BackTech fund inflows have national security risks
Policymakers need to balance the benefits of foreign investments into tech start-ups against the security risks, argues a new study
PremiumAmid growing mistrust towards Beijing, governments across the world are becoming wary of Chinese investments. Since March, several countries have taken measures to tighten regulations on such investments, especially in areas critical to national security, such as artificial intelligence, fintech and virtual reality. New research has found evidence that the worry is not misplaced.
In a VoxEU article, Ufuk Akcigit of University of Chicago and others find that through foreign investment, the financing country stands to benefit from superior technology being developed in countries where it invests.
Using a dataset of venture investments by foreign corporate investors in US start-ups between 1976 and 2015, the authors find that around the time of investment, patent applications in the country where the funder is based increase in the patent classes that the start-up focuses on. They also find that citations by firms in the investor country to the patents of US start-ups also increase after the investment.
These results suggest that the countries providing the financing benefit from knowledge spillovers. But the authors caution that this also means that there is risk of potential leakage of technology important to national security.
Regulatory barriers and taxes can keep such investments—and thereby leakage of technology—in check by raising the cost of foreign financing. But without such financing, new start-ups may not be able to put their superior technology into practice.
This means policymakers must balance the benefit of such investments for domestic technology start-ups against the potential risk it poses to national security.
When the threat of military competition rises, this optimal cost on foreign corporate investors should increase, the authors suggest. But they also warn that such a measure must not be undertaken unless there is a substantial enough threat that can justify the loss of investment opportunities.
Also read: The war of Tech: Cross-border venture capital, technology flows, and national security
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