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Sovereign Investments: Buying Influence or Interest?

August 30, 2019
International Political Economist, Robert Gilpin, claimed that in a global economy, states use economic forces to further their national interests.[1] Recently, this very concern has magnified with the proliferation of sovereign wealth funds (SWFs) and foreign direct investments (FDIs). SWFs are government-controlled assets that grow when states experience excess liquidity from budgetary surpluses.[2] SWFs are useful investment tools, often used for development, savings, and as stabilization funds to protect against economic volatility.[3] In contrast, FDIs are investments made by individual firms that usually exert direct control over operations. Ultimately, both FDIs and SWFs raise similar questions regarding the potential influence of foreign capital in local markets.

China recently raised concern when it announced, “Made in China 2025,” an industrial policy that aims to make it a dominant player in high-tech manufacturing.[4] Part of China’s policy encourages both private and state-owned Chinese firms to invest in foreign countries.[5] In response, congress passed a bill to expand the powers of the Committee on Foreign Investment in the United States (CFIUS), a body that regulates foreign investments in the United States. Its main purpose is to review transactions and identify national security risks.[6] In 2018, the Foreign Investment Risk Review Modernization Act (FIRRMA) was signed into law. Functionally, FIRRMA widened the range of transactions CFIUS oversaw and elongated its review timeline.[7]

In addition to China, the SWFs of Arab nations are a growing presence in the global financial market. Due to large surpluses from oil-rich industries, Arab nations have grown substantial SWFs. The Kuwait Investment Authority (KIA) for example, aims to gain returns form this abundance and ultimately create an “alternative source of income for when the country’s oil resources are depleted”.[8] In 2017, the KIA had holdings as high as $527 billion, nearly doubling since 2009. Similarly, the Sovereign Wealth Fund Institute found that the market size of SWF investments has doubled from 2007 to 2014.[9]

However, recent fears of sovereign investments focus less on economic competition and more on potential foreign policy influence. Some SWFs have admitted to using non-financial factors in determining their investment choices. For example, Norway’s Government Pension Fund only makes investments once an “ethical screening,” which includes environmental, labor, or transparency standards, is passed.[10] The economic goals of SWFs and FDIs are thus argued to be inherently motivated by political goals. These goals could potentially have both positive and negative intentions. China and other Arab nations investing heavily in the West, may create an economic interdependence that leads to common goals of political prosperity.[11] Conversely, however, the threat of divestment can be used to pressure foreign actors to make certain political decisions.[12]

The early growing public fear of SWFs led to the signing of the “Santiago Principles” in late 2008. The Santiago Principles were a code signed by 26 SWFs that helped assure SWFs only considered economic and financial factors in their investments, unless publicly admitted otherwise.[13]

Despite these early fears, many researchers have concluded that there is little evidence confirming political motives in sovereign investments. A study by the Brookings Institution in 2011 found that most SWFs are “inherently cautious, focused on capital preservation, asset diversification predictable returns and mitigation of political risk.”[14]

In fact, the 2011 Brookings study recommends that the U.S. welcome these sovereign investments, especially given its budget deficit. Furthermore, it has been shown that foreign capital has been extremely beneficial for the U.S. in the past. SWFs were particularly useful in bailing out financial institutions during the 2008 financial crisis.[15] For example, the Abu Dubai’s SWF invested $7.5 billion into CitiGroup in 2007, and Singapore’s SWF invested $5 billion into Merrill Lynch.[16]

In 2013, China launched the Belt and Road Initiative (BRI), which planned to promote infrastructure development in Asia, Africa, and Europe. Some argue that these large investments are a way for China to establish political influence and dominance.[17] Others state that BRI has solely economic motives.[18] Unlike SWFs and FDIs, the BRI is a low-interest loan, however its motives continue to raise concerns regarding foreign capital’s influence in the geopolitical sphere. While SWFs and FDIs have shown limited political interference, little is known of how these growing debts to China through the BRI will impact future global structures.[[19]

While the U.S. has established fears regarding the influence of foreign capital, the reality remains: the U.S. is the largest beneficiary of foreign investment.[20] As previous researchers have stated, it is essential that the U.S. determine whether expanding protectionist policies in response to growing foreign capital investments is the smartest economic strategy. Regardless, an examination of foreign investments should balance both anxieties about its implications as well as a recognition of its potential.

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  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

References

  [1]http://repozytorium.uni.lodz.pl:8080/xmlui/handle/11089/20581, page 26

  [2]https://www.yalelawjournal.org/forum/foreign-direct-investment-by-sovereign-wealth-funds-

  [3]http://www.revistadestatistica.ro/wp-content/uploads/2014/10/RRS_03_2014_A6.pdf

  [4]https://www.cfr.org/backgrounder/made-china-2025-threat-global-trade

  [5]Ibid.

  [6]https://home.treasury.gov/policy-issues/international/the-committee-on-foreign-investment-in-the-united-states-cfius

  [7]https://www.treasury.gov/resource-center/international/Documents/Summary-of-FIRRMA.pdf

  [8]https://carnegieendowment.org/files/arab_sovereign_wealth_funds.pdf, page 5

  [9]https://www.swfinstitute.org/research/sovereign-wealth-fund

  [10]http://repozytorium.uni.lodz.pl:8080/xmlui/handle/11089/20581

  [11]https://www.yalelawjournal.org/forum/foreign-direct-investment-by-sovereign-wealth-funds-

  [12]http://repozytorium.uni.lodz.pl:8080/xmlui/handle/11089/20581

  [13]https://carnegieendowment.org/files/santiago_principles.pdf, page 4

  [14]https://www.brookings.edu/research/rebuilding-america-the-role-of-foreign-capital-and-global-public-investors/

  [15]https://www.stimson.org/content/new-foreign-menace-sovereign-wealth-funds-and-us-national-security

  [16]Ibid.

  [17]https://www.piie.com/publications/piie-briefings/chinas-belt-and-road-initiative-motives-scope-and-challenges

  [18]https://www.cfr.org/backgrounder/chinas-massive-belt-and-road-initiative

  [19]Ibid.

  [20]https://www.cfr.org/backgrounder/foreign-investment-and-us-national-security

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