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Bilateral Political Relations and the Impact of Sovereign Wealth Fund Investment

49 Pages Posted: 3 Nov 2009 Last revised: 14 Nov 2011

April M. Knill

Florida State University College of Business; Florida State University - College of Law

Bong-Soo Lee

Florida State University

Nathan Mauck

University of Missouri - Kansas City

Date Written: March 9, 2011

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

Suggested Citation

Knill, April M. and Lee, Bong-Soo and Mauck, Nathan, Bilateral Political Relations and the Impact of Sovereign Wealth Fund Investment (March 9, 2011). Available at SSRN: https://ssrn.com/abstract=1498518 or http://dx.doi.org/10.2139/ssrn.1498518

April M. Knill (Contact Author)

Florida State University College of Business ( email )

Tallahassee, FL 32306-1042
United States
(850) 644-2047 (Phone)

Florida State University - College of Law ( email )

425 W. Jefferson Street
Tallahassee, FL 32306
United States

Bong-Soo Lee

Florida State University ( email )

423 Rovetta Business Building
Tallahassee, FL 32306-1110
United States
850-644-4713 (Phone)

HOME PAGE: http://www.cob.fsu.edu/fin/display_faculty_info.cfm?pID=401

Nathan Mauck

University of Missouri - Kansas City ( email )

5100 Rockhill Road
Kansas City, MO 64110-2499
United States

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