Microsoft invests $1.5 billion in AI firm G42 which faces U.S. scrutiny for China ties

Microsoft will invest $1.5 billion into G42, an artificial intelligence firm based in the United Arab Emirates, as the U.S. giant looks to strengthen its position in the technology amid fast-rising competition.

Microsoft President Brad Smith will join the board of directors of G42. The investment expands an existing partnership between the two firms, with Microsoft now taking a minority stake.

G42 will run its AI applications and services on the Microsoft Azure cloud service, as well as deploy Microsoft's cloud offerings.

G42 runs data centers and sells AI applications. The company has developed an Arabic large language model called Jais, which will be offered via Azure.

The deal itself is highly unusual. The commercial partnership is "backed by assurances to the U.S. and UAE governments through a first-of- its-kind binding agreement to apply world-class best practices to ensure the secure, trusted, and responsible development and deployment of AI," according to Microsoft.

The U.S. and UAE governments appeared to be heavily involved in the deal.

"Both companies will move forward with a commitment to comply with U.S. and international trade, security, responsible AI, and business integrity laws and regulations," Microsoft said.

"The work on these topics is governed by a detailed Intergovernmental Assurance Agreement between G42 and Microsoft that was developed in close consultation with both the UAE and U.S. governments."

G42 Chairman Sheikh Tahnoon bin Zayed Al Nahya is also the national security advisor of the UAE.

The government's involvement comes after months of scrutiny on G42 for its links to China. In January, House Rep. Mike Gallagher, R-Wi., chairman of the U.S. Select Committee on the Chinese Communist Party, called on the Commerce Department to "closely examine" G42 to see whether it should be included on a trade export blacklist.

Gallagher alleges that G42 maintains relationship with blacklisted Chinese firms, such as Huawei, and that it works with China's military and intelligence services.

In January, G42 "categorically" denied the allegations.

"In the field of advanced technologies, we have pursued a commercial strategy since 2022 to fully align with our U.S. partners and not to engage with Chinese companies," the company said at the time.

G42 itself has reportedly invested in Chinese firms, including TikTok owner ByteDance.

The Microsoft-G42 deal will give a big boost to the UAE, which has been trying to establish itself as a key technology hub in the Middle East, especially in areas such as artificial intelligence and cryptocurrency.

In February, OpenAI CEO Sam Altman said the UAE could serve as the world's "regulatory sandbox" to test AI, in what appeared to be praise for the country's rules around the technology.

Microsoft and G42 on Tuesday said they will set up a $1 billion fund for developers in the UAE and broader region to help support the development of skilled AI workforce.