Michael Moore’s Outlook on impending investment restrictions
The world would be a poorer place without metaphors. For all the risks of mixing them unintentionally, falling into cliché, or confusing them with analogies (their first cousins once-removed), they are the lubricants of modern communication. And at the risk of over-doing my point, they are amongst a writer’s best friends.
As such no-one can afford to turn their back on a new metaphor when it bursts onto the scene. Especially if it captures some big complex points in one concise phrase. So allow me to give top billing to ‘small yard, high fence’, which is being used to explain the United States’ new restrictions on Chinese interest in semi-conductors, quantum computing and artificial intelligence.
On an ever more competitive (and divided) world stage, international security has become more salient to global investment flows in recent years. Specifically, China’s economic rise (and its more assertive foreign policy) has led to course corrections by the USA, the UK, and (perhaps to a lesser extent) the EU, in their engagement with the world’s second largest economy.
Private capital has adapted to these changes, as it must. But the regulatory drone which used to have a narrow(ish) focus on which sectors or companies could be sold to (or accept investment from) China has now zoomed out. Following an Executive Order by the Biden Administration in early August, the regulatory field of view (and scrutiny) now includes outward investment into Chinese businesses where capital, know-how (specifically intellectual property) and operational expertise, are part of the deal. For private capital this has clear consequences.
So where does that ‘small yard, high fence’ metaphor fit in? It was at the heart of a speech on the global economy and foreign policy made at the Brookings Institution in April, by the President’s National Security Advisor, Jake Sullivan. His comments dove-tailed with prior speeches by the US Treasury Secretary, Janet Yellen, but his interest in economic policy, and how it should be woven into the fabric of national security, was nevertheless striking.
As was the desire to comfort onlookers. Anticipating the detail of the policy (which in definition is bound to be complex), and the reaction of investors (who prefer continuity to uncertainty), the ‘small yard, high fence’ imagery was designed to reassure – these new requirements may be highly restrictive, but their scope is narrow, Mr Sullivan was saying. Time will tell.
And the reaction of other nations will be telling, too. Does anyone seriously expect the UK and countries in the EU not to follow suit? Besides which, what does this mean for the wider principles of an open international economy?
Of course, national security has always cut across investment freedoms, and rightly so. But the direction of travel towards ‘de-globalising’ (if ever there was a horrid word in need of a slick new metaphor…) is not necessarily welcome. And greater intervention by policymakers in defining what are, or are not, acceptable investment strategies, raises a fairly basic question about the international ‘licence to operate’ of many businesses.
Closer to home, we should never take private capital’s ‘licence to operate’ for granted, and we don’t. The ‘licence’ is not, of course, a single document, but a set of complex, often hard-won, legal, tax and regulatory provisions which establish the opportunities and the boundaries of the industry.
Trade bodies like ours obsess about the ‘licence’, as we should, since that activity answers the question ‘if you didn’t exist, why would you be invented?’ But perhaps we have been a little bit guilty of treating its preamble as a given – inferring from elsewhere that the ‘licence’ will always contain basic permissions to invest across different sectors and across borders in a (largely) open world economy.
The prospect of high regulatory fences around a small yard of sensitive dual use technologies may be understandable now, but who thinks the external pressures on the yard-masters are settled? It is becoming clearer that we need to re-make the case for the global trade and investment framework which has underpinned the industry’s growth and delivered benefits for millions of people beyond the world of private capital.
There is a strong case to make. And by putting it forward we can prevent the industry becoming stuck outside a larger yard with even bigger fences.
Michael Moore
Chief Executive, BVCA
This article was originally published on 13 September 2023 on the Private Equity News website here.
