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Mark Thatcher London School of Economics

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

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Mark Thatcher London School of Economics

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

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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

  8. Examples of GCC SWFs • Kuwait Investment Authority (1953) • ADIA (Abu Dhabi Investment Authority)- 1976 • Mubadala (Abu Dhabi 2002) • Dubai Holding (2004) • Qatar Investment Authority 2005

  9. 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)

  10. 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

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

  12. 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.

  13. 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)

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

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

  16. Behaviour • Long-term investors • Cautious investments • Rate of return

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

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

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