From: allin
The discussion around foreign investments, particularly from the U.S. into China’s artificial intelligence (AI) sector, is a complex one, intertwined with geopolitical strategy, economic interdependency, and national security concerns.
Debate on US Investments in Chinese AI
There is an ongoing debate about whether U.S. Limited Partners (LPs) should continue to back firms like Sequoia China and Matrix China, especially given that these firms are investing in AI competitors to U.S. companies [00:57:22]. This raises broader questions about whether the U.S. should engage with or isolate countries like China and Saudi Arabia on the global economic stage [00:58:11].
One perspective is that U.S. firms should not be allowed to invest in China’s AI sector [01:00:10]. This stance emphasizes the need for the Committee on Foreign Investment in the United States (CFIUS) to gain control over such outbound investments [01:00:18]. CFIUS typically reviews foreign investments into the U.S. that might pose national security risks, but the argument is that a similar mechanism is needed for U.S. capital flowing out to adversarial nations, especially concerning advanced technologies like AI [01:00:27]. The concern is that U.S. “fingerprints” should not be on AI advancements perfected outside U.S. borders [01:01:45].
Historical Context: Constructive Engagement Policy
Historically, the U.S. policy of “constructive engagement” with China aimed to foster economic ties with the belief that making China wealthy would lead it to become more democratic and a closer friend [01:02:40]. However, critics, such as scholar John Mearsheimer, warned as early as 2002 that enriching China would instead lead it to convert wealth into political power, seeking regional dominance and pushing the U.S. out of Asia [01:03:04]. This predicted future is argued to have materialized [01:03:34].
This highlights a fundamental tension between viewing the world in economic terms (positive-sum games like trade) and geopolitical terms (zero-sum balance of power) [01:04:00]. While positive economic relationships are desirable, there’s a concurrent concern about preventing rival nations from achieving security competition parity or even surpassing the U.S. in power [01:04:09]. The relationship with China has shifted from primarily economic to primarily geopolitical in recent years [01:04:33].
Investment Frameworks and Geopolitical Considerations
A simple framework for U.S. venture capital firms considering foreign investment is:
- If the country is a U.S. ally, it’s generally considered fair game for business [01:05:00].
- If the U.S. government has designated a country as an adversary, doing business with them places firms in a precarious position that requires explanation to the U.S. government [01:05:07].
This framework suggests avoiding taking money from countries like Russia, North Korea, or Iran, which are U.S. adversaries [01:05:20]. For China, while there are deep interdependencies, the U.S. government increasingly views it as an adversary [01:07:07].
Economic interdependence has been theorized to prevent war, but historical examples like Britain and Germany before World War I — who were each other’s top trading partners yet still went to war — suggest that this theory isn’t definitively proven [01:06:01]. In a security competition, geopolitics tends to take the driver’s seat over economics [01:06:43].
Challenges and Risks of Investing in China
Beyond geopolitical concerns, direct investment in China presents inherent challenges for venture capitalists:
- Government Control: China’s single-party government can unilaterally decide outcomes, leading to situations where shareholders can be significantly impacted or “wiped out” by government actions, as seen with Alibaba [01:08:18].
- Difficulty of Exiting: Extracting money from China can be a difficult task [01:09:59].
While selling non-strategic products like movies or cars to China might be less problematic [01:09:41], investing in highly strategic sectors like advanced AI technology is viewed differently, especially by venture capital firms that seek to avoid future complications [01:09:44].