Bilateral Political Relations and the Impact of Sovereign Wealth Fund Investment

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 why SWFs invest but matter less in determining how much to invest. These results suggest that SWFs behave differently than other economic agents. Consistent with the FDI 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.

Keywords: sovereign wealth fund, investment determinants, political relations, trade, policy

JEL Classification: G15, G18, F34