Technology and Innovation

In July 2017, the Council on Foreign Relations’ Maurice R. Greenberg Center for Geoeconomic Studies held a workshop to explore the scale and scope of Chinese investment in U.S. technology, its national security implications, and potential policy responses. The workshop, hosted by then CFR Senior Fellow Jennifer M. Harris, was made possible by the support of the Carnegie Corporation of New York. The views described here are those of workshop participants only and are not CFR or Carnegie Corporation positions. The Council on Foreign Relations takes no institutional positions on policy issues and has no affiliation with the U.S. government. Introduction Chinese firms, both private and state-owned, have in recent years invested billions of dollars in the U.S. technology industry, raising concerns that a powerful rival has gained or could soon gain access to sensitive and, in some cases, critical technologies that underpin American military superiority and economic might. At the workshop entitled “Chinese Investment in Critical U.S. Technology: Risks to U.S. Security Interests,” held in San Francisco, on July 18, 2017, CFR convened nearly thirty current and former government officials, academics, bankers, investors, and corporate executives to explore whether the large and growing early-stage Chinese investment in critical U.S. technology poses a threat to U.S. national security, and, if so, to outline policies that mitigate the risks of unbridled Chinese investment and to bolster U.S. competitiveness. Show Me the Money: The Scope of Chinese Investment in U.S. Technology In 2016, Chinese investors, venture capital funds, and state-owned enterprises (SEOs) poured more money into all stages of U.S. technology development than ever before (see figure). This included acquisitions of not just established firms but also early-stage businesses and new initiatives from existing companies in nascent or newly developed technologies, in health and pharmaceuticals, in artificial intelligence (AI), and in other advanced technologies that could have cutting-edge military applications. Participants largely agreed that, while most of the Chinese investments come from nominally private-sector firms, U.S. policymakers should view them as being made at the behest of the Chinese government, whether due to the availability of financing from state-owned banks or due to the Communist Party of China’s influence over significant private-sector companies. There is little functional distinction between private firms and SEOs, one participant noted; another underscored the role that Chinese state financing plays in lending a political overtone to what might otherwise appear to be private-sector investment decisions. China’s Game: The Goals of Investing in U.S. Technology Some participants argued that the investment flows are a natural extension of China’s decade-long quest to develop indigenous technologies to fuel economic growth: while Beijing once copied or simply stole technologies from advanced economies, now it is also buying them. Others pointed to Chinese economic plans—such as Made in China 2025, the Belt and Road Initiative, and China’s goal of reaching developed country status by the Communist government’s centennial in 2049—to argue that technology investments are being centrally directed toward concrete goals. Other participants were more skeptical, pointing to what they described as a limited correlation between Chinese investment in U.S. technology and the Chinese government’s stated economic goals. Some investors could simply be chasing returns in the less-saturated U.S. market. Others underscored that a desire to get money out of mainland China could be driving “scattershot” investment across a range of U.S. economic sectors with minimal central direction or oversight. Or it could be a bit of everything at once; chasing returns, moving capital offshore, and meeting party goals are not mutually exclusive. One participant summed up the difficulties in tracing and analyzing Chinese investment thus: “We know who is investing in whom. [But] we don’t know who owns them. And we don’t know why” they are investing. Ultimately, participants concurred, while U.S. foreign direct investment in China still greatly exceeds Chinese investment in the United States, the playing field is “increasingly tilted” in favor of Chinese investors due to the essentially open nature of the U.S. economy. Though Chinese investors trying to purchase U.S. firms face low regulatory hurdles, the obstacles facing U.S. firms in China are much greater. U.S. banks operating in China, for instance, often cannot use the local currency; firms in other sectors face concerted challenges, from forced technology sharing to mandatory joint ventures, that foreign firms in the United States are not subjected to. “We don’t enjoy free trade today,” one participant argued. “It’s only in one direction.” Risks of Chinese Investment to U.S. Security Several participants agreed that increased Chinese investment in new U.S. technology sectors could have two main national security implications: a direct threat to the U.S. military’s technological superiority, and, more broadly, an undermining of U.S. competitiveness in what one participant called the ongoing economic war with Beijing. Some participants, however, cautioned against exaggerating the potential threat posed by Chinese investment, particularly the risk of a return to a Cold War mentality. The Department of Defense, in an unpublished 2017 report, has