Second, there is a set of concrete national security threats from FDI. Internationalagreements on free cross-border capital flows recognize this and allow countries to impose mechanismsto screen for such risks.51 While each nation defines what it considers a risk, scholars have identifiedfour particular risks that the United States is concerned about: foreign control over strategic assets(such as ports and pipelines); foreign control over the production of critical defense inputs (such asmilitary semiconductors); the transfer of sensitive technology or know-how to a foreign power withhostile intent; and FDI as a channel for espionage, sabotage, or other disruptive action.52To address these concerns in an otherwise open investment environment, the United Stateshas a special regime that screens foreign takeovers for these narrow national security risks,the Committee on Foreign Investment in the United States (CFIUS). CFIUS consists of ninegovernment agencies and offices, including the U.S. Department of Defense, the U.S. Departmentof Homeland Security, and the White House Office of Science and Technology Policy. In assessingthe impact of foreign acquisitions, they are assisted by other government entities, includingthe National Security Council, and they are supported by the analysis of the U.S. intelligencecommunity.53 The legislation that sets the foundation for U.S. screening of foreign takeovers—theSee Mansfield and Pollins (2003) for an overview of liberal and realist arguments on economic interdependence and conflict.See Yannaca-Small (2007).52See Graham and Marchick (2006) for an extensive discussion of national security risks from FDI and Moran (2009) for an analyticalframework for assessing national security risks from foreign investment.53See “Composition of CFIUS,” U.S. Department of the Treasury, accessed February 17, 2014, http://www.treasury.gov/resource-center/international/foreign-investment/Pages/cfius-members.aspx.505160 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA Defense Production Act of 1950 and the Foreign Investment and National Security Act of 2007—particularly highlights two concerns related to foreign investment in technology. First, thereare the potential effects of foreign ownership on “critical technologies” necessary for domesticindustries to meet national defense-related needs. Second, there are the potential effects of foreignownership on the sale of technology or high-tech products and services to a country or entitiesposing a national security threat to the United States or countries that are considered a risk forproliferation of such technologies to hostile governments or terrorist organizations.54In its assessment, CFIUS does not discriminate against particular countries, nor does it take asector-specific approach to risk. However, China presents particular concerns with regard totechnology sector acquisitions in particular, for at least three reasons.55 First, unlike other FDImajors such as Japan or the European countries, China is not an ally of the United States butrather an emerging power with a rapidly modernizing military and a stated aspiration to displacethe existing global and regional power balance in favor of a greater strategic role for itself.Technological catch-up is seen as key to those objectives.56 Second, overseas acquisitions couldserve as a potential channel for such upgrades, particularly as the government has various ways ofinfluencing firms’ investment decision making through either direct ownership or informal waysincluding the financial system or a mandatory approval process for outbound investments. Third,China is not embedded in mutual defense agreements and has a troubled record on export controlrules, as well as a reputation as a major proliferator of sensitive technologies to rogue regimes suchas Iran and North Korea.57While an empirical assessment of the national security impacts of Chinese FDI is beyond ourcapacities, it is fair to say that the CFIUS arrangement has worked well in the past in allowingAmerica’s security community to screen for threats while permitting non-problematic transactionsto proceed. The number of Chinese transactions reviewed by CFIUS has increased significantlyin recent years because of the overall increase in the number of Chinese U.S. transactions andthe relative shift toward higher technology sectors (Figure 23). CFIUS has intervened in severalannounced Chinese high-tech transactions in the United States. In 1990, the president blocked thetakeover of Mamco Manufacturing Inc., a manufacturer of aircraft parts, by China National AeroTechnology Import and Export Corporation.58 In 2009, Huawei and Bain Capital walked awayfrom a takeover of U.S. telecommunications firm 3Com because CFIUS signaled concerns that thecompanies were not able to mitigate.59 In 2011, CFIUS ordered Huawei to submit the acquisitionof assets from bankrupt U.S. cloud computing start-up 3Leaf and, ultimately, forced Huawei to54See Foreign Investment and National Security Act of 2007, accessed March 3, 2014, http://www.gpo.gov/fdsys/pkg/BILLS-110hr556enr/pdf/BILLS-110hr556enr.pdf.55This paragraph draws heavily on Graham and Marchick (2006), chap. 4.56See U.S. Department of Defense, “Annual Report to Congress: Military and Security Developments Involving the People’s Republic ofChina 2013,” accessed February 17, 2014, http://www.defense.gov/pubs/2013_china_report_final.pdf.57See Kan (2011).58Harriet King, “China Ends Silence on Deal U.S. Rescinded,” New York Times, February 20, 1990, accessed February 17, 2014, http://www.nytimes.com/1990/02/20/business/china-ends-silence-on-deal-us-rescinded.html.59Steven R. Weisman, “Sale of 3Com to Huawei Is Derailed by U.S. Security Concerns,” New York Times, February 21, 2008, accessedFebruary 17, 2014, http://www.nytimes.com/2008/02/21/business/worldbusiness/21iht-3com.1.10258216.html?pagewanted=all&_r=0.61 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA Number of transactions and percent share of totalFigure 23: CFIUS-Covered Transactions Led by a Chinese Buyer, 2006–2012Number of transactions and share (%) of total252020%Number of Covered Transactions with Chinese Buyer (left axis)Percent of All Covered Transactions (right axis)25%20%152315%9%104%50102%0%200610%6%6%63200720086420095%2010201120120%Source: CFIUS Annual Report to Congress, Public Version.Source: CFIUS Annual Report to Congress, Public Version.divest these assets.60 In 2012, a takeover of U.S. aircraft maker Hawker Beechcraft reportedly fell61apart because national securitycouldRH: This concernsis a newly addedfigurenot be mitigated by the parties.At the same time, CFIUS investigations allow U.S. government officials to approve deals that arefound to90have no negative impact on U.S. national security and to impose conditions for transactionsto mitigatespecific concerns. For deals involving basic technologies in the machinery500 or auto80Stock: SAFE (right axis)industries, such as Nexteer Automotive or Goss International, CFIUS did not pose a significantStock: MOFCOM (right axis)70hurdle.62 CFIUS also cleared several aerospace takeovers that did not include technology400 relevantFlows: SAFE (net) (left axis)6360for defense, including Cirrus Industries and Enstrom Helicopter. Mitigation agreements wereFlows: SAFE (gross) (left axis)imposed50on a numberof high-tech transactions, including Lenovo’s takeover of IBM’s300PC unit in64Flows:MOFCOM(leftaxis)2005 andWanxiang’s acquisition of the assets of bankrupt U.S. battery maker A123 in 2013.65402003060“Huawei 20Backs Away from 3Leaf Acquisition,” Reuters, February 19, 2011, accessed February 17, 2014, http://www.reuters.com/article/2011/02/19/us-huawei-3leaf-idUSTRE71I38920110219.10061Mike Spector,10 “Hawker Sales Talks Collapse over Review Worries,” Wall Street Journal, October 18, 2012, accessed February 17, 2014,http://online.wsj.com/news/articles/SB10000872396390443684104578064402725144988.62Nick Bunkley,0 “G.M. Sells Parts Maker to a Chinese Company,” New York Times, November 29, 2010, accessed February0 17, 2014,http://www.nytimes.com/2010/11/30/business/30gm.html; and Matt Whipp, “Shanghai Electric to Take 100% Stake in Goss International,” PrintWeek, May 19, 2010, accessed February 17, 2014, http://www.printweek.com/print-week/news/1127644/shanghai-electric100-stake-goss-international.63Norihiko Shirouzu, “China to Buy U.S. Plane Maker,” Wall Street Journal, March 3, 2011, accessed February 17, 2014, http://online.wsj.com/news/articles/SB10001424052748704728004576176243061806326; and Ernie Stephens, “New Chinese Ownership Brings‘Great Change’ to Enstrom,” Rotor & Wing, March 22, 2013, accessed February 17, 2014, http://www.aviationtoday.com/rw/commercial/observation-patrol/New-Chinese-Ownership-Brings-Great-Change-to-Enstrom_78775.html#.Up_MdsRDsdo.64“Lenovo to Acquire IBM Personal Computing Division,” IBM, news release, December 7, 2004, accessed February 17, 2014, http://www03.ibm.com/press/us/en/pressrelease/7450.wss.Source: MOFCOM, SAFE.65Michael Bathon, “Wanxiang Wins U.S. Approval to Buy Battery Maker A123,” Bloomberg News, January 30, 2013, accessed February17, 2014, http://www.bloomberg.com/news/2013-01-29/wanxiang-wins-cfius-approval-to-buy-bankrupt-battery-maker-a123.html.1982198319841985198619871988198919901991199219931994199519961997199819992000200120022003200420052006200720082009201020112012,19,22,23,A1-2-3-4.Figure 23: CFIUS-Covered Transactions Led by a Chinese Buyer, 2006-2012Figure A-2: China’s OFDI Stock by Country, 2011 (MOFCOM)Percent share of total OFDI StockRest of World, 19%62 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA IV. IMPEDIMENTS: TOWARD A PRODUCTIVEU.S.–CHINA INVESTMENT RELATIONSHIPOUR ASSESSMENT SUGGESTS THAT THE UNITED STATES is gaining in terms of consumer choice,local R&D spending, and employment from Chinese investment in advanced activities. Lookingforward, China’s rise as a global investor and innovator will present additional opportunities. Weexpect China’s outbound FDI stock to grow from $500 billion today to $1 trillion to $2 trillion by2020.66 Much of that capital will build innovative capacity; as the most advanced economy in theworld, the United States is positioned to attract a significant share of these flows.Concerns about the impacts of Chinese FDI on national security and other U.S. interests,meanwhile, are legitimate. These already pose a hurdle for Chinese investors and they will becomemore substantial as investment levels rise unless misgivings are better addressed. Increasingmistrust toward foreign technology in Beijing is raising hurdles for U.S. technology companiesoperating in China, and that is aggravating the American conversation. In short, there is a real riskof a protectionist downward spiral, which would threaten open, two-way FDI flows in innovationintensive activities between the two largest economies in the world—a scenario that would bringsignificant economic welfare losses for all.In this chapter, we assess the impediments and discuss what policy makers and the private sector can doto work toward a U.S.