Welcoming versus restricting Sovereign Wealth Fund Investment

TEAM 2

Case Overview
Sovereign Wealth Fund (SWF) = state-owned investment fund composed of financial assets such as stocks, bonds, real estate, or other financial instruments funded by foreign exchange assets First SWF created in 1953 in Kuwait Presently, fostered also by the developments during the financial crisis, SWF represent 10% of global in investments flow Examples of SWF large-scale investments:

2007 - Abu Dhabi Investment Authority - $7.5 billion (4.9% of equity) into Citigroup 2008 China Investment Corporation (CIC) - $5 billion (10% of equity) into Morgan Stanley

Debate Pros and Cons

Sovereign Wealth Fund investment has both benefits and costs Pros During the crisis SWF investments contributed to rescue firms affected by the financial crisis alternative solution to government bailouts Most SWF investments represent passive investments (free cash with little strings attached) Cons Concerns with regard to national security - SWF may be politically rather than economically motivated Inadequate transparency

Why SWF invest in developed countries like US?

Industry-based considerations corporate governance System
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Approximately 80% of listed US firms are characterized by diffused ownership with numerous small shareholders none with a dominant level of control separation of ownership and control
Corporations in US rely mostly on exit-based external mechanisms in enhancing governance Shareholder capitalism view of capitalism most fundamental purpose for firms to exist is to serve the economic interest of shareholders

Resource-based considerations Managerial human capital (know-how) Institution-based considerations - Formal institutional frameworks - protection of shareholders rights - Informal institutional frameworks impact of globalization

SWF Evolution
At the beginning governments in several developed economies erected anti-SWF barriers and measures arguing that they are protecting their companies After the financial crisis in 2008 2009 the trend with regard to SWF has changed Leading scholars opinions Political views Economic reasons - losses registered during the crisis that discouraged SWF The need for financing in order to counteract the effects of the crisis put a premium on maintaining a welcoming climate for SWF

Recent developments
Developed economies started to foster a welcoming climate for SWF investments initiating bilateral negotiations (July 2009 US-China Strategic and Economic Dialogue)

Efforts to enhance the transparency of such investments September 2008 major SWFs of the world agreed to a voluntary code of conduct Santiago Principles (Summit Santiago, Chile)