United States: INTERNATIONAL TECH INVESTMENT ISSUE – Threats Technology Investment From Global Politics: How To Succeed As Borders Tighten

Over the past year, the impact of international political risks on the global tech industry has been unprecedented."
Tung Tzu-hsien, Chairman of iPhone's Chinese assembly company, Pegatron

Technology investment is getting harder. A few years ago, strategic and private equity technology acquisitions, multinational joint venture creation, and cross-border R&D collaboration were not only relatively straightforward, they were an economic engine driving the global technology economy.

Now, U.S. export controls, technology transfer restrictions, CFIUS and other investment reviews, and tariffs and non-tariff barriers have begun to limit the options for successful transactions in the tech sector. In this article, we examine the new and emerging challenges and suggest a strategies for navigating the changing currents of global trade and politics to get your deal done despite the shifting landscape.

New Threats to Technology Investment

CFIUS and FIRRMA

In 2018, the Foreign Investment Risk Review Modernization Act (FIRRMA) broadened and strengthened the powers of the U.S. Committee on Foreign Investment in the United States (CFIUS) (discussed here). In November of last year, the Committee implemented a Pilot Program (reported on here) imposing mandatory filings for certain investments in the united states and providing for penalties up to the amount of the proposed transaction. Technology was a major focus of the pilot program, including Nanotechnology, Biotech, Energy Generation and Storage, Aerospace, Semiconductor Design and Manufacture, and Aerospeace, among many others.

The sudden increase in CFIUS power and the threat of potential penalties have potential investors reviewing their proposed transactions and many searching for targets in other countries.

International Investment Review

While U.S. Foreign Direct Investment (FDI) restrictions have caught the most business headlines, new and reinvigorated laws are cropping up around the world. As we report here dozens of countries are implementing or considering new FDI reviews and restrictions. That includes an EU-wide directive providing the framework for all 28 member states to implement their own FDI screening regimes.

Tariffs and Non-Tariff Barriers

In the United States, the Trump administration has imposed tariffs on imports of equipment in the burgeoning solar energy industry (among many other sectors). That system of tariffs has forced major alternative energy investors to reconsider the sourcing and logistics for their projects.

Meanwhile, the EU "Tech Tax," aimed at digital platforms that earn a significant amount of their revenue in Europe, has been an on-again, off-again effort. However, regardless of whether that tax is imposed, the EU competition authority has hammered Google with three separate penalties and is reportedly investigating Amazon. The EU Commissioner for Competition has suggested that the EU should not aim to break up the tech giants, but focus on regulating their use of data.

Individual company targeting

Narrowing in from moves against entire industries, the United States and others are targeting individual companies they see as threats to national security. In April 2018, the United States added Chinese telecom major ZTE to the Denied Parties List, effectively prohibiting exports of U.S.-origin items to ZTE. The Denied Party designation was later lifted, but regulators assessed enormous penalties against the company, and the settlement left open the likelihood that even a small future violation of export controls or sanctions by ZTE could result in redesignation of the company as a denied party.

In addition, the United States has issued new government procurement restrictions on the use of software and equipment from the Russian firm, Kaspersky, and five Chinese companies, including ZTE, Hytera, and Huawei. A new statute also directs the Department of Defense to limit the use of Huawei and ZTE by U.S. universities and other researchers funded by the federal government. The U.S. Department of Justice has also filed sweeping criminal charges against Huawei. Those charges have led to the arrest and an extradition request of the company's CFO and daughter of the company's founder, who is currently being detained in Canada.

The United States is not alone in its Huawei wariness. Since August 2018, Australia, New Zealand, Japan, the UK, Germany, Malaysia, Canada and Taiwan have raised concerns about Huawei. Some have taken action to restrict or block Huawei from certain business sectors in their countries.

Emerging Threats to Technology Investment

Chinese Technology Restrictions

China is not taking it lying down. Huawei is, effectively, China's state telecom tech company. In anticipation of even further restrictive U.S. actions against Huawei, the company has made a concerted effort to relocate certain Asian suppliers to the PRC. We anticipate that China will continue to take further actions designed to blunt the effects of U.S. restrictions.

U.S. Technology Controls

As we reported recently in Risk & Compliance Magazine, a wave further of U.S. controls on "emerging technology" is due in the coming year. Those controls will disrupt the disruptors, placing greater limits not only on who can receive U.S. technology exports, but also on the disclosure of technology to foreign nationals even within the United States. The new "emerging technology" controls will impact technology research and development, the export and logistics planning of tech companies, and investments, mergers, and acquisitions in the tech world.

Addressing the Current and Coming Changes

These changes, taken together, present a major challenge to the system of international technology investments and innovations that the world used to take for granted. However, planning your investment with an understanding and foresight of present and coming global political changes improves the chances of success. There are genuine policy debates behind the changes, which we must leave for another article. Meanwhile, we'll be monitoring the regulatory changes around the world and reporting on them here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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