–China investment relationship that maximizes economic welfare and innovationwhile addressing legitimate non-welfare concerns. We emphasize three responses that we believe areessential based on our experience tracking China’s OFDI evolution: (1) optimizing the mechanismsused to manage national security concerns, (2) integrating China deeper into a market-oriented globalinnovation system, and (3) developing strategies to sustain America’s comparative advantages in globalinnovation chains through domestic fundamentals rather than a nationalistic approach.MANAGING NATIONAL SECURITY RISKS APPROPRIATELYNational security concerns have dogged a number of Chinese high-tech investments in the UnitedStates, often providing a pretense for politicization. In China, national security concerns havetriggered debate about reliance on foreign technology, giving domestic interest groups an openingto lobby for nationalistic approaches to innovation. The potential for protectionism justified onnational security grounds is the foremost challenge to a mutually beneficial U.S.–China investmentrelationship today.Questions about the national security significance of Chinese investment will inevitably—andlegitimately—be raised in the United States, given China’s geostrategic and geoeconomic role.66The 2014 global OFDI projection announced at the March 3-11 National People’s Congress was just shy of $100 billion, an increase of10% year on year; so even without further growth in annual flows China will significantly exceed $1 trillion, there is little question.63 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA The United States needs to screen for real security risks while factoring the benefits of Chineseinvestment and the general value of a liberal international system into the equation. Through thelens of high-tech investment, we see three areas that deserve the attention of U.S. officials and thebusiness community.First, China’s recent readiness to invest in high-tech assets necessitates ensuring that the U.S.investment screening process remains up to date. CFIUS has generally dealt admirably withChinese acquisition overtures, as with previous generations of investors from other nations.However, a boom in bids by a non-ally with peer potential and a stated objective of counterbalancingAmerican power naturally deserves a stocktaking of existing approaches to assure they are up tonew challenges. Complicating this test, the ubiquity and depth of penetration of American (andChinese) society by high technology today is unprecedented, making the question of adequatehedging against the “security dilemma” that all nations confront doubly difficult to answer.Chinese high-tech investment flows highlight the need to evaluate the optimality of the CFIUSprocess in several aspects.The first question is CFIUS’s capacity and budget. As the number of Chinese deals in high-techindustries increases, CFIUS will have to deal with more transactions than before, subject to certaindeadlines. High-tech deals are prone to be smaller, earlier in stage, and less clear-cut in terms oflong-term innovative significance—hence harder to fully understand. No one at CFIUS would havethought that control over a college networking website had strategic implications 10 years ago; today,the question of Facebook’s relationship to national security is not beyond contemplation. Both thesheer number of tech start-ups that might be objects of Chinese attention and the obscurity of theirpotential to mid-level government committee members and their intelligence community briefersraises questions about capacity.This also highlights the need to reconsider threat perceptions and to be clear about no-go areasfor foreign firms. There is inherent flexibility in the U.S. national security screening system, withno “negative list” that explicitly prohibits foreign investment in certain industries. Decisionsare made case by case, which allows flexibility and openness. The case of information andcommunications technology (ICT) equipment, however, has shown that new technologies arechanging risk perceptions within security circles. Analysts are on the verge of saying that thereare redlines around telecommunications; some already say so. Does it still make sense, then, forU.S. officials to insist that the United States does not have a negative list, if, in practice, it appearsto? If the United States is to ring-fence whole industries, then it is better to save everyone timeand formally define those no-go zones, along with careful justifications.67 And if exclusions arelimited to certain countries or types of regimes, we need to be transparent about that as well. Thisis important not just for potential Chinese acquirers but also for U.S. consumers and firms, so thatthe ambiguity hanging over their vender options is removed and they can plan accordingly. In thecase of ICT equipment, for example, manufacturing value chains are profoundly global, and it67Importantly, such alterations to the recipe for success CFIUS has traditionally employed would require changes to US law.64 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA would be critical for firms to start planning for the added expense if we were to de-globalize ourtelecom infrastructure, as the costs would likely be enormous.68A related concern is the opacity of the national security screening process. CFIUS traditionallyhas been permitted to operate with a high degree of opacity to protect classified intelligenceinformation and the confidentiality of involved parties. A concern related to this opacity is that,shielded from public accountability, members of the committee might be prone to political orvested interest pressure to view a transaction in negative terms. Some relatively modest Chinesehigh-tech acquisitions have already caused confusion over the logic and criteria for CFIUSdecisions, for example, in the case of the Huawei-3Leaf transaction in February 2011. As thenumber of Chinese high-tech acquisitions grows further, there is greater risk that officials will feelpressure to “guard American innovation” and take a reactive, overly conservative stance on dealsin the absence of a more transparent check on their judgment. And even in cases in which there arelegitimate concerns, the lack of transparency may provoke foreign allegations of internal bias. Oneway to address this concern would be to make the CFIUS process more transparent with regardto its decision-making process and criteria, for example, through more substantial and frequentreporting. Another option would be to ensure effective oversight of the process by high-levelofficials with accountability and awareness of both narrow national security concerns and the fullstrategic significance of two-way investment flows.Recent growth in high-tech acquisitions also emphasizes—conversely—the importance of shieldingthe CFIUS process from external politicization. U.S. firms and special interest groups have, attimes, been tempted to use national security arguments to fend off potential Chinese competitors,in particular when it comes to high-tech transactions.69 Members of Congress regularly grandstandabout technology losses through Chinese investment, even when it comes to non–national securitymatters such as animalbreeding. This has perpetuated a constant fear of legislative action to eitherexpand the definition of our economic security interests or craft unique resolutions to impedespecific deals. A large industry of “helpers” has sprung up to invoice Chinese firms for aiding themin managing these political risks. While managing government relations is a normal part of doingbusiness in the United States and around the world, we must be careful that Washington does notstart to look like Beijing in terms of needing special “relationships” to get normal business done,which is precisely the kind of situation that U.S. firms are hoping to change in China—and China’sleaders, in fact, are trying to remedy.In addition to CFIUS, a second investment-related issue needing U.S. attention is export controls.These rules influence the decisions of Chinese firms on U.S. advanced manufacturing operations.American companies have long complained that the complex and often ineffective U.S. exportFor a first take on national security and globalized IT supply chains, see Moran (2013).A recent example is the takeover of battery manufacturer A123 by Wanxiang. In that case, national security was used by Wanxiang’scompetitors and related lobby groups as a pretense to influence public opinion; see Rachel Feintzeig, “Talking SMAC,” Bankruptcy Beat,January 10, 2013, accessed March 3, 2014, http://blogs.wsj.com/bankruptcy/2013/01/10/talking-smac/.686965 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA control regime is a disadvantage for them in global competition.70 These concerns are particularlyacute in markets in which U.S.-based firms compete with firms from countries with less strictregulations, such as China.71 In industries subject to such restrictions, the United States will be at adisadvantage in attracting investment from Chinese firms that are looking at the option of producinghigh-tech goods abroad for the Chinese market. Existing restrictions and compliance costs coulddivert investment in advanced manufacturing to economies with a similar factor endowment butwith less burdensome rules, such as Canada or advanced European and Asian economies. Optionsare to further streamline the export control regime to bring down compliance costs and bettercoordination with other advanced economies (most of which are military allies of the United States)about export controls to avoid a race to the bottom.72Third, it is in America’s interest to minimize the use of ad hoc, extralegal mechanisms for dealingwith national security interests. There may be legitimate grounds for excluding Chinese suppliersfrom certain U.S. markets, but authorities need to be up-front about restrictions so that a clearassessment of costs and benefits can be performed. If government agencies or major companies—for example, in telecommunications infrastructure—are to be barred entirely from purchasingequipment from Chinese firms, then that injunction needs to be legal, not based on ad hoc action.73Ad hoc approaches are known to underestimate consumer welfare costs, the cost of retaliationagainst U.S. firms in other markets, and the redirection of FDI to other countries.U.S. leadership in demonstrating sound national security review processes is particularlyimportant today because China’s own regimes are in transition. China’s inward FDI regime,which has required extensive political approvals for the past 4 decades (and was closed entirelyfor the 30 years before that) is under reform, to a regime allowing foreign firms to more freelyinvest in the Chinese economy, subject only to a more limited “negative list” of restricted sectors,merger control rules, and national security screening. China recently created its own regime toscreen inbound M&A for national security threats.74 The regime has not been applied yet, asother extant mandatory approvals make it superfluous. Once it becomes operational, it will becritical for China to apply this regime in an internationally consistent way and to minimize abuseby special interests.70A 2007 report funded by the U.S. Department of Defense found that export control rules “are becoming a matter of concern for U.S.firms and represent a unilateral disadvantage to U.S.