Going the Distance: The Foreign Investment Strategies of Sovereign Wealth Funds

Abstract

The spread of investments by sovereign wealth funds (SWFs) around the world has raised questions about what determines their location choices. We argue that SWFs, like multinational companies, consider a host of cross-country distance factors to guide their location decisions and that the effect of distances is significant not only for their direct investment in foreign affiliates, but also for the indirect stakes they hold via pyramids. Starting with a simple binary dependent variable indicating the presence of an investment of a given fund in a given country, we find that distances are key determinants of SWFs’ location choices for direct investments but are less important for indirect investments. Yet this difference in the effect of distances on direct and indirect location choices disappears when we adjust for the relative size of the investment. We thus confirm that SWFs pay more attention to indirect investments — as much as they do to direct ones — when those investments are relatively large. Our findings suggest that it is imperative that studies on foreign location and organizational distance account for indirect stakes and for the size of investments in order to see a more complete picture of firms’ investment strategies. In addition, we consider the moderating role of fund-level heterogeneous traits (such as their overall strategic orientation) but do not find consistent moderating effects on the link between distances and location choices.

Keywords: Corporate Governance, Corporate Strategy, Economic Geography, Nonmarket Strategies, Multinationals, Organizational Design, Corporate Finance, State Capitalism, International Business