noted possible risks from Chinese tech investment to the so-called Third Offset, the U.S. military’s effort to ensure continued qualitative advantages over potential rivals, including China. The Third Offset—like its predecessors in the Cold War and through the post–Cold War period—seeks to both deter potential foes and reassure allies that the United States intends to maintain technological dominance over its rivals. Extensive Chinese investment in sensitive technologies—such as guidance systems, AI, and light sensors that aid unmanned aviation systems—could erode or even eliminate that technological edge, some participants warned, potentially diminishing the United States’ ability to credibly defend allies, especially in Asia. Moreover, Chinese investment in high-tech firms could, in many cases, preclude U.S. government or military investment and cooperation with those same companies. Beyond purely defense-related technologies, several participants stressed the risk that Chinese acquisition of novel technologies—especially in foundational technology such as AI that enables advances in a wide range of other areas—could ultimately undermine U.S. economic competitiveness. Some participants warned that Chinese access to precision data on genomics and pharmaceutical development could steal the mantle from U.S. companies currently dominating health care and related fields. Likewise, Chinese efforts to gain access to core communications and digital technologies could give Beijing the ability to harden its own cyber defenses while sharpening its cyberattack potential against the digital and telecommunications infrastructure of the United States and other countries. The Third Offset: More Than Just Technology Although potential threats to the U.S. military’s technological superiority dominated concerns about the implications of Chinese investment, some participants cautioned that the recent U.S. technological edge is a historical anomaly; therefore, the ending of this dominance would be a return to normality, not a revolutionary development. Historically, few armies ever rode technological superiority to any lasting edge over their opponents, because most military technology, once encountered, is readily replicable, some participants noted. The introduction of the chariot, stirrup, firearms, automatic weapons, and armored vehicles were important but none remained dominant for long or conferred a lasting advantage. Instead, participants stressed, military doctrine, training, and operations are more reliable ways to ensure the ability to successfully wage war. A flexible command structure and battle-tested operational doctrines—rather than whizbang technology—provide a surer path to victory. Blitzkrieg was based not on superior technology—German tanks were initially lighter and weaker than their counterparts—but on doctrine and organization. Germany’s foes, especially the United States and the Soviet Union, copied much of that doctrine and organization in turning mobile tank warfare back against its creator. Even when clearly a superior technology emerges, such as France’s development of the first true machine gun, the desire to keep the technology secret and proprietary can erode all of its advantages: the mitrailleuse conspicuously failed to win the Franco-Prussian War because it was too secret for the French troops to be trained in. How the United States Should Respond With respect to countering security threats from Chinese investment in U.S. critical technology, participants overwhelmingly preferred playing offense to defense: policymakers should boost innovation in the U.S. economy as a way to maintain a technological edge rather than seek to block or restrict Chinese investment or to limit the export of certain technologies. To encourage innovation, many participants stressed the need for an industrial-competitive strategy in the United States, which would connect government and the private sector in planning, just as Chinese firms and their government coordinate. Some recommended institutionalizing public-private cooperation in the United States, while safeguarding free-market principles. Several cited the historical examples of government-funded and -directed basic research, epitomized by Bell Laboratories, as ways to ensure continued dominance of foundational technologies that ensure economic primacy. However, nearly all participants also acknowledged that the current political climate makes such cooperation difficult. Budget pressures on basic government research already threaten the network of national labs. Meanwhile, populist rhetoric favoring defensive measures such as tariffs and blacklists makes it harder for policymakers to make the case that a more open economy is ultimately more resilient. Participants vigorously debated how to bolster U.S. protections against Chinese access to critical technologies, including an expanded mandate for the Committee on Foreign Investment in the United States (CFIUS), targeted restrictions on critical technologies such as aeronautics and guidance systems that are vital to defense, and an insistence on Chinese reciprocity in investment and market access. CFIUS, a government panel that screens foreign investment for possible national security implications, has for decades been the default tool to limit foreign access to sensitive parts of the U.S. economy. But many participants argued that CFIUS is outdated, under-resourced, and applies too narrow a definition of national security to be particularly useful in limiting