I was recently invited to be a witness at a Foreign Affairs Committee hearing, which was looking into the risks arising from foreign investments in UK tech businesses, the viability of screening investments on national security grounds and the wider implications of tighter Foreign Direct Investment (FDI) controls on this flourishing sector. The committee was seeking to understand to what extent the UK is under threat from attempts by hostile actors to asset-strip key technologies and industries.
I was attending in my dual capacity as founder and CEO of crayfish.io (itself a technology-driven startup) and as co-vice chair of the UK-China Tech Forum. I was asked, as an opener, if I had any knowledge of issues with intellectual property (IP), tech transfer and hostile takeovers arriving out of foreign investment within the UK. I don’t and never have.
Companies do have problems with intellectual property in foreign countries (including China) – but that’s not because of having a foreign investor. Often, in that marketplace, it’s down to problems with distributors, customers or suppliers. But it’s definitely not caused by foreign investment, and I do not believe there should be a blanket prohibition.
IP risks are always there for tech companies doing business overseas – but the risks are easily avoided with good corporate governance to ensure that foreign investors do not have access to trade secrets other than what has been agreed as part of the investment. And in the cases I have seen, technology transfer has happened as part of the contract those parties were happy to accept. These are not causing national security issues. And there is no evidence whatsoever to show that foreign investment, including that from China, is linked to any increased IP theft.
It’s true that, in recent years, China has adopted a “market in exchange for technology” strategy to help bridge the shortfall of home-grown tech entrepreneurs and creative talent in China. However, this hasn’t proved successful. As a result, Chinese companies remain the top-paying customers for UK IPs. Additionally, having spent the last 20 years developing and protecting their own IPs, Chinese companies are now among the world’s largest patent applicants.
In fact, having a foreign investor is actually more likely to help protect IP. No investor wants to put their money into an asset and destroy it. On the contrary, some of the Chinese investors I know are careful to make introductions only to trusted partners in China and are the first to warn against potential infringing parties, in order to secure and protect their UK assets.
I should also point out that, while US investors typically require development facilities to be set up in the US, Chinese investors are invariably more flexible and do not require this. They see it as a safer option to keep the facilities in the UK (to help protect against IP risks). And, in general, and from my own extensive experience, Chinese investors and owners have always abided by the investment agreement in terms of keeping UK employment, corporate governance structure and continued investment into research and development (R&D).
Of course, when there is no investment forthcoming from the UK, foreign investment is invaluable to UK businesses – and any reduction in this would be damaging, in particular to the tech industry. In the majority of cases, tech companies don’t just need capital once. They need a continuous injection of capital in order to grow the tech, commercialise it and scale up. But often there simply isn’t the capital from the UK to help them.
One leading UK bio-engineering company I have worked with – which is using innovative lab technologies to transform drug discovery – has received their only investment from China and Hong Kong. When they started three years ago, there was no interest from within the UK. They ended up having seed investment from a Hong Kong family office after being introduced by a UK professor. A year later, when they needed more financing, the money once again came from Chinese capital on the recommendation of the original Hong Kong investor.
Even though they already had US contractors in the pipeline, US collaboration and a pending Food and Drug Administration (FDA) application, there was simply not enough risk appetite for that kind of technology. They didn’t have a choice of investors. Without the Chinese capital, they would not have been able to develop any of their applications, and the UK would not now be benefiting from any of these new technologies.
Most countries welcome FDI, as is evident from all the schemes in place to facilitate this. Some 20 years ago, there was barely any Chinese inward investment into the UK – but this has now grown phenomenally to over £2bn, around 0.2 per cent of the global total.
The recent opening of the London-Shanghai Stock Connect in June 2019 has further extended opportunities for Chinese companies to list and raise capital in London, with over 260 companies listed in Shanghai eligible to take part. However, if they cannot buy or invest here easily, these potential investors will take their money out of the UK and invest somewhere else.
Last year, research conducted by Grant Thornton demonstrated the increasingly significant contribution that Chinese companies are making to the UK economy. The Tou Ying Tracker 2019 analysed data from around 800 Chinese companies in the UK and found that, between them, they employed over 71,000 people (up from 62,000 the previous year) and had a combined turnover of £91bn (up from £68bn the previous year). These 800 companies represent only a fraction of the Chinese companies doing business in the UK. In total, they identified over 13,000 companies that were part of a China-owned corporate group or are majority-held by a Chinese national.
The advantage of inward investment works both ways, aiding export to foreign markets, too. Having Chinese investors on board to make warm introductions overseas and advise on the unfamiliar Chinese regulatory environment definitely helps with accessing and expanding into the large and lucrative Chinese market.
According to a House of Commons briefing paper published in July this year, UK exports to China were worth £30.7bn, more than 16 times the value in 1999 (£1.9bn); and China accounted for 4.4 per cent of UK exports and 6.8 per cent of all UK imports.
The UK already has tools to scrutinise foreign investment and acquisitions that raise national security concerns. It is normal to block any deals on those grounds. Is closer scrutiny really needed? I don’t believe it is. Because, to date, I have not seen one national security issue relating to Chinese investments which the UK has not been able to address or manage under existing regulations.
Of course, even closer scrutiny would mean additional regulatory processes for the foreign investor which would, in turn, slow the process considerably and be counter-productive for export. It will likely put off investors who have other options, and they may not bother with the UK at all. On top of that, there will inevitably be additional compliance costs for businesses to understand the process and more reporting liabilities which they can well do without.
At best, such restrictions need to be focused solely on those sectors where there are real and immediate national security concerns, such as infrastructure, defence and surveillance, otherwise it may not be serving its purpose. If the “closer scrutiny” is then targeting China, amongst a small number of countries, then it will send a very negative message to China, add to the increasingly strained relationship between the UK and China, and further dampen interest from Chinese investors.
There needs to be a balanced approach which, while protecting national security, ensures that the UK remains an open and free economy, as well as an attractive and predictable legal environment for foreign investment.