-based firms” and, in some cases, are “encouraging R&D and capital investment overseas.” See Institute for Defense Analyses, “Export Controls and the U.S. Defense Industrial Base,” 2007, accessed March 3, 2014, http://www.dtic.mil/cgi-bin/GetTRDoc?AD=ADA465592. See also the position of the U.S. National Association of Manufacturers on this issue,accessed March 3, 2014, http://www.nam.org/Issues/Trade-Regulation/Export-Controls.aspx.71The Export Compliance Working Group, consisting of members of the American Chamber of Commerce in China, estimates that U.S.firms face financial losses of billions of dollars every year to foreign competitors that are not subject to the same rules; see “High-Tech TradePromotion and Export Controls,” accessed March 3, 2014, http://web.resource.amchamchina.org/cmsfile/2011/04/25/94520f91b6ad941e0c421a37938bc1df.pdf.72For a summary of existing deficiencies in the U.S. export control regime and reform proposals, see Ian F. Fergusson and Paul K. Kerr, “TheU.S. Export Control System and the President’s Reform Initiative,” Congressional Research Service, January 13, 2014, accessed March 3,2014, http://www.fas.org/sgp/crs/natsec/R41916.pdf.73For an example of such ad-hoc action, see: “Locke Says Sprint’s Chief Was Called About Huawei Bid Concerns,” Bloomberg, December 7,2010, accessed March 15, 2014, http://www.bloomberg.com/news/2010-12-07/commerce-s-locke-says-sprint-s-chief-was-called-abouthuawei-bid-concerns.html74See the “The General Office of the State Council Announcement on Establishment of Foreign Investor Merger and Acquisition of DomesticEnterprises Security Review Scheme,” accessed March 3, 2014, http://www.gov.cn/zwgk/2011-02/12/content_1802467.htm.66 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA The same applies to a range of other national security–related areas that affect inward FDI andthe operations of foreign firms in China. Beijing must resist attempts to use communicationssurveillance revelations as an excuse for a techno-nationalist “de-Westernization” of technologymarkets in China, to benefit not security but indigenous commercial interests. It is in China’s ownnational interest to reject such calls and instead to work toward national security policies that aretransparent and that allow China to maintain the past benefits of integration with global productionchains.STRENGTHENING THE CONSENSUS FOR A MARKET-DRIVEN SYSTEMThe second major impediment to U.S.–China openness in high-tech investment is the debate overnonmarket elements in China’s economy and asymmetries in market access. Concerns about theadvantages enjoyed by Chinese firms in global competition, lack of reciprocity in market access, andindustrial policy biases have been voiced in connection with many Chinese high-tech acquisitionsin the United States. Such concerns have already prompted restrictive new rules in other Chinesepartner economies, notably Canada and Australia, and there are calls in the United States to expandthe scope of CFIUS or to erect new regimes to screen for potential competitive threats from Chineseinvestment. Addressing these concerns will be necessary to sustain a productive U.S.–Chinainvestment relationship.China’s goal of upgrading its national technology and innovation capacity is understandable and,in principle, legitimate. However, the range of measures that it has applied to achieve this goal arenot all compatible with the equally legitimate interests of other nations. Similar to other developingcountries in the past, China has relied on various industrial policies, including subsidies, protectionof domestic industries through import tariffs, lax enforcement of IPR, and technology transferrequirements for joint ventures and market access.75 As China now reaches middle-income statusand its firms become globally competitive – with market shares to prove it—China must reviseits economic policy mix. While not all Chinese firms will benefit from that graduation beyonddeveloping nation policies, China’s leaders know that national welfare already requires this shift andare pursuing a rapid reform course.Most centrally, China’s new leadership has vowed to move beyond many of the residual nonmarketelements applied in the past and to accelerate the transition to a new development model. Ifimplemented as announced, these economic reforms will address many foreign concerns aboutthe competitive impacts of Chinese FDI: a reform of China’s inward FDI regime toward a modernapproach with a negative list will improve market access for foreign firms and increase reciprocityin openness; a more flexible outbound FDI regime will allow Chinese firms to make completelyautonomous decisions about global value chains and limit the role of government in approvingoverseas operations; financial sector reforms will lead to more market-based interest rates andcapital costs; state-owned enterprise reforms will strengthen corporate governance and capital75For a summary of policies perceived as illegitimate from the U.S. perspective, see USITC (2010).67 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA discipline of state-owned firms and make them more transparent; and legal reforms will strengthenrule of law and protection for IPR.76The United States should recognize China’s efforts and support the announced reforms. At thesame time, questions remain about whether China can deliver progress fast enough. Therefore, U.S.leaders needs to be prepared to react if reforms do not materialize or move too slowly and exploreavailable options including the application of domestic frameworks, erection of new frameworksto screen foreign investment, and accelerating international regime building. Our long-standingposition is that border barriers such as “economic security” screening are a second-best solution oreven counterproductive, given their costs and implementation hurdles and the inherently multilateralquality of high-tech production chains today.77 The incorporation of an economic benefits testinto CFIUS reviews would significantly increase costs for government and firms, pose significantchallenges to measuring economic impacts in a fast-changing world of innovation, and open thedoor to politicization and manipulation of transactions. Similarly, outright demands for reciprocityin openness do not make sense, as the United States should welcome investments in local innovativecapacity (once tested for narrow national security concerns) independent of China’s openness.A better solution is to rely on existing domestic regimes and international frameworks to encourageChinese reform. With regard to domestic frameworks, the United States has a strong competitionpolicy regime, and merger controls and other post-market-entry regimes can be used to addressconcerns about acquisitions with negative impact on market concentration or uncompetitivebehavior.78 Existing frameworks to protect IPR and trade secrets are also an efficient way to addressconcerns, and the local presence of Chinese firms further increases the options for U.S. authoritiesand private sector firms to sanction violations rather than diminishing them. Similar tools includestricter enforcement of current rules against trade secrets theft and stronger legislation to targetindividuals and firms tied to such practices. The example of Chinese wind turbine manufacturerSinovel illustrates how the United States can effectively use existing laws to discipline Chinesecompanies that rely on technology stolen from U.S. interests.79 Cases such as Sinovel send a strongwarning to Chinese firms that such tactics will poison their reputations globally.U.S. leadership on multilateral agreements is an important complement to domestic policy. Initiativessuch as the Transatlantic Trade and Investment Partnership, the Trade in Services Agreement, andthe Trans-Pacific Partnership (TPP) can serve as platforms for the United States for improvingglobal rules on intellectual property protection, setting technology standards, open trade andinvestment policies, and market-based innovation systems.80 China’s participation and collaboration76For an English summary of the Third Plenum reform decisions, see “Decision of the Central Committee of the Communist Party of Chinaon Some Major Issues Concerning Comprehensively Deepening the Reform,” January 16, 2014, accessed March 3, 2014, http://www.china.org.cn/china/third_plenary_session/2014-01/16/content_31212602.htm. 77See, e.g., Rosen and Hanemann (2011).78For details on U.S. competition policy, see the Federal Trade Commission’s guide, accessed March 3, 2014, http://www.ftc.gov/tipsadvice/competition-guidance/guide-antitrust-laws.79See U.S. Department of Justice, “Sinovel Corporation and Three Individuals Charged in Wisconsin with Theft of AMSC Trade Secrets,”news release, June 27, 2013, accessed March 3, 2014, http://www.justice.gov/opa/pr/2013/June/13-crm-730.html.80For information on the Transatlantic Trade and Investment Partnership, see http://www.ustr.gov/ttip; on the Trade in Services Agreement,see http://www.regulations.gov/#!documentDetail;D=USTR_FRDOC_0001-0270; on the Trans-Pacific Partnership, see http://www.ustr.gov/tpp, all accessed March 3, 2014.68 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA in these efforts would be more constructive than agreements excluding China. For that reason,National Security Advisor Susan Rice said, “We welcome any nation that is willing to live up to thehigh-standards… to join and share in the benefits of the TPP, and that includes China.”81 Chinesepresident Xi Jinping has laid out a domestic reform agenda that is compatible with participationin these next-generation agreements; however, if China fails to achieve its self-defined goals, theseagreements will serve as a hedge against the negative implications. In this regard, congressionalpassage of Trade Promotion Authority to empower the executive branch to pursue such agreementstakes on an added importance.82BUILDING AND SUSTAINING COMPARATIVE ADVANTAGESA third ingredient for sustained U.S.–China investment openness is national confidence aboutfuture potential. Both China and the United States harbor uncertainties about the distributionalimpacts and benefits of globalization. It is critical that both countries take the right steps to beconfident about an internationalist rather than a nationalist approach to technology value chains.China needs to successfully transition from a developing to an advanced economy approach tonurturing innovation and must provide the right institutional framework for this next stage ofeconomic growth. The United States needs to implement necessary reforms to sustain its technologyleadership at home and thus maintain its confidence.China has many of the prerequisites for leadership in global innovation. However, for China to beconfident about its role in an open and market-based global innovation system, it needs to createthe necessary institutions to make the transition from a planned economy legacy to a modernnational innovation system. A joint assessment by the OECD and China’s Ministry of Scienceand Technology outlined the cornerstones for such reforms in 2007, but little progress has beenmade on many of these imperatives: adjusting the role of the government from industrial policy toprovision of public goods and correcting market failures, improving the governance of science andtechnology policy, following an innovation-oriented and nondiscriminatory public procurementpolicy, improving IPR protection, fostering market competition, improving corporate governance,and increasing the efficiency of capital markets.83 It is not hard to argue that some of these factors,such as capital market efficiency, have gotten worse over the past half-decade. Xi Jinping’s ThirdPlenum program for Chinese reform identifies the challenges for action to catch up to