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Bilateral political relations and sovereign wealth fund investment

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  • Knill, April
  • Lee, Bong-Soo
  • Mauck, Nathan

Abstract

We examine the role of bilateral political relations in sovereign wealth fund (SWF) investment decisions. Our empirical results suggest that political relations play a role in SWF decision making. Contrary to predictions based on the FDI and political relations literature, we find that relative to nations in which they do not invest, SWFs prefer to invest in nations with which they have weaker political relations. Using a two-stage Cragg model, we find that political relations are an important factor in where SWFs invest but matter less in determining how much to invest. Inconsistent with the FDI and political relations literature, these results suggest that SWFs behave differently than rational investors who maximize return while minimizing risk. Consistent with the trade and political relations literature, we find that SWF investment has a positive (negative) impact for relatively closed (open) countries. Our results suggest that SWFs use—at least partially—non-financial motives in investment decisions.

Suggested Citation

  • Knill, April & Lee, Bong-Soo & Mauck, Nathan, 2012. "Bilateral political relations and sovereign wealth fund investment," Journal of Corporate Finance, Elsevier, vol. 18(1), pages 108-123.
    • Handle: RePEc:eee:corfin:v:18:y:2012:i:1:p:108-123
    DOI: 10.1016/j.jcorpfin.2011.11.002
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    More about this item

    Keywords

    Sovereign wealth fund; Investment determinants; Political relations; Foreign investment;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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