Trade-offs of the U.S. Government Taking Equity Stakes
These equity positions seek to lessen U.S. dependence on China, help reshore manufacturing, and provide support for innovative U.S. companies. Yet, if not constrained, they can also pose risks, including the potential politicization of corporate decisionmaking.
Pros
Strengthens National Security and Supply Chain Resilience: An equity stake is one tool to allow the government to directly support firms in sectors where reliance on foreign suppliers—especially China—poses strategic vulnerability. This is particularly relevant for semiconductors and critical minerals, which are vital to both technology and defense systems.
Provides Capital and Liquidity: Many of these sectors—critical mineral processing, advanced semiconductor manufacturing, and nuclear energy—require very large amounts of capital as well as new infrastructure to execute long-term projects (e.g., reshoring). Government investment can help meet these capital needs, lowering risk and attracting private investors, thus providing support to industries crucial to national security—especially in sectors that are not currently economically viable, not least due to the industrial policies of U.S. competitors.
Signals Market Confidence That Can Attract Private Investment: U.S. equity stakes in private companies signal to investors that the company is a strategic asset to the United States, which may catalyze private investment. For example, since the enactment of the CHIPS and Science Act in 2022, over $450 billion in private investment has gone toward rebuilding domestic semiconducting manufacturing capabilities.
Maintains Competitiveness in Global Markets: U.S. firms increasingly compete against firms backed by strong industrial policies and government support—this is the case with China, South Korea, and Japan. Equity stakes in U.S. companies may help the United States to stay competitive in the global economy through the provision of more patient capital and political support.
Potential Financial Returns: These equity stakes and investments could potentially generate returns for the U.S. government if they are successful. This would offset the original cost of the investment to taxpayers, as with the highly successful “bailout” of the U.S. automotive industry in 2008.
Cons
Risk of Private Sector Politicization: With an ownership stake, the government may be able to exert influence over a company’s strategic direction, potentially forcing decisions that are not in the best long-term financial interest of the company or its shareholders (but may better serve national policy objectives). Although the Intel deal is structured as passive ownership, with no board representation, questions remain about the Department of Commerce’s potential influence going forward. There are also potential conflicts between the role of the government as an investor in a particular company and its role as a regulator (e.g., regarding export controls) of firms across the wider industry. Government equity positions may also create political dilemmas if the firm in question were to fail. For example, Republicans took advantage of the failure of Solyndra with its Department of Energy loan guarantee to bludgeon the Obama administration for its “industrial policy” failures, while ignoring the success of the loan guarantees to Tesla under the same program.
Risk of Cronyism: Cronyism refers to the “practice in which particular businesses receive preferential treatment from government authorities, often to the benefit of politicians” (or their friends and family). This preferential treatment could be in the form of advantageous loans or contracts, focused tax credits, or equity stakes on favorable terms. This may distort competition, stifle innovation, and potentially lead to monopolies or market concentration in strategic sectors. Furthermore, the selection process itself for equity stakes may erode public confidence if the choices seem to be driven by political connections rather than strategic merit.
No Guarantee of Success: Like any investment, there are substantial risks and no guarantee of success or profitability when the government takes an equity stake. Indeed, mixed ownership can lead to further instability when the owner’s interests are not aligned. Intel is not yet competitive with TSMC despite being a beneficiary of a grant from the CHIPS and Science Act, but its capital and market position have improved. Perhaps this is partly due to the government’s equity stake in the company, which was followed by substantial private investment. Still, capital alone cannot resolve the issues facing the company, particularly the uptake of its latest chips by major companies and improvements in its foundry business. Equity stakes might signal confidence, but they do not ensure success, though they may well facilitate success.
Conclusion
The move by the U.S. government to take equity stakes in private companies is a recognition of the reality of current dependencies created by China’s chokehold on the supply chain in critical sectors. The willingness to take activist measures to reduce those dependencies has a rationale at the strategic, economic, and national security levels.
While government equity stakes can be a pragmatic tool, the terms of their implementation are vital. In the case of Intel, the government currently holds a 9.9 percent equity stake but has no seat on Intel’s board of directors and has agreed to vote its shares in alignment with the company’s board on most matters. These conditions at present temper the fear of some critics about undue government influence and doubts about the government’s capability for active management of a company in a highly dynamic market environment. Looking to the future, these considerations need to be addressed upfront, in addition to the articulation of a clear economic and national security rationale for deploying this tool.
Fundamentally, the decision to inject public capital reflects a realization that, without such capital, in some strategic, capital-intensive sectors, profit-oriented U.S. companies are unlikely to be able to compete with publicly supported loss-absorbing foreign firms. It also reflects, however belatedly, the realization that the competition faced by U.S. companies in minerals, microelectronics, and elsewhere is often driven by well-funded industrial policies, most notably China’s, which by its scale and the breadth of its objectives poses strategic challenges of an unprecedented nature.
Sujai Shivakumar is the director and senior fellow of Renewing American Innovation at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Charles Wessner is a senior adviser (non-resident) for Renewing American Innovation at CSIS. Christina Tutino is an intern for Renewing American Innovation at CSIS.