China's technology grab: shifting from being a technology taker to a technology licenser.

• Author: Heilmann, Sebastian

The merger and acquisition activities of mainland Chinese firms now make headlines on the front pages of the world's top newspapers. With China accounting for 15 percent of all M&A transactions globally in the first quarter of this year, M&A advisers are understandably enthusiastic about the emergence of China as a major new buyer with deep pockets.

In an open global economy, Chinese foreign direct investment activities should not be much of a concern. Acquiring ownership stakes in large Western firms helps the Chinese get more exposure to global markets, management, and governance practices.

However, some important questions need to be asked. This starts with seeing much more clearly what the funding sources for these deals are. Not only are many of the Chinese companies on the acquisition trail already highly indebted, the actual sources of Chinese FDI are often impossible to determine. They could be private or public (via a state-owned enterprise), or a mix of the two that is impossible to decipher.

In addition, either source could be used to disguise a politically motivated national agenda. The Chinese government has a hand in many transactions and operates on the basis of very specific, strategically targeted investment plans. Although a lot of attention has recently been paid in Western media to Chinese attempts to go trophy hunting after marquee Western names, specifically in the hotel and tourism sector, such transactions are only a sideshow.

It is much more relevant to consider the country's "Made in China 2025" strategy as a roadmap. The overriding goal of this strategy is to realize China's ambition to move well beyond serving as "the world's factory." China wants to shift from largely being a technology taker to becoming a technology licenser.

The realization of this goal--shared by the leadership and the population at large--involves the acquisition of as many technologies as possible. One key target is niche technologies and so-called "hidden" champions. That is what makes German Mittelstand companies so attractive to the Chinese. The same is true for smaller U.S. firms with promising emerging technologies who are facing the valley of death--that is, running out of money before they can make their technology commercially viable.

Because the targeted acquisitions often are an integral part of China's industrial policy, they are driven by far more than mere commercial considerations. And if this approach ends up wasting some...