either the extent or the impact of Chinese investment. While a majority of participants agreed that CFIUS should be expanded, with added resources to handle an already large volume of cases, they contended that even a new and improved CFIUS would at best be a “piece of the pie” in dealing with Chinese investment in U.S. technology. Similarly, participants noted that U.S. policymakers have struggled since the end of the Bill Clinton administration to limit Chinese access to potentially sensitive technologies, especially those that could have both civilian and military applications. Some participants argued that a more targeted approach, meant not to block all or most Chinese investment but just that in the most critical technologies—such as machine learning and AI—would mitigate the damage. However, other participants countered that the U.S. government is not well equipped to identify which specific technologies will be game changers or which could pose a future security threat, rendering such an approach useless and potentially counterproductive. Soviet acquisition of precision-guided missiles was ultimately enabled by ball bearing technology, for example, something no U.S. government agency foresaw. Participants agreed that China has, in recent years, taken advantage of the traditionally open U.S. economy by investing freely in the United States while enforcing export controls and rigorously vetting investments and acquisitions on its shores. Most agreed that U.S. policymakers should therefore seek to make reciprocity—more equal access in China for U.S. investors, banks, and firms—a priority objective. And the United States currently has leverage over China to level the playing field. Participants differed, however, in how to do so. Some argued that privately urging China to open up would be more consistent with Chinese sensibilities, while others insisted that only by raising a “vocal stink” with Chinese authorities could unfair practices be rescinded.

On March 29 and 30, the Council on Foreign Relations convened a workshop in New York to explore how international cooperation can accelerate energy innovation. The workshop, hosted by Douglas Dillon Fellow and Acting Director of the Energy Security and Climate Change Program Varun Sivaram, was made possible by the support of the Alfred P. Sloan Foundation. The views described here are those of workshop participants only and are not CFR or Sloan Foundation positions. CFR takes no institutional positions on policy issues and has no affiliation with the U.S. government. Introduction New and improved clean energy technologies to confront climate change can help countries set ambitious targets to reduce their carbon emissions. Whereas countries have long participated in formal negotiations convened by the United Nations to curb emissions, it was not until the 2015 Paris Climate Change Conference that momentum grew for international cooperation on advancing energy innovation. The election of U.S. President Donald J. Trump threatens to undermine that progress. To take stock of recent events and discuss prospects for the future, CFR convened a workshop, gathering nearly forty current and former government officials, entrepreneurs, scientists, investors, executives, philanthropists, and policy researchers. Participants explored how international cooperation can accelerate energy innovation, which lessons from other sectors are applicable to the energy sector, and what policy options are available to spur cooperation in light of political realities. Mission Impossible The Paris Agreement on climate change was a major breakthrough because nearly every country around the world committed to reducing its carbon emissions. But these individual commitments do not add up to the reductions needed to limit global warming to 2 degrees Celsius or less, the agreement’s stated goal. Fortunately, on the sidelines of the Paris summit, twenty world leaders announced Mission Innovation (MI), a pledge to double public funding for energy research and development (R&D) within five years. At the same time, Bill Gates and twenty-eight other billionaires collectively announced that they would also invest in the next generation of energy technologies, highlighting the importance of the private sector in bringing new technologies to market. These public and private leaders argued that better and cheaper energy technologies could enable even deeper cuts to carbon emissions than countries were initially willing to commit to. Workshop participants expressed concern that the Trump administration would ignore the MI pledge, which had been brokered by the Barack Obama administration. Such a move would be unfortunate, participants noted, because MI, for the first time, focused high-level political attention on the urgent challenge of advancing energy innovation. Already, energy ministers had convened in 2016 in San Francisco and concluded how their countries would cooperate: for example, by sharing data about public and private R&D investment. And MI’s second ministerial summit is slated to convene in Beijing in June 2017, when countries will determine its future. MI’s original target—doubling global public R&D funding from $15 billion to $30 billion by 2021—cannot be met if the United States does not live up to its commitment to boost funding from $6.4 billion to $12.8 billion. Trump’s budget proposal slashes R&D funding by over $3 billion, which affects renewable energy technology in particular. Congress is unlikely to approve such a sharp reduction, but