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This article was previously published in the National Interest.
Last month, the US passed the CHIPS and SCIENCE Act, one of the first pieces of national industrial policy to address government planning and intervention in a specific industry over the past 50 years — in this case, semiconductors. After the celebratory champagne is drunk and the confetti floats to the floor, it’s important to put the CHIPS Act in context and understand the work that remains to be done by public and private capital.
Today, the United States is in a great power struggle with China. In the 21st century, the country’s diplomatic, intelligence, military and economic system is a race to lead the world. The result is a Chinese dystopian or democratic future in which individuals and nations make their own choices. At the heart of this competition is leadership in emerging and disruptive technologies – from semiconductors and supercomputers to biotech and blockchain and everything in between.
National Industrial Policy – America versus China
Unlike the US, China manages its industrial policy through top-down 5-year plans. Their overall goal is to make China a technologically superior and militarily powerful nation that challenges US commercial and military leadership. Unlike the US, China has embraced the idea that national security depends on commercial technology (semiconductors, drones, AI, machine learning, autonomy, biotech, cyber, semiconductors, quantum, high-performance computing, commercial space access, and others). .) They did what they said. Military/civilian integration – Building a dual-use ecosystem by combining their commercial technology companies with their defense ecosystem.
China has taken the past three 5-year plans as national priorities to invest in critical technologies (semiconductors, supercomputers, Al/ML, quantum, space access, biotech). They have built a sophisticated public/private financing ecosystem to support these plans. China’s technology funding ecosystem includes more than $700 billion in regional investment funds (called civil/military guidance funds). These are investment vehicles through which central and local government agencies jointly invest with private venture capital and state-owned enterprises. They are tightly integrated with their defense ecosystem to help critical civilian companies develop military equipment and strategic surprises. (Tai Ming Cheng’s book is an excellent description of the system.)
The United States has nothing to compare.
In contrast, for the past several decades planning the American economy has been left to the “market.” Guided by economic theory from the Chicago School of Economics, the premise is that free markets better allocate resources in an economy and that little, or no, government intervention is optimal for economic prosperity. For the past several decades in the US, we have run our economy on this theory as a bipartisan experiment. Maximizing profits above all else led to mass outsourcing of manufacturing and general industries to cut costs. Investors shifted away from long-term capital investments (eg social media, e-commerce, gaming) to investing heavily in fast and high-yield industries, rather than hardware, semiconductors, advanced manufacturing, transportation infrastructure, etc. The result was by default. , private equity and venture capital were the definitive decision-makers of American industrial policy.
As the Soviet Union and America were the only superpowers, this “first advantage” strategy was “adequate” because no other country could match our technical superiority. That changed when we weren’t paying attention.
China’s ambitions and strategic wonders
In the first two decades of the 21st century, when the US focused on fighting non-state governments (ISIS, al-Qaeda, etc.), US policymakers could not grasp China’s size, scope, ambition, and national commitment to surpass the US. Global leader in technology. Not just in “A” technology, but in everything that is critical to our national and economic security in this century.
China’s top-down national industrial policy is de-planning, out-of-work and out-of-pocket costs. By some estimates, China may become a leader in several critical technology sectors sooner than we think. While China’s investments in technology have often been wasteful and wasteful, the sum of these technological investments has yielded consistent results. Systematic surprises For the US – hypersonic, ballistic missile warheads such as aircraft carriers, fractional ballistic missile systems, rapid advances in space, semiconductors, supercomputers and biotech… along with more surprises – all this is aimed at gaining commercial dominance from the US on both sides. And in the military.
Limits and obstacles to China’s dominance
However, the US has advantages that China does not have: capital markets that can be stimulated without coercion, untapped creativity willing to help, labor markets that can help, university and corporate research and research still superior, etc. At the same time, there are a few cracks. They are showing superiority in technology in China; The arrest of some of their most successful entrepreneurs and investors, “extreme” technology (gaming, online learning) and a slowdown in listing on China’s version of the NASDAQ, the Shanghai Stock Exchange’s Star Market – could indicate the party. Advocating for an “anything goes” approach to bypassing the US, the US Commerce Department has also begun banning China from exporting critical equipment and components needed to build its technology ecosystem.
Billionaires and venture capital funding defensive innovation
In the US DoD, the traditional suppliers of defense equipment, technologies, and weapons—prime contractors and federal laboratories—are not leaders in many of these emerging and disruptive technologies. And the Ministry of Defense has world-class people and organizations It’s for a world that doesn’t exist now.. (The inability to rapidly acquire and deploy business systems requires organizational reform on the scale of the Goldwater/Nichols rule, not reform.)
In many areas, technological innovation now falls to commercial companies. From a coherent US national investment strategy on emerging and disruptive technologies in the US (think CHIPS Act times ten), billionaires in the US have launched their own initiatives – Elon Musk – SpaceX and Starlink (reusable rockets and space-based broadband internet). , Palmer Lucky – Anduril (AI and Machine Learning for Defense), Peter Theil – Palantir (Data Analytics). And in the past few years, a series of defense-oriented venture funds – Shield Capital, Lux Capital and others – have emerged.
But it’s not a sustainable strategy based on billionaires with a vested interest in defense, and venture capital invests in businesses that are likely to be profitable in 10 years or less. This means that technologies that may take decades to mature (integration, activities in space, new industrial processes,…) are caught and die in the “valley of death”. Attempts to bridge this valley of death will find tech companies relying on government capital. These programs (DIU, In-Q-Tel, AFWERX, and others) are limited in scope, time, and success. In measure. These government investment programs have failed to promote these emerging and impactful technologies for four reasons.
- Government agencies have limited access to senior investment talent to help them make sophisticated technical investment decisions.
- Government agencies lack the marketing skills to help founders turn technical ideas into businesses.
- While the Department of Defense encouraged the start-up of new jobs, it could not match the procurement dollars to expand them. There is no coherent DoD strategy for creating new prime contractors around these new and disruptive technologies.
- No private or public funds act as “patient capital” – investing in critical deep technologies that can take more than a decade To cook and measure
American Frontier Fund
Today, a private equity fund is trying to solve this problem. Gilman Louis, founder of In-Q-Tel, has launched American Frontier Fund (AFF). AFF plans to raise $1 billion in “patient private capital” from public and private sources. Structuring their fund as a charity allows them to focus on long-term investing, not just what maximizes their profits. These investments lead to large commercial and dual-use companies focused on the national interest.
They’ve built an experienced team of venture capitalists (I’ve known Gilman Lewis and Steve Weinstein for decades), a world-class chief scientist, a startup incubation team, and bring a unique and deep understanding of the intersection. National Security and Emerging and Disruptive Technologies.
AFF is the most promising effort I’ve seen in tackling long-term challenges in funding and addressing emerging and disruptive technologies.
The concern is whether the rest of the 21st century will be determined by a dictator who wants to impose a dystopian future on the world, or whether free nations can decide their own future.
These are tough problems to tackle, and no single fund can absorb the huge investments China is making, but the AFF’s market-oriented approach combined with measures to stop government re-engagement in industrial policy could tip the scales. Our favor.
We hope they succeed.
File under: National Security |
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