More than 90% of outbound U.S. investment into Chinese artificial intelligence companies in recent years has occurred in the venture capital stage, with investors providing valuable intangibles like name recognition and networking opportunities, a new policy brief from Georgetown University has found.
The report, released this week by Georgetown’s Center for Security and Emerging Technology, comes amid heightened concerns in Washington over security risks posed by certain investment in Chinese companies, especially in emerging technologies like AI.
Analyzing financial data from Crunchbase, the report found that American investors funneled over USD 40 billion into 251 Chinese AI companies between 2015 and 2021.
China’s AI market—the second largest worldwide after the U.S.—is dominated by domestic investors, who make up 92% of the rest of the investment transactions analyzed in the data set. Those transactions also are heavily skewed toward the early stages of VC funding.
U.S. investments are set apart in many cases by the intangible benefits passed onto a nascent Chinese company. In addition to the stamp of approval from a well-known Silicon Valley VC firm, they gain mentorship, name recognition, and networking opportunities.
“Chinese AI companies are going to find the money regardless of whether or not U.S. investors are giving them money. It’s more about the name recognition, about being able to say, ‘look, Intel backed me,'” said Emily Weinstein, a research fellow at the Georgetown center and co-author of the report.
That stamp of approval helps attract further investment for a company, both at home and from abroad, a crucial positive feedback loop when seeking access to early investment rounds.
“This is not a company that’s almost at its IPO where it’s going to be really successful, where they already have a product, have everything set up,” Weinstein said.
Though the raw capital injected by American investors may be limited, “such financial activity, commercial linkages, and the tacit expertise that transfers from U.S.-based funders to target companies in China’s booming AI ecosystem carries implications that extend beyond the business sector,” the report said.
These dynamics echo the broader policy discussions in Washington about private American investment flowing into China’s tech sector. This has raised the issue of whether outbound investment screening—similar to what the U.S. government has in place for inbound foreign investment—should be established.
One challenge with such a screening process is parsing the security threat posed by any given technological investment, considering the multipurpose nature of the entire tech sector. Another issue is how to adopt such a framework without bogging down an entire investment ecosystem.
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Compared with something like weapons guidance systems, everything from semiconductors to telecommunications has dual-use applications for private and military use. Perhaps nowhere is that multiple-use dimension more apparent than in AI, complicating efforts to regulate investments.
“You could probably draw parallels between AI and electricity,” said Ngor Luong, a research analyst at the Georgetown center and a co-author of the report. “So you can’t say it’s an industry, or a sector. It spans across different industries. It spans across different applications.”
This article first appeared on Nikkei Asia. It has been republished here as part of 36Kr’s ongoing partnership with Nikkei.