the president’s proposal reduces the likelihood that the United States will increase its R&D funding as previously committed. One participant speculated that the best-case scenario would be if the United States boosted funding only for those technologies favored by the Trump administration, such as advanced nuclear reactors or equipment to capture and store carbon emissions from fossil fuel power plants. At least for now, other countries remain committed. One participant noted that countries as diverse as Indonesia, Saudi Arabia, Canada, and various European Union members are all committed to ramping up public R&D spending. And these investment flows will likely be overshadowed by a tidal wave of funding from China, which has pledged to spend $8 billion per year by 2021 and will thus overtake the United States as the largest funder of energy R&D. However, without U.S. financial support, the global MI funding goal would be out of reach. In fact, it is even uncertain whether the Trump administration will continue to host MI’s small staff at the U.S. Department of Energy (DOE). Summing up these developments, one participant lamented, “This is a disappointing, chastening time for clean energy innovation.” Quality Over Quantity There might, however, be a silver lining, some participants noted. Now that doubling global public R&D funding appears improbable, countries could focus on improving the quality of their innovation efforts. Many participants agreed that although the quantity of R&D funding is woefully inadequate today, simply doubling it could be wasteful. For example, one participant noted that India cannot double its public R&D funding because it lacks the institutional capacity to spend that money effectively. Many participants argued that a more promising function for MI could therefore be in enabling countries to share lessons about designing public institutions to fund innovation. The United States, for example, has the Advanced Research Projects Agency-Energy (ARPA-E)—modeled after the military’s funding body for emerging technologies—which funds potentially transformative technologies but cuts off grants to projects that miss their milestones. Though ARPA-E has existed for less than a decade, one participant noted that teams funded by ARPA-E are more likely to obtain patents and private funding than those funded by other arms of the DOE. Another participant proposed Germany’s Fraunhofer Institutes as an important model of “translational infrastructure to bridge the gap between great science and engineering at universities and commercial products produced by industry.” Yet another cited the Low Carbon Trust, which was created by the British government but enjoyed political autonomy to make investments in promising technologies alongside the private sector. Although that institution’s budget was sharply curtailed in 2009 as a result of the financial crisis, participants agreed that it offered valuable lessons for funding innovation. Still, participants noted that institutions “can’t be dropped from a helicopter” into one country from another because of differing national contexts. U.S. universities, federal laboratories, and private firms generate enough good ideas for an institution like ARPA-E to assemble a diverse portfolio of technology bets, but countries that have no such research backing would have no practical or political value for a (low) carbon copy of ARPA-E. For that reason, participants concluded, information-sharing on institutional design and performance would help countries try out elements best suited to their national contexts. Countries could also evaluate and help improve one another’s innovation. This approach has a precedent: Group of Twenty countries have exchanged reviews to help members identify wasteful fossil fuel subsidies to eliminate. Participants concluded that MI should reorient its focus toward enhancing the quality, rather than the quantity, of its members’ innovation efforts (see figure 1). Recognizing that MI might need an alternative home to the U.S. Department of Energy, participants debated whether MI should be subsumed within an existing international institution, such as the International Energy Agency or the International Renewable Energy Agency. Although some supported that route to ensure MI’s survival, others doubted that countries would pay leader-level attention to MI if it were part of a large institution. Either way, most participants agreed, MI should not become a large, bureaucratic institution; it should remain a nimble, bottom-up coalition of countries whose leaders are willing to work together to advance energy innovation. Figure 1. Experts' Assessments of the Future of Mission Innovation Other Opportunities for Cooperation Participants stressed that MI is not the only venue for countries to cooperate on energy innovation. Two other modes offer important benefits as well. Bilateral Research Collaborations In some cases, bilateral collaborations have achieved a similarly high political profile to that of MI. One participant cited the U.S.