Security Externalities and Dual-Use Technology: A Quick Note on Definitions
The concepts of security externalities and dual-use technology are crucial to evaluating the relevancy of various literatures to my research question. I draw on William Norris’ definition of security externalities as “the notion that a given transaction may produce [security] effects that are not fully internalized among the parties that are directly conducting the transactions.” That is, they denote the military consequences of a commercial activity. Dual-use technology refers to technology that can be applied in both military and economic contexts. The European Commission defines general dual-use goods as any “products and technologies normally used for civilian purposes but which may have military applications.”
Rational Giants: Unifying Assumptions from the Literature
All of the scholars I survey in this chapter begin with a rationality assumption, suggesting that a rational actor model is a useful starting point for my own analysis. They posit that the actions of players in the international system, whether states or companies, can be understood through the lens of cost-benefit analysis. Academics, of course, disagree on whether the scope of these costs and benefits is limited to economic considerations or includes security concerns in as well, but their approach is commonly steeped in rational choice theory. With the exception of the authors from the profit-maximization school of thought, furthermore, scholars adopt the state as their unit of analysis. Domestic audiences or international systemic factors like the global distribution of power do not factor into their arguments. The mercantilist school of thought, for instance, would not expect a state to behave much differently in a bipolar or a multipolar world. The scholars I examine also assume that states are powerful and, with the right tools, are capable of shaping the decisions of commercial actors. Finally, most IPE and security studies authors acknowledge the link between a state’s economic behavior and security concerns, but they differ on the nature of that relationship. It is to this debate that I first turn.
Theories of the Relationship Between Economics and Security
It’s the Economy, Stupid: Profit-Maximization
Scholars who belong to the profit-maximization school of thought would explain Chinese investment in the US as simply rational economic behavior: firms that do not exclusively work to maximize profits cannot long survive since they will be outcompeted by more efficient rivals. The nationality of a company is accordingly irrelevant to understanding its actions. Peter Nolan, for instance, points out that foreign investment is characteristic of all large multinational corporations. If Chinese technology companies pursue investment opportunities abroad, he asserts, they do so to grab global market share just like their non-Chinese competitors. Edward Graham and Paul Krugman similarly question whether foreign investors are any different from domestically headquartered companies in a globalized international economy. They rebuff the notion that British Petroleum (BP) acts differently from Exxon because the former files taxes in London and the latter in Texas. Graham and Krugman therefore conclude that the rationale driving foreign investment in the US is no different from that of American investment abroad: both arise because investors have a comparative advantage that outweighs the cost of operating in an overseas market. Authors who adhere to the profit-maximization paradigm thus refute the notion that political factors shape outbound investment to any significant degree. In their view, there is no relationship between the actions of firms and the security concerns of states.
Most scholars who apply this theoretical framework to China concentrate on Chinese overseas oil, rather than technology, investment. These academics assert that even companies with strong political ties, such as State-Owned Enterprises (SOEs) are profit-oriented entities whose overriding incentives are to generate returns, not advance Chinese Communist Party (CCP) policy. Erica Downs argues that Chinese oil companies look abroad for lucrative deals that are simply unavailable in China. In particular, a lack of unexplored oil reserves at home pushes them to search overseas for exploration and production opportunities. If Chinese petroleum firms do not invest abroad, therefore, they risk becoming uncompetitive in the global hydrocarbon market.
This account faces serious objections from scholars who argue that it is incompatible with the reality of Chinese state capitalism and industrial policy. BP and Exxon may prioritize profit maximization, but the incentives Huawei faces are quite different. Kenneth Lieberthal and Mikkal Herberg point out that the Chinese government regards certain industries as “too important to leave to global markets.” The resulting government intervention is most visible in the raw materials and technology markets, which are the cornerstones of China’s strategy to become an economic and military superpower. SOEs and private Chinese firms in these sectors are heavily subsidized through large capital injections from state-owned banks. The neoclassical economic assumption of perfect competition fails to hold under these circumstances.
The CCP, furthermore, works to ensure that firms respond to political as well as economic imperatives. Bruce Dickson suggests in his 2008 study of the Chinese private sector that Chinese entrepreneurs have been systematically co-opted by the CCP and now constitute one of its key bases of political support. Michael Pillsbury likewise claims that Chinese SOEs function primarily as instruments of Chinese industrial policy. Not only do SOE charters almost always align with the government’s strategic priorities, but the CCP is also in charge of selecting most high-level SOE managers, often pulling them from the Chinese intelligence or military apparatus. Even Graham and Krugman grant that investors are not immune from political influence. They concede that, historically, foreign companies have sometimes acted as a “fifth column” for their parent nations: “There is evidence that US-based multinational oil companies actively worked with the US Department of State during the late 1930s and early 1940s to prevent Japan from building up petroleum reserves.” This admission is even more significant than Graham and Krugman acknowledge. Historically, Washington has embraced laissez-faire capitalism and intervened sparingly in industry. China’s state-centered approach to economic organization lies at the opposite end of the spectrum. If the US government has conscripted firms to advance its political agenda, therefore, we can certainly expect China to do the same. Profits may well factor into Chinese investment in US technology companies, but the argument that firm-level economic considerations alone determine Chinese investment patterns is implausible.