Why are many countries worried about foreign investment in tech?

Governments right across the globe are taking steps to stop other countries from acquiring homegrown tech startups. But why?

Governments typically embrace inward investment with open arms as it contributes hugely to their economies. But when it comes to tech, things seem different. Many countries are actually discouraging foreign investment over national security concerns and the possibility of being outflanked on the world stage. Are they right to be worried?

 

Uncertain times

During these times of economic uncertainty, startups are struggling. So the opportunity to be bought out by a foreign business may seem attractive - and is often a crucial lifeline.

Russ Shaw, founder of Tech London Advocates, says: "The struggles experienced by many early stage tech companies translate into opportunity for others. With valuations of start-ups falling, larger companies, whether the classic ‘Big Tech' cohort or others, are potentially more likely to acquire them.

"Who can blame a struggling founder for wanting to cash out in the current economic climate if the opportunity presents itself? After all, industry mainstays have better access to capital markets and significant cash reserves, making it far easier for them to weather the economic storm with confidence, and even make bolder moves to tighten their hold on the market."

Foreign takeovers happen in all industries, but Shaw says digital companies are more susceptible to acquisition due to the relatively small cluster of powerful companies that dominate the global tech sector. He says: "Given their perennial influence, the US tech giants such as Google, Facebook and Amazon are the prime candidates to search for strategic acquisitions at a cut price."

However, he says that as the pandemic eases in Asia, leading state-backed entities in China may look to snap up innovative companies cheaply. "In fact, resistance to attempts by Canyon Bridge, the Chinese owners of British chip maker Imagination Technologies, to tighten their influence on the firm's board, highlights the prevailing concerns about the risk of moving domestic IP overseas."

If governments truly want to protect startups from foreign takeovers, they must continue to support them amid a global recession. Shaw explains: "Most founders do not want to sell a business and IP that she or he has worked so long to build from scratch. To resist the lure of a sizable offer, they need immediate help.

"While government support packages will be a key component of this, start-ups are at the mercy of what could be a cumbersome and oversubscribed distribution system. For example, expediting R&D tax credits and modifying the Enterprise Investment Scheme and Venture Capital Trust rules will allow investors to inject cash into start-ups right now."

 

Chinese dominance

Foreign investment isn't necessarily a bad thing. But the concern is when governments or companies with a poor security track record and ulterior motives acquire startups from other countries in order to achieve market dominance.

Many experts warn that the technology industry is being used as a pawn, especially by China. Jake Moore, security specialist at ESET, says: "Ever since the beginning of the Huawei saga with the UK government and the disagreements therein, tensions have grown. The technology industry is arguably a kingpin used in the dispute to win the battle too."

China, in particular, looks set on dominating the technology sector by investing overseas. Moore explains: "Start up companies with profitable fortunes are desirable to many countries but more so by countries like China who are clearly trying to monopolize the industry in the future. The USA currently has a fair share of the world's largest technology firms but China is always looking ahead and confidently looks to strike where opportunity lies.

The worry, according to Moore, is that countries like the UK may get left behind. Moore says: "This may not be a prominent concern right now, but soon there could be a tipping point where growing technology firms are snapped up by other countries and the threat is that the UK could be left behind in the technology race."

As well as being outgunned by China, there are also concerns around security. Moore adds: "National security threats from within the Chinese technology investment have been a worrying cloud over the nations battling it out to be the big winner in the industry.

"The UK is keen to keep homegrown talent where possible and is clearly desperate to retain the industry's best talent right here. It is extremely important that the UK does all it can to encourage the best people to stay in this ever-expanding industry before it is lost overseas."

 

Stopping foreign takeovers

Many countries are taking steps to prevent foreign takeovers. In the UK, the Boris Johnson administration is working on new legislation to compel firms to report foreign takeovers that pose a national security risk. Failing to do so could lead to jail terms and hefty fines.

Similarly, France has outlined plans for a 500 million euro fund to invest in homegrown startups and protect them from foreign takeover, and Canadian lawmakers are currently discussing potential changes to the Investment Canada Act that could prevent foreign takeovers.

Glafkos Tombolis, corporate partner at law firm Kemp Little, says the issue of foreign acquisition of domestic tech companies has been climbing the agendas of governments around the world.

Tombolis tells IDG Connect: "Both the EU and the US are repurposing competition and national security laws to capture transactions involving firms which hold (amongst other things) sensitive intellectual property and healthcare data.

"This type of data holds so much value; it paints a picture of a user's demographic profile, health, wellness, treatments, procedures and diagnoses and outcomes. It can be used to plot trajectories of what medicines and care users will need in the future, thereby enabling non-domestic private businesses to profit from domestic health needs, a prospect that is anathema to many governments, regardless of ideological persuasion."

But could these rules do more damage than good? In the case of the UK, Yash Dubal, founder and managing director of A Y & J Solicitors, explains how they might stifle its ability to attract investment and talent from abroad as firms are faced with the uncertainty of coronavirus and EU trade talks.

"If I was a Chinese investor eyeing an opportunity to back British industry, or a highly skilled Chinese IT worker looking to work and pay tax in the UK, I would be extremely confused right now," he says.

"Because on the one hand the messaging from Government declares the UK open for international business with opportunities for ‘the brightest and best' from around the world, but on the other hand, foreign investors and workers from certain countries are not so welcome, particularly China. If the situation is confusing for investors and potential employees, imagine what it is like for UK businesses hit by the corona pandemic and in need of investment who don't know whose money they should be taking."

The arguments for and against foreign investment are nuanced. Attracting the investment of a wealthy nation like China results in opportunities for business owners and people seeking highly skilled jobs. However, this may come at the expense of national security and homegrown success.