-China Clean Energy Research Center (CERC), which U.S. President Barack Obama and Chinese President Xi Jinping discussed on several occasions. CERC’s priorities include developing technologies to reduce energy use in buildings, to capture and store emissions from coal plants, and to design cleaner vehicles. The participant conceded that U.S. and Chinese research teams have not yet obtained joint patents. One possible reason is that theft of intellectual property (IP) remains a concern for U.S. researchers and companies. But CERC has clear IP rules, and as teams get more comfortable designing joint research projects, joint IP ownership will likely follow. Participants cited CERC’s ability to attract private-sector firms to work alongside academic researchers as an important strength. Participants also noted that the United States would benefit from continued participation in CERC, because U.S. firms can demonstrate their technologies in China and thus gain access to a massive and growing market for advanced energy products. Other participants cited the U.S. research partnership with India as a successful example of collaboration that combines the research expertise of industrialized countries with the technology needs of developing ones. For example, one participant noted that developing energy-efficient ceiling fans is an important priority for India, even if it is not one for the U.S. market. The United States stands to benefit from such partnerships if its firms can design better products for fast-growing emerging economies. International Technology Standards Given that almost six hundred standards apply worldwide to renewable energy technologies, and more apply regionally or domestically, countries could collaboratively develop future standards for shared benefits. Participants did not see the need for new international institutions to develop and help implement standards across borders. However, some argued, existing institutions could take a systemic approach to setting standards. Such an approach would mean, for example, setting standards for not only how well a solar panel should work in isolation but also how it should interact with the power grid. “Standards play a critical role for technology markets, as they contain technical specifications or other precise criteria designed to be used consistently as rules, guidelines, or definitions,” one participant noted. Participants explained that standards matter for three reasons. One, they increase the size of the market for energy products by, for example, making it possible to use the same energy-efficient lightbulbs all over the world. Two, they help customers and investors trust that new technologies will work as advertised. And three, standards can improve the performance of energy products. A participant noted that the first two advantages arise from scalar standards that simply standardize product specifications; the third advantage arises from vector standards that impose a directional requirement that products get better over time. Another participant offered an example of how standards could popularize cleaner energy technologies. In colder parts of North America, Europe, and China, the burning of fuel oil or coal to heat homes and businesses is a major source of emissions. Electric heat pumps offer a much cleaner alternative. Developing standards on equipment performance and installation practices could make it attractive for customers to use heat pumps. The participant noted further that Canada and the United States had already started to cooperate on setting such standards. Working With the Private Sector Several participants stressed that successfully bringing new energy technologies into the marketplace will require far greater investment in innovation by the private sector. Therefore, a primary objective of international cooperation should be to catalyze private investment flows. Other sectors offer important examples of how to accomplish this goal. Participants noted that the semiconductor industry, in which private R&D investment far outstrips public R&D funding, offers an aspirational example for the energy sector. One expert from that industry explained that corporations, rather than governments, drive international cooperation, often joining forces with international rivals on research and manufacturing ventures. The expert noted that nonprofit standards-setting bodies play an important role in coordinating the global industry and pushing firms to innovate rapidly. And when governments enact strict IP protections, remove trade and capital barriers, and invite talent from abroad, firms cooperate across borders and invest heavily in innovation. Another participant shared lessons from the global health sector, in which pharmaceutical companies invest heavily in R&D for new drugs. Some drugs, particularly vaccines that target tropical diseases such as malaria that are endemic to lower-income countries, are not lucrative to develop. For some such cases, governments around the world pool funds to purchase large quantities of vaccines and create markets for otherwise unprofitable drugs. Participants reasoned that this strategy could apply to the energy sector, in which some clean energy products for developing countries would be profitable for the private sector to develop only if governments were to create the right incentives. A participant noted that universities could also play an important role in spurring private sector investment; they could tailor programs for corporations to invest in breakthrough energy research on campus. Finally, although participants generally agreed on the need for far greater private investment in energy innovation, some energy entrepreneurs and venture capital investors reported on exciting examples of ongoing breakthroughs in developing the vehicles of the future, designing cleaner power grids, and bringing electricity to millions who lack it. Innovation is inevitable, they argued; the challenge is to accelerate it.