rhetoric; theworld is watching to see whether that cognizance translates to action.On the U.S. side, confidence is similarly necessary to keep growing Chinese investment a positivestory. At their core, U.S. concerns about Chinese FDI in innovation-intensive industries reflect81Remarks by National Security Advisor Susan E. Rice, Georgetown University, November 20, 2013, accessed March 3, 2014, http://www.whitehouse.gov/the-press-office/2013/11/21/remarks-prepared-delivery-national-security-advisor-susan-e-rice.82As of this writing, the U.S. Senate has introduced such a bill. See U.S. Senate Committee on Finance, “Baucus, Hatch, Camp Unveil Billto Bring Home Job-Creating Trade Agreements,” news release, January 9, 2014, accessed March 3, 2014, http://www.finance.senate.gov/newsroom/chairman/release/?id=7CD1C188-87F1-4A0B-8856-3FC139121CA9. The bill was cosponsored by outgoing Senate FinanceCommittee chair Max Baucus, who was confirmed as the American ambassador to China in February.83For details, see OECD (2007). Although the report captures the reality in 2007, the analysis and policy recommendation are still valid inour eyes.69 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA anxiety about the loss of U.S. technology leadership. The popular and political reactions toChinese overtures reflect that concern clearly. However, closer scrutiny of FDI from China andother foreign countries will do little to defend U.S. technology leadership—in fact, by shuttingout new competitors and future technology spillovers, it could hurt. The solution is to ensure thatthe United States remains a highly attractive place for innovation-intensive activities. The mostcommon recommendations by experts and businesses to ensure long-term U.S. competitivenessare improving the U.S. education system, particularly science, technology, engineering, and mathcapabilities; increasing federal funding for basic research and development; reforming the U.S.corporate tax system; creating a more efficient health care system; modernizing outdated U.S.infrastructure; establishing a more effective patent system; and modernizing the immigrationregime.84 Implementing such reforms is the best guarantee for attracting “good” FDI from Chinaand elsewhere, instead of short-term investments that are aimed at quick transfer of technology.84See U.S. Department of Commerce (2012); Council on Competitiveness (2005); European-American Business Council and InformationTechnology and Innovation Foundation (2011); Hufbauer and Vieiro (2013); and OECD (2012).70 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA V. CONCLUSIONS ANDRECOMMENDATIONSIN THIS REPORT, we have analyzed the dimensions, patterns, and drivers of Chinese FDI in U.S.high-tech industries. While still at an early stage, these flows have grown from a trickle to morethan $1 billion annually since 2010. The year 2014 looks to be a milestone, with more than $6billion of transactions completed or pending in the first quarter. This surge in Chinese high-techFDI comes at a difficult time for U.S.–China economic relations in technology and innovation.Many Americans are suspicious about China’s readiness to comply with the norms of a marketbased global system. This view is rooted in the perception that predatory Chinese trade practicesand IPR theft have contributed to the loss of manufacturing capabilities and jobs and that Beijing’sinnovation policies are a continuation of old industrial policies that discriminate against foreignfirms. In China, revelations about U.S. surveillance programs have triggered calls for banningforeign technology and a nationalist approach to innovation and technology.The trajectory of Chinese high-tech FDI in the United States will be an important factor indetermining the path forward for the U.S.–China relationship. Successful investments will helpAmericans appreciate the benefits of new and more two-way investment interaction China and willremind Chinese leaders that reciprocity in FDI openness and IPR protection are in China’s owninterest. Troubled Chinese investment forays and impediments to foreign firms in China, on theother hand, may lead to a backlash. Such a negative U.S. response would aggravate existing tensionsand empower proponents of a more nationalist and discriminatory approaches to technology onboth sides. Public and private sector leadership will be required to avoid such a scenario. We offera few recommendations for each side toward that goal.RECOMMENDATIONS FOR U.S. POLICY MAKERS AND BUSINESSES1. Acknowledge China’s arrival as high-tech investor: Many policy makers and businesses arestill new to the fact that China is now a major U.S. investor, and they struggle to imagine thatChinese firms could be major contributors to local innovation. As our data show, they alreadyare. Many local economies now benefit from Chinese capital flows and related job creation. Thereadiness of Chinese firms to invest in such operations opens up great opportunities for mayors andgovernors to attract FDI and revitalize struggling companies, but they need to do their homeworkto match their states and cities with the right investors. The U.S. business community will have tocarefully consider the opportunities and challenges of this shift in Chinese investment interests fortheir operations at home and abroad.2. Ensure that CFIUS remains effective: For decades CFIUS has fulfilled its mandate well:screening for narrowly defined national security concerns in inward acquisitions so as to clear theway for general openness to foreign investment flows. Now more than ever, such a gatekeeper is71 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA necessary to establish confidence that openness to China entails no unmanageable risks. However,in a democracy few institutions are immune from political pressure and mission creep, and thesensitivity of relations with China today is so great that officials are prone to hypersensitivity. Theopacity granted to CFIUS, combined with rapid growth in China-related deal flow, raises the riskthat the narrow standard of what constitutes a legitimate national security concern may widen. Suchrisks should be headed off by clear guidance from the Office of the President (CFIUS’s ultimateaudience) in terms of the committee’s role. Transparency in more frequent CFIUS reporting ontechnology-related concerns, better disclosure of procedures and results, and frankness in terms ofcases withdrawn prior to being rejected have been suggested as ways to provide greater confidenceto applicants that the committee is not biased against Chinese investment. These and otherconfidence-building measures that do not impinge on the committee’s necessary insulation fromoutside second-guessing should all be considered.3. Reassess other investment-relevant elements of U.S. security policy: The emergence ofinvestors from emerging markets and the growing complexity of global innovation value chainshighlight the need to evaluate other elements of U.S. national security policy. One area is theU.S. export controls regime, which has been a drag on the global competitiveness of U.S.-basedfirms for a long time and will put U.S. locations at a disadvantage in competition with Europeanor Asian economies for legitimate greenfield investments from China. The United States shouldaccelerate the reform of its export control rules and coordinate technology export control regimeswith allies to avoid a race to the bottom in the competition for Chinese investment. A second areais market access restrictions for Chinese technology goods. It may be legitimate to ban Chinesegoods from government agencies or infrastructure projects, but such restrictions will affect thelocation decisions of Chinese firms and, most likely, lead to retaliation against U.S. firms in China.If market restrictions are deemed necessary from a national security perspective, they need to benarrow, codified, and transparent.4. Utilize domestic frameworks to address economic and commercial concerns: Thegreater presence of Chinese firms in the United States through FDI gives American regulators anopportunity to oversee and influence the behavior of those firms, as well as options for sanctioningabuses should they occur. Instead of expanding CFIUS reviews to “economic security” questionsor erecting a burdensome at-the-border regime, the United States should use its ample domesticregimes—including competition policy or trade secrets laws—to address economic concerns suchas fair competition. The greater physical presence and assets of Chinese firms in the United Stateswill in fact give U.S. companies a greater ability to use the U.S. court system for pursuing theirinterests in technology-related disputes with Chinese firms, such as copyright and intellectualproperty rights (IPR) violations.5. Push for a bilateral investment treaty and international regimes to incentivize upwardconvergence: A bilateral investment treaty between China and the United States will not beguarantee a level playing field overnight, but it provides a detailed template for improving China’sinward FDI regime and testing China’s degree of readiness. At the same time, the United States72 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA should continue its leadership on issues including IPR protection, transparency, and supervision ofnonmarket distortions internationally. Initiatives including the Transatlantic Trade and InvestmentPartnership, the Trade in Services Agreement, and the well-advanced Trans-Pacific Partnership allhave a part to play. If reforms proceed quickly, then China can look forward to an early on-ramp tothese agreements; if they fall short, then international investment covenants will serve as a safetynet for market economies and an incentive for convergence.6. Tackle reforms to ensure long-term U.S. competitiveness in innovation-intensiveactivities: Our analysis shows that the United States is attractive to Chinese firms because it is theworld leader in many cutting-edge technologies and offers firms an environment they cannot findelsewhere, based on factors that are not movable, such as the right institutional environment andhighly qualified and educated workers. The way to keep these firms in the United States and attractmore of them is to sustain these advantages and make the United States a more attractive placefor knowledge-intensive activities than its peer competitors in Europe or Asia. Barriers to foreigninvestment will do nothing to improve these domestic fundamentals, and Washington must guardagainst the misconception that a tighter external firewall will repair American competitiveness—infact it could easily impair it further.RECOMMENDATIONS FOR CHINESE POLICY MAKERS AND BUSINESSES1. Acknowledge foreign concerns: Foreign concerns about the impact of Chinese OFDI are neitherfantastic nor simply protectionist. For the most part, these worries are an extension of unsettleddebates about distortions and imbalances in China’s home economy. American anxieties about thecharacter of China’s behavior in the context of high technology in particular are not surprising, givenBeijing’s extensive official indigenous innovation programs couched in nationalistic terms, talk of“de-Westernizing” Chinese technology, recent setbacks in an expanded Information TechnologyAgreement as a result of Chinese foot-dragging, and a history of aggressive technology theft byChinese firms both at home and abroad. China is not unique in any of