Chinese Investment in Israeli Technology and Infrastructure
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C O R P O R A T I O N SHIRA EFRON, KAREN SCHWINDT, EMILY HASKEL Chinese Investment in Israeli Technology and Infrastructure Security Implications for Israel and the United States For more information on this publication, visit www.rand.org/t/RR3176 Library of Congress Cataloging-in-Publication Data is available for this publication. ISBN: 978-1-9774-0435-0 Published by the RAND Corporation, Santa Monica, Calif. © Copyright 2020 RAND Corporation R® is a registered trademark. Cover design: Rick Penn-Kraus Limited Print and Electronic Distribution Rights This document and trademark(s) contained herein are protected by law. This representation of RAND intellectual property is provided for noncommercial use only. Unauthorized posting of this publication online is prohibited. Permission is given to duplicate this document for personal use only, as long as it is unaltered and complete. Permission is required from RAND to reproduce, or reuse in another form, any of its research documents for commercial use. For information on reprint and linking permissions, please visit www.rand.org/pubs/permissions. The RAND Corporation is a research organization that develops solutions to public policy challenges to help make communities throughout the world safer and more secure, healthier and more prosperous. RAND is nonprofit, nonpartisan, and committed to the public interest. RAND’s publications do not necessarily reflect the opinions of its research clients and sponsors. Support RAND Make a tax-deductible charitable contribution at www.rand.org/giving/contribute www.rand.org Preface Relations between China and Israel have expanded rapidly since the early 2000s in numerous areas, including diplomacy, trade, invest- ment, construction, educational partnerships, scientific cooperation, and tourism. Israel seeks to expand its diplomatic, economic, and stra- tegic ties with the world’s fastest-growing major economy and diver- sify its export markets and investments away from the United States and Europe. China seeks Israel’s advanced technology and values Isra- el’s location as part of the Belt and Road Initiative. In recent years, Chinese investments in Israel have grown substantially. They include investments in high-tech companies that produce sensitive technolo- gies, as well as the construction and operation of key infrastructure projects. Chinese investment in sensitive technologies and construction of major Israeli infrastructure present distinct concerns for Israel and the United States. This report, born out of a broader internally funded RAND Cor- poration study on Israeli-Chinese ties, includes an examination of the extent and nature of Chinese investments into Israeli technology and infrastructure and a review of the security implications these pose for Israel and the United States. It is an exploratory effort, rather than a comprehensive research endeavor, relying on unclassified and publicly available materials as well as interviews with over a dozen Israeli and U.S. current and former government officials, subject-matter experts, and business executives. We found that the primary concern regard- ing investment relates to Chinese ownership of companies that might possess sensitive technology or data; concerns over construction are focused on the use of infrastructure projects to further Chinese foreign iii iv Chinese Investment in Israeli Technology and Infrastructure policy goals. The operation of infrastructure projects affords China unique surveillance opportunities and possibly economic and political levers of influence. The report concludes with a set of open-ended questions that merit further investigation to better understand the magnitude of risks associated with growing Chinese investment in the Israeli market. It should be of interest to policymakers, analysts, and academic research- ers studying Israel, U.S.-Israel relations, and China and that country’s international relations. This research was sponsored by the Office of the Secretary of Defense and conducted within the Cyber and Intelligence Policy Center of the RAND National Defense Research Institute (NDRI), a federally funded research and development center (FFRDC) sponsored by the Office of the Secretary of Defense, the Joint Staff, the Uni- fied Combatant Commands, the Navy, the Marine Corps, the defense agencies, and the defense Intelligence Community. For more information on Cyber and Intelligence Policy Center, see www.rand.org/nsrd/ndri/centers/intel or contact the director (con- tact information is provided on the webpage). Contents Preface ............................................................................. iii Figures and Tables ...............................................................vii Summary .......................................................................... ix Acknowledgments ............................................................xxvii Abbreviations ...................................................................xxix CHAPTER ONE Introduction ....................................................................... 1 Evolution of Israeli-Chinese Defense Ties ..................................... 2 Data Collection and Methods .................................................... 5 Organization of this Report ...................................................... 7 CHAPTER TWO China’s Outbound Investment Strategy ...................................... 9 Background: Evolution of China’s Policy on Outbound Foreign Investment ..................................................................... 9 Chinese Technology Goals .......................................................12 How Israel Fits with China’s Policy Goals .....................................17 CHAPTER THREE Foreign Investment and Regulatory Policies in Israel ...................21 Why Engagement with China Is Attractive to Israel .........................21 Israeli Regulation on Foreign Investment ..................................... 23 CHAPTER FOUR Chinese Technology Investment and Construction in Israel ............35 v vi Chinese Investment in Israeli Technology and Infrastructure Overview of Chinese Investment and Construction Activity................35 Chinese Entities ...................................................................39 Israeli Companies .................................................................55 Conclusion .........................................................................62 CHAPTER FIVE Security Risks for Israel and the United States ............................63 Government or Military Connections of Chinese Companies Doing Business in Israel .............................................................63 Cyber and Intelligence Threats Arising from Chinese Investments and Construction Activities ..................................................... 66 Incompatibility Between Israeli and Chinese Interests in the Middle East ...................................................................73 Impact on the Israel-U.S. Relationship .........................................75 Conclusion .........................................................................79 CHAPTER SIX Concluding Thoughts and Research Gaps for Further Study ...........81 Follow-On Questions ........................................................... 84 APPENDIX Chinese Investments in Israel ................................................ 87 References ....................................................................... 101 Figures and Tables Figures 4.1. Known Chinese Investment in Israel, 2007–2018 ...............37 4.2. Aerial Image of the Ashdod Port Area ........................... 46 4.3. Map of the Red Line of the Tel Aviv Rail Built by China Railway Tunnel Group ..............................................55 5.1. China’s Dual-Use Ports .............................................76 Tables 4.1. Overview of Chinese Companies That Have Invested or Built Infrastructure in Israel ....................................... 40 4.2. Overview of Israeli Technology Deals ............................ 56 4.3. Overview of Israeli Venture Capital Deals ........................59 A.1. Chinese Investments in Israel ..................................... 88 vii Summary Bilateral ties between Israel and China began in 1950, but the two countries recently substantially expanded their relationship. China is interested in Israeli advanced technology, wants to learn from Israel’s success in innovation, and considers Israel an important player within the Middle East and a useful node in China’s ambitious Belt and Road Initiative (BRI)—China’s vision to connect Europe, Asia, and Africa via land and sea. Israel, for its part, seeks to diversify its relationships beyond its traditional partners, the United States and Europe, and wants to benefit from enhanced ties with the world’s fastest-growing major economy. Since 2013, Chinese companies have increasingly become more involved in Israel by purchasing Israeli companies and successfully bidding on key infrastructure construction projects. Such activity has been significant in the high-tech sector, in which Chinese investment of venture capital (VC) doubled from $500 million in 2014 to $1 billion in 2016. Israeli tech startups received Chinese investment of $325 mil- lion in the first three quarters of 2018, up 37 percent from a year earlier.1 This exploratory research is a deep dive into an issue—the secu- rity implications of Chinese investments in Israeli technology and infrastructure—raised in a 2018 RAND Corporation