Both candidates to become the UK’s next prime minister have pledged to limit China’s access to UK technology. In a televised debate this week, Liz Truss said the UK “absolutely should be cracking down” on Chinese-owned technology companies, such as social media app TikTok, and “limiting the amount of technology exports we do to authoritarian regimes”.
And on Twitter yesterday, Rishi Sunak laid out how he would address “the largest threat to Britain and the world’s security and prosperity this century”. This includes “examining the need to prevent Chinese acquisitions of key British assets including strategically sensitive tech firms,” he wrote, and expanding MI5’s reach “to counter Chinese industrial espionage”.
But this fighting talk may be wasted breath. The UK government is already tightening its grip on foreign investment in technology, invoking new legislation to block Chinese access to UK technology for the first time last week. Meanwhile, amid increasing scrutiny, China is turning its attention away from Europe as a destination for technology investment.
Last week, the Department for Business, Energy and Industry Strategy blocked the University of Manchester from licensing computer vision technology for autonomous robots to China’s Beijing Infinite Vision Technology Company, on national security grounds.
It was the first application to date of the National Security and Investment Act 2021 (NSIA), which allows the government to inspect and block foreign technology acquisitions that “could harm the UK’s national security”.
BEIS ruled that the University of Manchester’s technology “could be used to build defence or technological capabilities which may present national security risk to the United Kingdom”. The University says it will abide by the ruling.
“This is the first exercise of power by the UK government to block a transaction on national security grounds, under the NSIA regime,” explains Sally Evans, partner at Kirkland and Ellis LLP, who has worked with companies referring their acquisitions to the NSIA. “The NSIA regime is agnostic about the purchaser’s origin, however it is no real surprise that the first enforcement action under the regime has been taken against a Chinese acquirer.”
More bans could soon follow, as 178 proposed acquisitions are currently under scrutiny, according to BEIS statistics. These include deals related to defence technology, ‘dual use’ technologies that have both military and civilian applications, as well as AI and data infrastructure.
UK tech investment: China looks for easier markets
But China's pursuit of UK-based technology could be short-lived. The country’s foreign direct investment across all sectors in Europe has been steadily plummeting in recent years.
In 2021, Europe received $13bn of investment from China, with the UK receiving $2.6bn, according to law firm Baker McKenzie. This pales in comparison to the $91bn China pumped into Europe in 2017.
Technology investment has fallen even faster, as countries across the region began to clamp down on acquisitions in sensitive sectors and China develops its domestic capabilities. In 2016 and 2017, Chinese investment in Europe’s ICT sector stood at $8bn; in 2020 and 2021, the figure fell to just $3bn.
The same is true of North America, where China's investment in ICT companies fell from $10bn in 2016 and 2017 collectively, to less than $150m in the four years that followed, according to lawyers at Baker McKenzie. Amid mounting national security fears, Chinese investors have divested their holdings in companies including dating app Grindr, IT distributor Ingram Micro, and health tech platform PatientsLikeMe.
This downward trend is likely to continue, says Loletta Chow, global lead of EY’s China Overseas Investment Network, spurred by factors including the war in Ukraine, inflation in Europe and the US, and uncertainty about the pandemic in China.
“Global supply chains might be further reshaped due to geopolitical uncertainty and more Chinese enterprises might instead consider greenfield investments to keep up with the growing trend of getting closer to the consumer market," Chow says.
But growing scrutiny over acquisitions of sensitive technology is also driving China to look for easier acquisition markets. "There has been a shift of outbound FDI deals to Latin America in recent years where local regulators still mostly welcome Chinese investment," says Zhang Hong, head of private equity at the law firm FenXun Shanghai.
As a result, Truss and Sunak's tough talk on China and tech may never be put to the test.