these blemishes—Americanfirms have sinned in similar ways at times—but if Beijing wants to optimize investment marketaccess abroad today, then the onus is on China to change these perceptions.2. Make a down payment on broad market reforms: The aggressive economic reform programlaid out by the Third Plenum of the Communist Party in November 2013 is a big step forward, butuncertainty remains about what path the leadership intends to take on innovation and technology andwhether they can implement those intentions. By making a “down payment” on reform, Beijing candemonstrate what kind of future foreign partners can expect and make it easier to get past currentmisgivings about high-tech OFDI. Examples of confidence-building early-harvest moves with regardto innovation include lower barriers to foreign participation in technology and service sectors in Chinaor the abolition of nationality-based discrimination in technology-relevant industrial policies.3. Take bolder steps on China’s specific inward FDI regime: A prime determinant of foreignappetite for Chinese FDI in technology is the treatment of foreign firms in China. The faster China73 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA moves from the current approval system to a modern FDI regime, the more easily U.S. leadersand businesses can advocate for reciprocal openness. Within this new regime, the list of restrictedsectors should be narrow and transparent, and informal barriers should be minimized. Beijing mustassure partners that vested commercial interest groups cannot use self-interested nationalistic orsecurity agendas to foil legitimate foreign competition in technology sectors. A revised and radicallyslimmed down negative list of sectors to be exempted from general openness, in the context of boththe new Shanghai Free Trade Zone and the US-China BIT negotiations, is the singular indicationof boldness that foreign observers are looking for..4. Unleash the private sector: China has made great strides in the transition from a governmentdominated economy to a market economy, and it is private firms and entrepreneurs that are nowdriving outbound FDI in technology sectors. However, private innovators need a better legalenvironment at home, as well as more freedom to make unfettered decisions about global operations.Beijing needs to simplify outbound investment rules and give up the idea that it can “guide” firmsin their global investment decisions. Cutting back the role of industrial policy behemoths such asthe National Development and Reform Commission and the Ministry of Industry and InformationTechnology in the approval process will not only make firms more competitive but also ease foreignfears about politically involved investment decisions. Conversely, China’s private sector needs tostep up and stand on its own instead of letting the Ministry of Commerce and state media representtheir interests. The best way to counter politicization of investments is to educate local stakeholdersabout motives and communicate successes more effectively on the firm level or through a privatebusiness association or chamber of commerce. China’s business community must also work topositively influence its own government and join the U.S. business community in becoming astabilizing factor for two-way openness and economic integration.5. Provide greater leadership on investment-related international regime building: Afterthree decades as a major recipient of inward FDI, China’s recent emergence as exporter of FDI hasled to greater interest in international agreements that promote openness and investor protection.The readiness to engage in negotiations of bilateral investment treaties with the United States andEuropean Union indicate this sea change. As the world’s second-largest economy and now one ofthe top exporters of FDI globally, China needs to take a leadership role in the future in designingand expanding multilateral regimes that promote investment openness. Ultimately, China couldbecome a powerful force in the revival of a multilateral agreement on investment (such as failedto come to fruition in the past). China’s changing global investment interests, combined withchanges in the domestic political economy, should also increase the urgency for China to promoteor join related international agreements, for example, the World Trade Organization’s governmentprocurement agreement and the Information Technology Agreement.74 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA REFERENCESAghion, Philippe, Richard Blundell, Rachel Griffith, Peter Howitt, and Susanne Prantl. 2006. “TheEffects of Entry on Incumbent Innovation and Productivity.” National Bureau of Economic Research,Working Paper no. 12027, February. Accessed March 3, 2014. http://www.nber.org/papers/w12027.Ahrens, Nathaniel. 2013. “China’s Competitiveness: Myths, Reality, and Lessons for the United Statesand Japan.” Center for Strategic and International Studies, February. 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Accessed February 17, 2014. http://www.oecd.org/daf/inv/investment-policy/40243411.pdf.83 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA DATA APPENDIXGlobal Capital Flows and FDIIn national accounting statistics, cross-border investment flows are commonly separated into fivecategories: direct investment, portfolio investment, derivatives, other investment, and reserves.85By definition, direct investment entails cross-border capital flows that achieve significant influenceover the management of an invested entity and a long-term investment relationship. The commonthreshold for a direct investment is 10% of voting shares. Portfolio investment refers to a typicallyshorter-term investment in liquid securities that constitutes no control, for example, holdings ofequity shares with less than 10% of voting rights or corporate debt instruments. Derivatives referto financial instruments such as swaps, futures, and options, which are only contractually relatedto the underlying value of real assets such as firms or commodities.86 Other investment entailsall flows that do not fall into the previous categories, such as foreign bank deposits, currencyholdings, cross-border loans, or trade credits. Finally, reserves are highly liquid instruments held bygovernments or central banks in the form of gold, foreign exchange, or special drawing rights at theInternational Monetary Fund (IMF).87Foreign direct investment flows can include three components: equity investment, reinvestedearnings, and other capital flows. A direct investment relationship usually starts with an equityinjection into an overseas company, either for the establishment of a new overseas subsidiary(greenfield investments) or the acquisition of a significant stake (greater than 10%) in an existingcompany (mergers and acquisitions). All subsequent capital flows between the parent companyand the foreign subsidiary are counted as direct investment, including profits that are reinvestedin the subsidiary (reinvested earnings) and other capital flows between the two firms (such asintercompany debt).88Available Data Sources for Global FDI FlowsA range of different measures and sources are available for tracking global FDI flows. Most countriescompile balance of payments (BOP) statistics that include information on annual inflows and outflowsfor each type of cross-border investment and related income flows. The corresponding numbers for85See the IMF’s Balance of Payments and International Investment Position Manual (2009). The IMF definitions also are used by otherinternational organizations such as the Organisation for Economic Co-operation and Development and the United Nations Conference onTrade and Development.86The new category of derivatives was introduced in the sixth edition of the IMF’s Balance of Payments and International Investment Position Manual, released in 2009.87See IMF (1993).88Detailed information on the nature of direct investment and its measurement can be found in the OECD’s “Benchmark Definition ofForeign Direct Investment” (OECD 2008a).84 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA the inward and outward stock of each category—the accumulated flows adjusted for exchange rateand valuation changes—are recorded in countries’ international investment position statistics. TheIMF uses these figures as reported by its member states to compile global financial statistics.In addition to national accounting statistics that capture aggregate flows with the rest of the worldbased on IMF standard definitions, many countries publish additional datasets that provide a moredisaggregated view of their investment relationships with other economies. Several internationalorganizations, such as the United Nations Conference on Trade and Development (UNCTAD)and the Organisation for Economic Co-operation and Development (OECD), also collect data onFDI and other cross-border investment flows. However, those figures are mostly based on input bynational governments and are not independent calculations.89Known Problems with FDI DataProblems with the timeliness, accuracy, and international comparability of available measures forFDI are widely known.90 One major problem is that statistical authorities have different capacitiesand experience in collecting information and processing data. Countries use very differentmethodologies for collecting data, they often lack the capacity for making the relevant adjustmentsfrom historical to market value, and the pace of data processing differs greatly.Another problem is that the use of holding companies and offshore vehicles has increasedtremendously in recent years, and the extent of “round-tripping” (whereby companies route fundsto themselves through countries or regions with generous tax policies and other incentives) and“trans-shipping” (whereby companies channel funds into a country to take advantage of favorabletax policies, only to reinvest those funds in a third country) makes it increasingly difficult to trackflows accurately. Those practices and complicated deal structures with “indirect” holdings alsomake it difficult for statistical agencies to correctly separate FDI from portfolio investment stakes.The result is that comprehensive international FDI statistics are usually published with a delay of1.5 years or more. Moreover, data from home and host countries are often inconsistent with eachother, and global aggregate data on FDI assets and liabilities do not match. These problems make aholistic real-time assessment of global FDI flows increasingly difficult and require analysts to findways of working around existing gaps and distortions.Challenges in Measuring Chinese Capital OutflowsProblems with collecting and disseminating FDI data are a global phenomenon, but they particularlyapply to FDI flows to and from emerging economies. Local statistical offices often do not havethe manpower or adequate training for collecting detailed and accurate data on FDI flows andthe operations of transnational enterprises.91 In addition, emerging-economy investors often have899091For more detailed information, see Patterson et al. (2004).For an overview, see for example UNCTAD (2005a).UNCTAD (2005b).85 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA additional incentives to use offshore holding companies because of existing capital controls or thelack of adequate financial and legal structures at home. The case of Chinese FDI statistics illustratesthese problems.In