Policies by European industrialized countries towards inward investment and sovereign wealth funds Mark Thatcher London School of Economics

Pressures on financial systems Low growth and unemployment in industrialised countries Fiscal constraints Fear of sovereign bonds Need for capital investment Pressure on bank balance sheets- esp capital requirements Global financial imbalances

Forms of external investment in Europe Purchase of government bonds Establishment of special purpose vehicles Greater resources for IMF Foreign direct investment in companies- equities or bonds- eg by SWFs

Definitions of SWFs special purpose investment funds or arrangements, owned by the general Government and created for macroeconomic purposes. SWFs hold, manage, or administer assets to achieve financial objectives, and employ a set of investment strategies which include investing in foreign financial assets. The SWFs are commonly established out of balance of payments surpluses, official foreign currency operations, the proceeds of privatizations, fiscal surpluses, and/or receipts resulting from commodity exports – International Working group of SWFs- IMF Oct 2008

Other definitions state-owned investment vehicles which manage a diversified portfolio of domestic and international financial assets – European Commission a government investment vehicle that manages foreign assets with a higher risk tolerance and higher expected returns than for central bank foreign currency reserves- Sir John Gieve

SWFs are sovereign investment vehicles that are not central banks, monetary authorities in charge of foreign reserves, or national pension funds, unless they are financed by commodities exports- Gilson and Milhaupt

3 key elements 1 Ownership by general govts- national and subnational 2 Investment covers at least some in foreign assets- not just domestic assets 3 Financial objectives- investment strategies and not just for reserve portfolios held only for balance of payments purposes

Examples of GCC SWFs Kuwait Investment Authority (1953) ADIA (Abu Dhabi Investment Authority) Mubadala (Abu Dhabi 2002) Dubai Holding (2004) Qatar Investment Authority 2005

Examples of non-GCC SWFs Government Pension Fund Norway 1990 Temasek (1974) and GIC (govt of Singapore Investment corp) (1981) – Singapore China Investment Corporation 2007 Stabilization Fund (Russia) 2004 Permanent Reserve Fund (Alaska- US) Fonds Strategique d’Investissement 2008 (France)

Possible Concerns by countries facing inward investment International financial stability Overseas state control or influence- esp by ‘rogue’ states Ownership of strategic assets Form of renationalisation Inappropriate/inefficient investment allocation Create asset bubbles Lack of transparency and accountability

Regulatory measures Santiago principles- Generally Accepted Principles and Practices- International Working group of SWFs- IMF Oct 2008 US- CFIUS EU National measures

US Committee on Foreign Investment in the United States (CFIUS)- inter-agency committee chaired by the Secretary of the Treasury- seeks to serve US investment policy through reviews that protect national security while maintaining the credibility of the nation’s open investment policy and preserving the confidence of foreign investors and of American investors abroad that they will not be subject to retaliatory discrimination. The Foreign Investment and National Security Act of 2007 (FINSA) additional scrutiny and higher-level clearances for transactions involving foreign government-owned investments.

EU 2008 paper Freedom of movement of capital Commitment to open investment environment Support for multilateral work Use of existing instruments Treaty obligations Proportionality and transparency Neutrality vis-à-vis ownership M&As- both EU and national legislation (eg France)

National measures Eg France, Germany, discussed in Italy Protection of ‘strategic sectors’ from takeovers and mergers Eg loss of voting rights Limited application

Possible beneficial aspects of SWFs Long-term investment Counter-cyclical/ counter-trend Systemic viewpoint Policy tool

Behaviour Long-term investors Cautious investments Rate of return

Changes in attitudes after financial crisis Major SWF investments in: Banking Stock exchanges Industry Construction/real estate

Conclusions SWFs much more welcomed Valuable capital contribution But limited size Possible losses Competing demands- eg local investment