Investor States and the Rise of Sovereign Wealth Funds (SWFs)

Abstract

SWFs manage large financial assets of sovereign states. The ownership by the governments has made it difficult to apply the conventional economic theories to SWFs. On the other hand, the economic nature of investment has made application of international relations theories to these funds more intricate. Almost all scholars (economists or political scientists) contend that the creation of SWFs has been a result of accumulation of foreign reserves. However, they diverge in their position with respect to the purposes of the sovereign funds. The economic view explains the purpose of these funds in terms of economic smoothing and shock absorbing. But economics is only one side of the story. States may have decided to establish sovereign funds for reasons other than economic smoothing or shock absorbing. The main argument here is that the economic view is insufficient in explaining operation and specifically evolution of these funds. In other words, the choices states make regarding the operation and management of sovereign funds can be based on reasons other than maintenance of the domestic economy. This research responds to an academically under-studied yet critical area, by first providing a systematic methodology for the study of these funds at the micro-level, and then applying this methodology to two prominent case studies, i.e., Norway and UAE. A better understanding of the functioning of SWFs is of high importance because it enables both the recipient states and the international community to better address the issues pertaining to SWFS such as governance, code of conduct, etc.