China, FDI statistics are compiled by two government agencies. The State Administration ofForeign Exchange (SAFE), China’s foreign exchange regulator under the People’s Bank of China,is responsible for collecting and publishing FDI data used for China’s balance of payments andinternational investment position statistics. In compiling such data, SAFE follows the principlesoutlined in the fifth edition of the IMF’s Balance of Payments Manual.92 SAFE’s data are publishedon a quarterly and annual basis. The second government agency involved in FDI data compilationis China’s Ministry of Commerce (MOFCOM), which publishes monthly data on outbound FDI bynonfinancial companies. MOFCOM also takes the lead for publishing a statistical annual bulletinon Chinese outbound FDI in cooperation with SAFE and the National Bureau of Statistics, whichprovides detailed breakdowns of Chinese OFDI by country and industry.93The first difficulty with China’s system lies in understanding the roles of the two agencies andreconciling differences between their data. In recent years, China has streamlined its OFDIstatistical system with both agencies responsible for different parts of data collection but workingwith the same definition of FDI, as summarized in a statistical manual on outbound FDI thatis updated every two years.94 In theory, China’s OFDI figures should be based on MOFCOM’soutward FDI reporting system for nonfinancial companies and SAFE data on OFDI by financialcompanies and reverse investment flows. In practice however, the dual-agency system continuesto complicate compilation and dissemination of China’s OFDI data. The two agencies separatelypublish monthly, quarterly, and annual data on their respective parts as well as total FDI, showingsignificant discrepancies—for example, as of August 2013, MOFCOM recorded $87.7 billion inOFDI flows in 2011, while SAFE only recorded $65.8 billion in gross outflows and $48.4 billion innet outflows for the same year (the latter of which should be seen as appropriate figure according tointernationally accepted definitions). Both agencies reconcile their stock figures during annual datarevisions, but the discrepancies between annual flows persist (Figure A-1).A second problem is that official Chinese FDI statistics are not suitable for an in-depth analysis ofdistribution by industry or country because they do not accurately capture the final destination ofoutflows. The increasingly common use of offshore financial centers is a global trend, but Chinesefirms have even greater incentives to use special offshore purpose vehicles to structure theirinvestments because of insufficient legal and financial systems at home, existing capital controls,and burdensome regulatory requirements for outbound investors.92For detailed information on the fifth edition of the IMF’s Balance of Payments Manual, see IMF (1993). IMF General Data DisseminationSystem (GDDS) on China is available at http://dsbb.imf.org/pages/gdds/ComprehensiveFwReport.aspx?ctycode=CHN&catcode=BPS00,accessed February 17, 2014.93See the official summary of the 2012 China Outward Foreign Direct Investment Statistical Bulletin, September 2013, accessed February17, 2014, http://www.mofcom.gov.cn/article/ae/ai/201309/20130900292811.shtml.942012 China Outward Foreign Direct Investment Statistical Procedure, accessed February 17, 2014, http://www.mofcom.gov.cn/article/b/bf/201212/20121208507450.shtml.5102%65%60%43:86 | ASIA SOCIETY HIGH TECH0 THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA 2007200820092010200620110%2012Source: CFIUS Annual Report to Congress, Public Version.RH: This is a newly added figureFigure A-1: Chinese Outbound FDI, 1992–2012 (Official Chinese Data)$US (billions)9080Stock: SAFE (right axis)70Stock: MOFCOM (right axis)500400Flows: SAFE (net) (left axis)60Flows: SAFE (gross) (left axis)50300Flows: MOFCOM (left axis)40200302010001982198319841985198619871988198919901991199219931994199519961997199819992000200120022003200420052006200720082009201020112012100Sources: Ministry of Commerce; State Administration of Foreign Exchange. While Chinese statistical agencies haveSource:madeimprovementsto create more transparency, theMOFCOM,SAFE.current official data on the distribution of China’s outbound FDI stock must be seen as unreliablesnapshot. According to MOFCOM, more than 70% of China’s 2011 outbound FDI stock wasFigure A-2: China’s OFDI Stock by Country, 2011 (MOFCOM)registered in either Hong Kong orPercenttax havenssuch as the Cayman Islands or Bermuda (Figure A-2).share of total OFDI StockSimilar problems are apparent in MOFCOM’s statistics on the industry distribution of China’sOFDI stock, where “business services” is the biggest category (34% of total OFDI stock in 2011)Rest of World,and mining only accountsfor 19%17% of the total—a stark contrast to observed deal patterns aroundthe globe.US, 2%Data from host countries can offer an alternative perspective on Chinese outbound investment,though theseSingapore,mirror 2%data display similar problems and shortcomings. Since 2009, the IMF has runa new initiative to improve the quality and availability of global FDI data, the Coordinated DirectAustralia, 3%Investment Survey(CDIS).95 One of the CDIS datasets presents mirror data for a country’s outwardFDI stock based on the inward FDI stock reported by partner economies. The resulting data hintthat Chinese official data may be too low, with 87 countries in the CDIS survey reporting a stockCayman Islands, 5%Kong,stock62% of $425of $510 billionat the end of 2011 (Figure A-3), compared to China’s official HongOFDIbillion for the world in the same year.British Virgin Islands, 7%However, the CDIS data are not very useful for analyzing the patterns of China’s global OFDI,as they are compiled according to direct counterpart economies and not ultimate beneficiary95Source: MOFCOM.CDIS is available at http://cdis.imf.org/, accessed February 17, 2014.Figure A-3: Reported Inward FDI Stock from China, 2009-2011 (IMF CDIS)USD billion600Inward FDI Stock from China reported by 87 economies5111982198219831983198419841985198519861986198719871988198819891989199019901991199119921992199319931994199419951995199619961997199719981998199919992000200020012001200220022003200320042004200520052006200620072007200820082009200920102010201120112012201210000087 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA Source: MOFCOM, SAFE.Source: MOFCOM, SAFE.Figure A-2: China’s OFDI Stock by Country, 2011 (MOFCOM)FigureChina’sOFDIStockby Country, 2011 (MOFCOM)Figure A-2: China’s OFDI StockbyA-2:Country,2011(MOFCOM)Percentshareof totalOFDIStockShare (%) of total OFDI Stock Percent share of total OFDI StockRest of World, 19%Rest of World, 19%US, 2%US, 2%Singapore, 2%Singapore, 2%Australia, 3%Australia, 3%Cayman Islands, 5%Cayman Islands, 5%Hong Kong, 62%Hong Kong, 62%British Virgin Islands, 7%British Virgin Islands, 7%Source: Ministry of Finance.Source: MOFCOM.Source: MOFCOM.Figure A-3: Reported Inward FDI Stock from China, 2009-2011 (IMF CDIS)Figure A-3: Reported InwardFigureFDIA-3:Stockfrom China, 2009–2011 (IMF CDIS)Reported Inward FDI Stock from China, 2009-2011 (IMF CDIS)USD billionUSD billion$US (billions)600600500500Inward FDI Stock from China reported by 87 economiesInward FDI Stock from China reported by 87 economies475475511511390390400400300300200200100100002004200420052005200620062007200720082008200920092010201020112011Source: International Monetary Fund, Coordinated Direct Investment Survey.Source: IMF CDIS.Source: IMF CDIS.Figure A-4: China’s OFDI Stock by Country, 2011 (IMF CDIS)Figure A-4:China’sOFDIStockby Country, 2011 (IMF CDIS)Percentshareof totalOFDIStockAustralia, 3%Percent share of total OFDI StockAll Others, 8%All Others, 8%Canada, 2%Canada, 2%Source: MOFCOM.88 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA Figure A-3: Reported Inward FDI Stock from China, 2009-2011 (IMF CDIS)USD billion600ownership, which means that Hong Kong and financial centers with favorable tax environmentsInward FDI Stock from China reported by 87 economiessuch as Luxembourgor Mauritius are again dominating the picture (Figure A-4). 511In short, mirror500475data offer a useful additional perspective, but unless host countries present data on an ultimatebeneficiary ownership principle, these data do not help to better understand the global distribution390400 OFDI.of Chinese300 Approaches and Datasets to Measure Chinese OFDIAlternativeGiven the200problems with quality, accuracy, and timeliness, official data from both China and recipientcountries are not sufficient for an in-depth, real-time analysis of Chinese investment patterns. Thisis particularlytrue for policy research, which requires timely information for decision makers.100Therefore, researchers have to come up with alternative approaches to improve the understandingof the scope and direction of Chinese overseas investment.020042005200620072008200920102011In recent years, several think tanks, academic institutions, and private sector firms have come upwith alternative solutions to help address those shortcomings and further improve the transparencyof China’s global investments. Most of those datasets are based on a bottom-up approach ofSource: IMF CDIS.collecting data on individual transactions or companies.96Figure A-4: China’s OFDI Stock2011CDIS)FigurebyA-4:Country,China’s OFDIStock (IMFby Country,2011 (IMF CDIS)Share (%) of total OFDI Stock Percent share of total OFDI StockAustralia, 3%Canada, 2%All Others, 8%Luxembourg, 3%Mauritius, 3%Singapore, 5%Hong Kong, 76%Source: International Monetary Fund, Coordinated Direct Investment Survey.Source: IMF CDIS.96In addition to the RHG dataset, there is the Heritage Foundation’s China Investment Tracker, which tracks China’s global nonbond investments, but only those with a value of $100 million and more.89 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA The RHG Dataset on Chinese FDI in the United StatesRhodium Group (RHG) has developed two datasets that provide a comprehensive picture of Chinesedirect investment transactions in the United States and the European Union, which served as abasis for two major studies on the patterns and impacts of Chinese investments in both economies.The RHG China Investment Monitor (CIM) is a dataset that aims to provide a comprehensivepicture of Chinese direct investment transactions in the United States. It currently covers the periodfrom 2000 to the present. Data are updated on a quarterly basis and made available to the public inaggregate form, together with commentary on recent patterns and specific transactions and policydevelopments.97Data are compiled from a transactional bottom-up approach, which relies on the aggregationof relevant transactions into a headline figure, as well as various metrics of interest. Relevanttransactions are defined as investments by mainland Chinese firms that qualify as direct investmentunder common international definitions, that is, greenfield projects or acquisitions of stakes inexisting companies that exceed the FDI threshold of 10%.The RHG dataset is compiled through several steps:First, raw data on outbound investments by ultimately Chinese-owned firms in the United Statesare collected. The data mining relies on a wide range of channels, including commercial databases,online search algorithms, media reports, regulatory filings, company reports, industry associations,official sources, investment promotion agencies, industry contacts, and other sources. As