Reimagining industrial policy for a technological cold war

Last month, the United States passed the CHIPS and Science Act, one of the first pieces of national industrial policy (government planning and intervention in a specific industry) in fifty years, in this case for semiconductors. After the celebratory champagne has been drunk and the confetti is floating on the ground, it helps to put the CHIPS Act into context and understand the work that government and private capital have left to do.

The United States is now engaged in a major power competition with China. It is a competition over which nation’s diplomatic, information, military, and economic system will lead the world in the 21st century. And the outcome will determine whether we face a dystopian Chinese future or a democratic one in which individuals and nations can make their own decisions. At the heart of this competition is leadership in emerging and disruptive technologies, running the gamut from semiconductors and supercomputers to biotech and blockchain and everything in between.

Chinese and American national industrial policy

Unlike the United States, China runs its industrial policy through five-year plans from the top down. The overall goal is to build China into a technologically advanced and militarily powerful state that can challenge US commercial and military leadership. Beijing, unlike Washington, has embraced the idea that national security is inextricably intertwined with commercial technologies. such as semiconductors, drones and artificial intelligence (AI). China has developed what it calls military-civilian fusion: a dual-use ecosystem built by closely linking its commercial technology companies with its defense ecosystem.

China has used its last three five-year plans to invest in critical technologies including semiconductors, supercomputers, AI, machine learning, access to space and biotechnology, making this effort a national priority. Furthermore, Beijing has built a sophisticated public-private financing ecosystem to support these plans. This technology financing ecosystem includes regional investment funds, known in China as civil-military oriented funds, which exceed $700 billion. These are investment vehicles in which central and local government agencies make investments that are combined with private venture capital and state-owned companies in areas of strategic importance. Through these efforts, China is closely linking critical civilian companies with its defense ecosystem to help develop military weapons and strategic surprises.

America has nothing comparable. On the contrary, during the last decades, the planning of the American economy was left in the hands of the “market”. Driven by the economic theory of the Chicago School of Economics, this premise is that free markets better allocate resources in an economy and that minimal or even no government intervention is best for economic prosperity. In a bipartisan experiment, the United States has run its economy on this theory for years. Optimizing profits above all else led to wholesale offshoring of manufacturing and entire industries to cut costs. Investors turned to making massive investments in industries with the fastest and largest returns without long-term capital investments (social media, e-commerce, and gaming, for example) instead of hardware, semiconductors, advanced manufacturing, transportation infrastructure, and other key aspects. industries. The result was that, by default, private equity and venture capital were the de facto decision makers in US industrial policy.

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With the demise of the Soviet Union and the rise of the United States as the sole superpower, this profit-first strategy was “good enough,” as there was no other nation that could match the technical superiority of the United States. That changed while we weren’t paying attention.

China’s strategic ambition and surprises

In the first two decades of the 21st century, as the United States focused on combating non-state actors, US policymakers failed to grasp the size, scale, ambition, and national commitment of China to overtake the United States as world leader in technology. Not just in “a” technology, but in all those that are critical to the national and economic security of the United States in this century.

China’s top-down national industrial policy means the United States is being out-planned, out-staffed, and out-spent. By some estimates, China could be the leader in a number of critical technology areas sooner than is commonly thought. While Chinese investment in technology has been redundant and wasteful at times, the sum of these investments has resulted in a number of “strategic surprises” for the United States, including hypersonic weapons, “carrier-killer” ballistic missiles and bombing systems. fractional orbital. as well as rapid advances in space, semiconductors, supercomputers, and biotechnology. More surprises seem likely, all of which will be driven by the goal of gaining commercial and military superiority over the United States.

Yet the United States has advantages that China lacks, such as capital markets that can be incentivized rather than coerced, untapped innovative talent willing to help, labor markets that can be improved, and university and corporate research institutions that still excel. At the same time, some cracks are showing in China’s march to technological supremacy. Beijing’s arrest of some of China’s most successful entrepreneurs and investors, its crackdown on “superfluous” technologies like video games, and the slowdown in trading on China’s version of NASDAQ, the Stock Exchange’s STAR Market from Shanghai, may indicate that the party is reining in its “anything goes” approach to passing the United States. Simultaneously, the US Department of Commerce began banning the export of critical equipment and components that China has needed to build its tech ecosystem.

Billionaires and venture capital?

The traditional providers of defense tools, technologies, and weapons to the Department of Defense (the prime contractors and federal laboratories) are no longer the leaders in many of these emerging and disruptive technologies. And while the Department of Defense has world-class people and organizations, it is designed for a world that no longer exists. The Pentagon’s inability to rapidly acquire and implement commercial systems requires organizational redesign on the scale of the Goldwater-Nichols Act, not just reform.

Technological innovation in many areas now falls to commercial companies. Instead of a coherent US national investment strategy in emerging and disruptive technologies (think CHIPS Act multiplied by ten), US billionaires have started their own initiatives. Elon Musk’s SpaceX and Starlink companies make reusable rockets and space-based broadband internet, Palmer Lucky’s Anduril develops AI and machine learning defense technology, and Peter Theil’s Palantir focuses on data analytics. And, in recent years, a number of defense-focused venture funds have sprung up: Shield Capital, Lux Capital and others.

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However, relying on defense-interested billionaires is not a sustainable strategy, and venture capital invests in businesses that can turn profitable in ten years or less. This means that technologies that could take decades to mature are trapped and die in a “valley of death.” Attempts to bridge this valley of death often find technology companies dependent on government capital. These programs are limited in scope, time, and success. to scale. Such government investment programs have largely failed to scale these emerging and disruptive technologies for three reasons.

First, government agencies have limited access to top investment talent to help them make sophisticated technical investment decisions.

Second, government agencies lack the marketing skills to help founders turn technical ideas into commercial ventures.

Third, no private or government fund functions as “patient capital,” investing in critical deep technologies that can take more than a decade to mature and scale.

United States border background

Today, a private equity fund is trying to solve this problem. Gilman Louie, the founder of In-Q-Tel, has started America’s Frontier Fund (AFF). This new fund will invest in key deep technologies to help the United States keep pace with the rush of Chinese capital focused on this area. AFF plans to raise $1 billion in “patient private capital” from public and private sources and focus entirely on identifying critical technologies and strategic investments. Establishing the fund as a non-profit organization allows it to focus on long-term investments for the country, not just what is convenient to maximize profits. This will ensure that these investments become large dual-use and commercial enterprises focused on the national interest.

AFF has an extraordinary team of experienced venture capitalists, a world-class chief scientist, and a start-up incubator team. Importantly, this team comes with a unique and deep understanding of the intersection of national security and emerging and disruptive technologies.

AFF is the most promising effort I have seen to address the long-term challenges of financing and scaling emerging and disruptive technologies.

What is at stake is whether the rest of the 21st century will be determined by an authoritarian government willing to impose a dystopian future on the world, or by free nations capable of determining their own future.

These are difficult problems to solve, and no single fund can take on the massive investments China is making. However, it is possible that the BFA’s market focus, combined with the government’s hesitant steps to re-engage in industrial policy, could tip the scales in our favour.

Here’s hoping they succeed.

Steve Blank is an adjunct professor at Stanford and co-founder of the Gordian Knot Center for National Security Innovation. He has been described as the Father of Modern Entrepreneurship. Credited with launching the Lean Startup movement and curricula for the National Science Foundation Innovation Corps and Hacking for Defense and Diplomacy, he is the author of The four steps to Epiphany Y Start-up owner’s manual that revolutionized the way startups were built.

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