Abstract
Sovereign wealth funds (SWFs) have emerged in developing Asia as a policy response to an unprecedented accumulation of foreign exchange (FX) reserves since 2000. At the same time, developing countries have become an increasingly important source of outward foreign direct investment (FDI). The central objective of this paper is to evaluate the prospects for SWFs to serve as a major conduit for the region’s outward FDI. In principle, FDI represents an attractive means of earning higher returns on FX reserves than traditional reserve assets. In practice, the limited institutional capacity and the political sensitivity of state-led FDI severely constrains the ability of developing Asia’s SWFs to undertake FDI on a significant scale. Therefore, the potential for developing Asia’s SWFs to become major sources of outward FDI is more apparent than real. This paper also explores the implications of the Santiago Principles and the global financial crisis on outward FDI by SWFs.
Highlights
One of the most significant developments in the global economic landscape since the Asian crisis of 1997–1998 is the transformation of developing Asia from a net capital importer to a net capital exporter
Some additional issues we explore in this paper are the implications of the Santiago Principles, a voluntary code of conduct for SWFs, as well as the global financial crisis on outward foreign direct investment (FDI) by SWFs
While FDI inflows have made important contribution to the rapid industrialization and growth of developing Asia in the past, the region has itself become an increasingly significant source of FDI. Part of this transformation has to do with the growing relative weight of the region in the global economy and the emergence of globally competitive companies with the willingness and capacity to venture abroad
Summary
One of the most significant developments in the global economic landscape since the Asian crisis of 1997–1998 is the transformation of developing Asia from a net capital importer to a net capital exporter. This trend reflects the transformation of developing countries as a whole into net capital exporters and the broader trend of their fast-rising relative weight in the world economy due to their more rapid economic growth relative to developed countries. Whether the SWFs are able to convert such promise into reality depends on whether they are good at adding value to the assets they acquire, which, in turn, depends on their managerial skills and know-how It depends on the policies of host countries toward investment by foreign state-owned institutions.
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