there arehundreds or even thousands of small-scale FDI transactions every year that are impossible to follow,the minimum value for individual deals included in the database is $500,000.Second, completed deals that formally qualify as direct investment (following the generally acceptedthreshold of 10% of equity or voting shares) are separated from portfolio investment transactions(stakes of less than 10%), and detailed information on each investment is collected. Pending andwithdrawn deals are excluded. Acquisitions are added to the list at the date of their completion;greenfield projects are added at the date of their announcement (but only if there is clear evidencethat they have broken ground). The deal values are added based on either the officially announcedinvestment volume or the most convincing analyst estimates; total deal values for M&A transactionsinclude equity investment as well as debt assumption. Deals without reliable estimates are includedin the database with a zero value.Third, each FDI transaction is coded with additional variables such as source state, employment,target state, or ownership of investing company. For ownership, we apply a conservative thresholdthat requires 80% or more private ownership to qualify as private enterprise. Employment dataare retrieved directly from company sources or estimated based on similar transactions, revenue,industry, and other data points. Each deal is then assigned an industry category based on the main97See http://rhg.com/topics/cross-border-investment, accessed February 17, 2014.90 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA activity of the greenfield facility or target firm, using an industry category system derived from theStandard Industrial Classification (SIC).Finally, during each update, past deals and existing operations are screened again in order to ensurethat changes in investment amount, employment, or other relevant metrics are captured in the newestversion of the database. Therefore, our data are never final but instead are subject to constant updates.The CIM dataset provides a real-time perspective on Chinese FDI transactions in the UnitedStates. By recording investment flows from the bottom up, several problems are avoided—mostimportantly, the significant time lags and distortions resulting from extensive use of pass-throughlocations—making the dataset useful for a real-time assessment of aggregate investment patterns,as well as the distribution of those investments by industry, modes of entry, geographical spread,and ownership. However, the data resulting from a transaction-based approach are not directlycomparable to FDI statistics compiled according to balance of payments principles.98 As such, theCIM data cannot be used to analyze balance of payments-related problems and other issues basedon the national accounting framework.The combined value of our FDI transactions is generally higher than the annual FDI flows shownin official statistics from the U.S. Bureau of Economic Analysis and China’s Ministry of Commerce,for the following reasons: First, as opposed to official BOP data, we track investments back to theultimate beneficiary owner. BOP data usually track flows back to the immediate source countryand therefore miss Chinese FDI routed through Hong Kong and other offshore financial centers.Second, our definitions and accounting slightly differ from the BOP rules. The most importantdifferences are that we count the total value for M&A transactions (including assumed debt) anddo not separate financing from the Chinese parent company and financing provided by local U.S.partners; we do not account for reverse flows back to China, for example, through intracompanytransactions or divestures; there may be differences in counting transactions that are at the edgebetween portfolio and direct investment flows (most importantly commercial real estate transactionsand nonoperating stakes in extractive industries).Employment EstimatesOfficial statistics do not provide good information on employment provided by U.S. affiliatesof Chinese firms, for the same reasons mentioned earlier. The CIM dataset allows us to trackemployment related to each transaction and thus provide an aggregate estimate for the jobs impactof Chinese FDI in the United States.99 Our estimates only include direct full-time jobs and do notcount temporary part-time staff. We also only count employment at U.S. subsidiaries with Chinesemajority ownership, which means that our figures do not include employment provided by firms inwhich Chinese investors hold a minority interest (for example, passive stakes in energy or utilities).98For more information, see the IMF’s Balance of Payments Manual, 5th edition, accessed February 17, 2014, https://www.imf.org/external/pubs/ft/bopman/bopman.pdf.99For more background, see the Data Appendix and Hanemann and Lysenko (2012).91 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA Table A-1: Classification Systems for Knowledge- and Technology-Intensive IndustriesSystemType of DataBasisCoverageData SourceData PreparationHigh-technologymanufacturingindustriesProduction and valueaddedIndustry byInternational StandardIndustrial Classification(ISIC)Aerospace,pharmaceuticals, officeand computing equipment,communications equipment,scientific instrumentsUnited NationsCommodity TradeStatistics and IHSGlobal InsightIHS Global Insight,proprietary specialtabulationsKnowledge-intensiveservice industriesIndustry production(revenues fromservices), in currentdollarsIndustry byBusiness, financial,International Standard communications, health,Industrial Classification and education services(ISIC)United NationsCommodity TradeStatistics and IHSGlobal InsightIHS Global Insight,proprietary specialtabulationsTrade in hightechnology productsProduct exports andimports, in currentdollarsProduct by technologyarea, harmonizedcode, country of origin,and destinationUnited NationsCommodity TradeStatistics and IHSGlobal InsightIHS Global Insight,proprietary specialtabulationsAerospace,pharmaceuticals, officeand computing equipment,communications equipmentand scientific instrumentsU.S. trade in advanced U.S. product exportsProduct by technologytechnology productsand imports, in current area, harmonizeddollarscode, country of origin,and destinationBiotechnology, life sciences, U.S. Census Bureau,optoelectronics, information Foreign Trade Divisionand communications,electronics, flexiblemanufacturing, advancedmaterials, aerospace,weapons, nucleartechnology, softwareU.S. trade inU.S. exports andcommercial knowledge- imports, in currentintensive servicesdollarsBusiness, financial, andcommunications servicesType of service,country of originU.S. Census Bureau,Foreign Trade Division,special tabulationsU.S. Bureau ofEconomic AnalysisU.S. Bureau ofEconomic AnalysisBusiness, financial,U.S. Bureau ofand communicationsEconomic Analysisservices, aerospace,pharmaceuticals, officeand computing equipment,communications equipment,scientific instrumentsmanufacturingU.S. Bureau ofEconomic AnalysisGlobalization of U.S.multinationalsValue added and direct North Americaninvestment position, in Industry Classificationcurrent dollars(NAICS), in country oforigin and destinationU.S. trade inintangiblesU.S. receipts andpayments, in currentdollarsType of intangibles and Total intangibles andindustrial processesindustrial processesU.S. Bureau ofEconomic AnalysisU.S. Bureau ofEconomic AnalysisPatentsNumber of patentsfor inventions, triadicpatents (inventionwith patent grantedor applied for in theU.S., European, andJapanese patentoffices)Technology class,country of originU.S. Patent andTrademark Office(USPTO) andOrganisation forEconomic Cooperation andDevelopment (OECD)USPTO, the PatentBoard, and OECDAngel capitalFunds invested by U.S. Technologyangel investorsBiotechnology, electronics, Center for Venturefinancial services, healthResearch, Universitycare, industrial/energy,of New Hampshireinformation technology,media, telecommunicationsCenter for VentureResearch, Universityof New HampshireVenture capitalFunds invested by USventure capital fundsBiotechnology,National Venturecommunications, computer Capital Associationhardware, consumerrelated, industrial/energy, medical/health,semiconductors, computersoftware, Internet specificThomson FinancialServices, specialtabulationsSource: National Science FoundationTechnology areadefined by dataproviderMore than 400 U.S.patent classes, inventionsclassified according totechnology disclosed inapplication92 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA We also do not include indirect job creation related to the construction of facilities or at suppliers.The jobs figures are estimated based on a thorough review of every firm in our proprietary database.The number of full-time employees at each firm is estimated based on official company information,regulatory filings, company profiles in professional databases, and innovative online strategies suchas professional networking websites.Classification of High-Tech Industries for this ReportThere is no single preferred or internationally accepted method for classifying high-technologyindustries. Table A-1 provides an overview of commonly used classifications. The OECD offershigh-technology industry definitions based on research intensity or R&D spending as a percentageof total sales. In this system, high-technology industries are defined by ISIC (International StandardIndustrial Classification) industry codes. In the United States, the Bureau of Labor Statistics(BLS) also compiles a list of high-technology industries based on R&D employment intensityof an industry. The BLS list is compiled using NAICS (North American Industry ClassificationSystem) industry codes. The European Union mostly relies on a classification that is similar to theOECD’s system but uses NACE (Nomenclature des Activités Économiques dans la CommunautéEuropéene) industry codes. In the absence of one globally accepted definition, researchers have topick the approach or definition that is best suited to their analytical goals.For the analysis in this report, we broadly follow the OECD principles to break down the 26industry categories used in the CIM database. The CIM dataset is based on 26 industry categoriesderived from SIC industry categories. Following the OECD’s system of high-tech manufacturingand innovation-intensive services, we divide these 26 industries into 15 high-tech and 11 low-techindustries (Table A-2). The most important caveats for such an approach are that it is fairly broadand that it does not allow us to distinguish between lower- and higher-value-added activities (e.g.,a simple administrative office is counted the same as high-tech investment as long as it occurs inan industry defined as high tech). We address this problem by separately analyzing the motives andadding a second layer of analysis.Taxonomy of FDI Drivers There is an abundant body of academic literature on the drivers and motives of foreign directinvestment. Economic theories explaining FDI and location decisions by multinational enterpriseswere developed by pioneers such as Stephen Hymer, Charles Kindleberger, and John H. Dunningand refined by following generations of researchers.100 The scholarship of motivations for outboundFDI by firms from developing and emerging economies is still fragmented, and it is often limitedto qualitative case studies on individual firms.101For a good summary of FDI theories, see Moran and