Bilateral political relations and sovereign wealth fund investment |
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Authors: | April Knill Bong-Soo Lee Nathan Mauck |
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Affiliation: | 1. EMLYON Business School — Department of Economics, Finance and Control and Research Center on Entrepreneurial Finance (ReCEntFin), France;2. Utrecht University — School of Economics, The Netherlands;1. Bank of Italy, International Relations Directorate, Via Nazionale 91, 00184 Rome, Italy;2. Università Cattolica, Facoltà di Scienze Politiche e Sociali, Largo Gemelli 1, 20123 Milan, Italy |
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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. |
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