Microsoft Corp. (Nasdaq: MSFT) will invest $1.5 billion in the United Arab Emirates’ top artificial intelligence firm, G42, after the Abu Dhabi-based company worked out an unusual deal with the U.S. government to end any cooperation with China.

Microsoft logo

The agreement follows behind-the-scenes negotiations between the U.S. government and the Middle Eastern firm, in which G42 agreed to divest from China and pivot to American technology. G42, a leader in the UAE’s push into AI, had come under scrutiny for alleged ties to blacklisted Chinese companies and its government.

The Microsoft investment will align a key Middle East firm with the U.S. as Washington seeks to curtail Chinese access to AI technologies. As part of the accord, Microsoft President Brad Smith will join G42’s board, and G42 will use the U.S. software maker’s Azure cloud for its AI applications. 

“Microsoft got strong encouragement from the US government to move forward in this process,” Smith said in an interview with G42 Chief Executive Officer Peng Xiao. “That reflects a recognition by the U.S. government of the importance of the relationship between the two countries and the importance of continuing to encourage responsible companies like G42 and Microsoft really be at the forefront, not only of the technology itself, but of world-leading security and safety and responsible AI standards.”

G42 held talks with the U.S. Commerce Department’s Bureau of Industry and Security and came to an understanding last year, according to people familiar with the discussions. Under the arrangement, G42 agreed to pare back its presence in China or face potentially punitive measures from Washington, they said. 

The firm had been criticized in Washington, with one key lawmaker calling for sanctions because of alleged links to Chinese businesses, including Huawei Technologies Co. The firm “categorically” denied that it had “connections to the Chinese government and their military-industrial complex.”

G42 said it has “pursued a commercial strategy since 2022 to fully align with our U.S. partners and not to engage with Chinese companies.”

The Abu Dhabi firm has businesses spanning everything from cloud computing to driverless cars. It’s part of the $1.5 trillion empire of UAE National Security Adviser Sheikh Tahnoon bin Zayed Al Nahyan.

The Microsoft investment, an expansion of an existing partnership between the two companies, gives the U.S. tech giant a minority stake in G42, said Xiao, who declined to disclose financial terms or say how much G42 would spend on Microsoft’s cloud services. Redmond, Wash.-based Microsoft and G42 will also set up a $1 billion fund for developers.

In a later stage of the deal, Microsoft will host some of its own applications in G42’s data centers and use the relationship as a way to reach customers in Africa and Central Asia, Smith said.

“There are markets today where Microsoft and really no American technology company has a real data center presence,” he said. “This is the kind of partnership that can really bring the cloud and AI to the global south probably a decade faster than would otherwise be the case.”

The investment agreement, signed when Smith visited Abu Dhabi earlier this month, is the product of a year’s worth of talks that included coordination with government officials in both countries. In February, G42’s Xiao said in an interview that the company would cut its presence in China, and pledged to invest in key Western markets.

That pivot came against the backdrop of broader U.S. pushback on entities perceived to have close ties with Beijing. Officials in President Joe Biden’s cabinet were reviewing more than half a dozen acquisitions, people familiar with the matter said last year, including deals from Mubadala Investment Co., which owns a stake in G42.

G42’s partnerships include one with artificial intelligence developer OpenAI, creator of ChatGPT, which is teaming up with the Gulf firm as part of an expansion within the UAE and the broader region. San Francisco-based OpenAI — whose biggest investor is Microsoft — has held discussions with G42 to raise funding for a new chip venture, Bloomberg reported last year, but the current status of those talks is unclear. 

G42 isn’t looking for more investments, but it is seeking additional partnerships, Xiao said. “Through this anchor relationship with Microsoft, we will be able to work with a lot more global partners in the AI and cloud-computing domain.”