Oldenski (2013, 19ff).See, e.g., the Harvard Business School case studies “Haier: Taking a Chinese Company Global,” August 23, 2011, accessed Feburuary17, 2014, http://hbr.org/product/haier-taking-a-chinese-company-global-in-2011/an/712408-PDF-ENG; and “Lenovo: Building a GlobalBrand,” July 19, 2006, accessed February 17, 2014, http://hbr.org/product/Lenovo--Building-A-Global/an/507014-PDF-ENG.10010193 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA Table A-2: RHG Classification of High-Tech IndustriesIncludedNot IncludedAerospace Equipment and ComponentsFarming, Logging, and HusbandryAutomotive Equipment and ComponentsFood Processing and DistributionOther Transportation EquipmentMetals and MineralsChemicalsConsumer Product and ServicesRenewable EnergyCoal, Oil, and GasFinancial Services and InsuranceUtilitiesBusiness ServicesHospitality and TourismPharmaceuticals and BiotechnologyEntertainment, Media, and PublishingPlastic, Rubber, and Other Materials.Real EstateHealth Care and Medical DevicesConstruction ServicesIndustrial Machinery and ToolsTransportation ServicesElectronics and Electronics PartsIT EquipmentSoftware and IT ServicesSemiconductorsSource: Rhodium Group. Tertiary sectors marked in blue.Table A-3: Taxonomy of FDI MotivesNatural-Resources-Seeking FDIInvestments to gain access to particular natural resources that are not available or abundant at home ordiversify supply of these resourcesMarket-Seeking FDIInvestments to facilitate access to overseas markets for goods or servicesStrategic-Asset-Seeking FDIInvestments to acquire or build existing strategically important assets that strengthen a firm’s long-termcompetitiveness such as technology, brands and distribution channelsEfficiency-Seeking FDIInvestments that allows firms to reorganize their global operations to take advantage of different factorendowments, market structures, and institutional environmentsReturn-Seeking FDIInvestments that are primarily made for financial returns but that exceed the 10% threshold for FDISource: Authors’ compilation based on Dunning (1993).94 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA In this report, we attempt to systematically review and quantify the motives for Chinese firms’investment in U.S. high-tech industries.102 For this purpose, we use a taxonomy of FDI driversderived from the work of John H. Dunning. Dunning (1993) identified four primary motives forfirms investing overseas: resource-seeking, market-seeking, strategic-asset-seeking, and efficiencyseeking motives. While Dunning’s work has been augmented and refined by others over the pasttwo decades, we believe this basic taxonomy still provides a useful framework for understandingwhat is driving Chinese FDI in the United States. In order to account for the increasing importanceof passive quasi-portfolio stakes in global FDI, we added a fifth category of return-seeking FDI (seeTable A-3 for an overview).By coding each of the 518 deals in our high-tech sample with one or multiple of these motives, weare able to capture the evolution of motives for U.S. high-tech investments. Because multiple driversmay motivate an investment decision, the coding is not exclusive, and each deal may be coded withone or more motives. The coding was primarily based on public documents, including companyannouncements, regulatory filings, press releases, analyst reports, and quotes of related executives andother stakeholders. When such information was unavailable or insufficient, we subjectively coded therespective transaction considering the company’s situation in the marketplace and specific industrydynamics. Each transaction was independently coded by three different reviewers to minimize thesubjectivity of such decisions. The coding of individuals transactions was based on a review of publicinformation and company announcements using the following definitions and keywords:Resource-Seeking FDIFirms invest overseas to get access to resources they need for their products that are not available athome and to diversify their supply of these materials. In most cases, that concerns stakes in upstreamnatural resource operations such as ores, energy, or other raw materials. An example is SuntechPower’s acquisition of a stake in Hoku Scientific, a U.S. supplier of polysilicon. Deals are coded asresource seeking if the U.S. target company is a supplier of a key natural resources or basic materials.Key words: Resources, oil and gas, timber, metals, rare earths, polysilicon, basic materials, upstream,extractive, supplier. (资源, 石油和天然气, 木材, 金属, 稀土, 多晶硅, 基础材料, 上游, 采掘, 供应商)Types of U.S. operations: Upstream resource extraction, basic processing of resources.Market-Seeking FDIFirms invest overseas to seek new markets for their products and services. If their home market is notgrowing fast enough or if they have unique advantages such as lower costs or higher quality, firmscan enter overseas markets through trade and FDI. Often, exporting products to foreign marketsrequires local presence and operations, for example, sales offices or after-sales services. Sometimes,102This exercise explicitly looks at commercial motivations for U.S. investments based on each company’s commercial inc95 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA it makes commercial sense to give up trade and build local production facilities. And sometimespolitical hurdles or requirements (tariffs, local content requirements) force firms to invest in localoperations instead of using trade channels. Examples include investments by Haier and Lenovo inlocal manufacturing facilities or Chinese service providers such as Air China and China Shipping.Deals are coded market seeking if a Chinese investor already has a significant customer base in theUnited States, wants to expand into the U.S. market (first operation), or wants to defend its marketshare by localizing production.Key words: Sales, exports, clients, customers, supplier, localization, after sale customer service, market,customer, marketing. (销售,出口,客户, 顾客, 供应商, 本土化, 售后客户服务, 市场,客户, 市场营销)Types of U.S. operations: Sales offices, representative offices, after-sales operations, final assemblyand other manufacturing, provision of modern services.Strategic-Asset-Seeking FDIFirms also use FDI to acquire strategic assets that enhance their long-term competitiveness. Themost commonly sought-after after strategic assets are knowledge (including intellectual property,technology, and industry knowledge), distribution channels, and brands. Strategic-asset-seekingFDI mostly comes in the form of acquisitions and is an attractive way for developed-economyfirms to enter new industries. It is also often used by emerging-economy firms to play catch-up.Examples are the acquisition of IBM’s PC business by Lenovo, the purchase of Enstrom HelicopterCorporation by Chongqing Helicopter Investment, and the acquisition of ZONARE MedicalSystems by Mindray Medical International. Deals are coded as strategic asset seeking if Chinesefirms acquire assets such as IPR, experienced staff, management knowledge, distribution channels,and brands or if the target firm operates in a different industry in which the buyer is not present.Key words: Capacity, technology, knowledge, leaders, experts, distribution channels, brands, patents,IPR. (能力,技术,知识, 领导者,专家,分销渠道,品牌,专利, 知识产权)Types of U.S. operations: Existing R&D facilities, sales and distribution assets, patents and brandassets, innovation-intensive operations, manufacturing and production facilities.Efficiency-Seeking FDIFirms invest overseas with the goal of achieving greater efficiency of their global operations. Often,this type of FDI comes in the form of greenfield investment, and it is used by firms aiming tostreamline their existing global operations to take advantage of different factor endowments (suchas human talent or access to financing), market structures, and institutional environments (such asmature IPR, financial, and legal environments). For example, a Chinese auto firm may invest in U.S.R&D operations to tap into the local talent base, or a major Chinese tech firm may invest in a U.S.office to raise financing in U.S. capital markets. Deals are coded as efficiency seeking if the Chinese96 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA buyer is looking to build long-term U.S. operations with the goal of making up for input factorsthat are scarce at home but abundant in the United States, including human talent, experience,innovation-supportive capital markets, and a sound legal environment. Investment decisions basedon changes in relative factor costs in China and the United States (energy, labor, land) would alsofall into this category.Key words: Human talent, system, research, R&D, design, global operations, adequate, environment,mature, IPR protection, financial markets, regulatory environment. (人才, 体系, 科研, 研发,设计, 全球运营, 完善,环境,成熟,知识产权保护,金融市场, 监管体系)Types of U.S. operations: Greenfield research and development centers, greenfield manufacturingand production facilities, expansion of existing local operations, headquarters, administrative offices.Return-Seeking FDIIn addition to these four motives, it makes sense to add a fifth motive, return seeking. Today,many institutional and private investors hold passive stakes in companies that would qualify asFDI because they exceed the 10% threshold and the investors can exert control, but they are purelyfor the purpose of long-term capital gains. Examples are the alternative investment portfolioof China’s sovereign wealth fund China Investment Corporation in the United States (such asAES) and Alibaba’s recent stake in Shoprunner. Deals are coded return seeking if they end up ina noncontrolling stake with the goal of long-term capital returns. Often such deals are done bysovereign funds, institutional investors, conglomerates, or private equity firms.Keywords: Passive stake, private equity, financial stake, venture capital, early stage, seed financing,initial public offering. (被动股权,私募投资,金融投资,风险投资, 早期, 种子融资,首次公开发行)Types of U.S. operations: Start-up companies, real estate, utilities, renewable energy projects.Future Data UpdatesRhodium Group’s dataset on Chinese FDI transactions in the United States is constantly updatedand therefore subject to change. The most recent dataset can be found on the China InvestmentMonitor website, which allows users to track Chinese direct investment transactions in the UnitedStates by state and industry: http://rhg.com/interactive/china-investment-monitor.97 | ASIA SOCIETY HIGH TECH: THE NEXT WAVE OF CHINESE INVESTMENT IN AMERICA Asia Society Reports onchinese investment into the United StatesAn American Open Door? Maximizing the Benefits of Chinese ForeignDirect Investment (April 2011)Chinese Direct Investment in California (October 2012)Preparing Asians and Americans for a Shared FutureAsia Society is the leading global and pan-Asian organization working to strengthen relationships andpromote understanding among the people, leaders, and institutions of Asia and the United States.We seek to increase knowledge and enhance dialogue, encourage creative expression, and generate newideas across the fields of policy, business, education, arts and culture. Founded in 1956, Asia Societyis a nonpartisan, nonprofit educational institution with offices in Hong Kong, Houston, Los Angeles, Manila,Mumbai, New York, San Francisco, Seoul, Shanghai, Sydney, and Washington D.C.For more information, AsiaSociety.org/chinaHiTechinvestment