FDI as a Trojan Horse? Chinese Foreign Direct Investment in the United States and Reverse Technology Flows

Abstract

Although Chinese foreign direct investment (FDI) still represents an extremely small fraction of inward FDI in the United States, annual flows are increasing at a rapid pace. While the U.S. has traditionally welcomed foreign investment, the fact that China is a security rival, a developing economy, and a state-capitalist regime mark it as clearly different from major direct investors. Due to these unique characteristics, American policymakers have expressed concerns that Chinese companies investing in the U.S. may be driven by non-commercial goals and have proposed amendments to the U.S. investment screening process to address these strategic motivations. Especially when China invests in high-technology sectors, there are fears that Chinese-owned companies will strategically transfer technology out of the U.S. in order to upgrade the Chinese domestic economy and improve China’s international economic competitiveness. Taking the perspective of the United States, this thesis addresses the theoretical question of whether the economic benefits of FDI outweigh the costs when technology is being transferred from the host country (the U.S.) to the home country of the investor (China). In order to answer this question in a narrower context, this thesis asks whether Chinese investments in two particular high-technology industries lead to reverse technology flows—the transfer of technology from host to home country—and whether U.S. firms and the local economy still benefit even if these reverse technology flows occur. Using a method of process tracing informed by interviews with Chineseowned companies, U.S. government officials, and China experts, this thesis finds that (1) Chinese FDI in these industries does lead to reverse technology flows and that (2) the benefits to the U.S. economy of these investments are still larger than the costs. Contrary to popular fears, the Chinese firms appear to be largely profit-driven and do not seek to “strip” U.S. firms of their technology assets. These findings suggest that recent proposals for increased scrutiny of Chinese investments might discourage truly beneficial investment. Instead of closing the door to Chinese investors, the U.S. should work to make the screening process more transparent and welcome the economic benefits of Chinese FDI, while simultaneously pursuing bilateral and multilateral initiatives to support China’s gradual economic liberalization.