Sovereign Investment OXFORD UNIVERSITY PRESS. Karl P. Sauvant Lisa E. Sachs Wouter P.F. Schmit Jongbloed CONCERNS AND POLICY REACTIONS.

Transcription

1 Sovereign Investment CONCERNS AND POLICY REACTIONS Editors Karl P. Sauvant Lisa E. Sachs Wouter P.F. Schmit Jongbloed OXFORD UNIVERSITY PRESS

2 Detailed Table of Contents Foreword by Jeffrey D. Sachs xxi Acknowledgements xxv List of contributors xxvii PART ONE I THE RISE OF SOVEREIGN WEALTH FUNDS AND STATE-OWNED ENTERPRISES Chapter 1 Sovereign Investment: An Introduction 3 A. Sovereign Foreign Direct Investment Vehicles 3 1. Sovereign Wealth Funds 4 2. State-Owned Enterprises 9 B. Concerns National Security Transparency Other Concerns 15 C. Policy Reactions Country Reactions 16 United States 18 Canada 19 Germany Supranational Reactions 21 Outlook 23 Chapter 2 Sovereign Wealth Funds: An Overview 24 Introduction 24 A. What are Sovereign Wealth Funds? Nature and Size Sources of Funding Functions of SWFs 29 a. Revenue Stabilization and Related Benefits 29

3 x : Detailed Table of Contents b. Other Purposes and Goals 30 B. Political, Strategic, and Legal Concerns Raised by SWF Activity Political Concerns Strategic and National Security Concerns Business Concerns 35 C. Regulatory Responses Recent Developments in Global Regulation of SWFs 36 a. U.S. Political and Legal Responses 36 b. National Security Review 38 c. European Efforts 39 d. The Santiago Principles 39 e. OECD's Efforts 41 D. Response Among SWFs to Key Concerns Mitigation Chilled SWF Interest? 44 E. Recent Trends in Sovereign Wealth Fund Activity and Behavior Equity Infusions Into Financial Sector Investment Activity Outside of the Financial Sector Strategic Support Transactions Recent Developments 49 F. Impact of the Financial Crisis on Sovereign Wealth Funds Weaker Growth More Inward-Looking Investment Approach and Targeting of Emerging Markets Entering the Next Phase 55 Conclusions 56 Chapters Sovereign Wealth Funds: A Developing Country Perspective 57 Introduction 57 A. The Accumulation of Foreign Exchange Reserves and the Rise of SWFs 58 B. The Rationale for Reserve Accumulation 63 C. A Broader Framework Recollecting Useful Identities The Motivations for the Accumulation of Foreign Exchange Assets The Instruments and Political Economy of Foreign Exchange Asset Accumulation 75 D. Systemic Implications of Large Reserves and SWFs 79 Conclusions 82

4 Detailed Table of Contents \ xi Chapter 4 Sovereign Wealth Funds and the Crisis: Investment Managers or Providers of Liquidity? 84 Introduction 84 A. Slower Growth for SWFs During the Crisis 86 B. A Change in Strategy or Crisis Response? 89 C. Focus on Large Funds Change in Sectoral Distribution Preference for Minority Stakes 95 D. SWFs as Investment Managers and Providers of Liquidity in Home Countries? 96 Chapters The International Activities and Impacts of State-Owned Enterprises 98 Introduction 98 A. Nature and Importance of SOEs OECD Countries Emerging and Transition Markets Ownership Models Summary 113 B. Problems with SOEs Purpose of SOEs Governance of SOEs Performance of SOEs Summary 124 C. FDI and the SOE Eclectic Theory and the Nature of the MNE The Investment Development Path and MNEs from Emerging Markets Host-Country Benefits Summary Comments 133 D. China 133 Conclusions 140 PART TWO REGULATORY CONCERNS Chapter 6 Sovereign Wealth Funds and Global Finance 145 Introduction 145 A. SWFs in Global Finance: The Evidence 146 B. Organization and Governance Economic Theories Economic Sociology Political Economy 157

5 xii i Detailed Table of Contents C. The Evidence: Case Studies in Global Financial Relations To Stay or To Go Deepening Ties 163 Concluding Comments 170 Chapter 7 National Security and Foreign Government Ownership Restrictions on Foreign Investment: Predictability for Investors at the National Level 173 Introduction 173 A. General Approaches to Oversight and Regulation of Foreign Direct Investment 175 B. The Process for Addressing National Security Concerns within FDI Frameworks 180 C. Foreign Government Ownership as a Factor in the Review Process 182 D. Predictability and the Effect of Regulation on Sovereign Wealth Fund and State- Controlled Entity Investors 183 Conclusions 186 Annex: Country Comparison Table: Regulation of FDI, National Security and Foreign Government Ownership 187 Chapter 8 Are Sovereign Wealth Fund Investments Politically Biased? A Comparison with Mutual Funds 221 Introduction 221 A. Literature Review and Stylized Facts Defining a Benchmark for SWFs Toward Better Regulation 228 B. Data Analysis Portfolio Characteristics 230 a. Geographical Distribution 231 b. Sector and Industry Distribution Investment in OECD and Non-OECD Countries 235 C. SWF Investments: The Political Dimension Internal Governance and Investment Strategy 237 a. Political Regimes 239 Conclusions 243 Annexes 245 Annex 1. Portfolio Characteristics for Selected SWFs, Annex 2. Portfolio Characteristics for Selected Mutual Funds, Annex 3. Sector and Industry Classification 251

6 Detailed Table of Contents Annex 4. Political Regimes and Fund Investments: Definition of Political Variables 254 Annex 5. Truman's Investment Indicators for OECD and non-oecd SWFs, 200J Annex 6. Truman's Investment Indicators for Commodity and non-commodity SWFs, Chapter 9 Sovereign Concerns and the International Investment Regime 258 Introduction 258 A. Sovereign Concerns with FDI 262 B. The Evolving International Investment Regime 267 C. The Essential Security Challenge 273 Conclusion 282 Chapter 10 Sovereign Wealth Funds and National Security 283 PART THREE CHANGING RULES FOR STATE-CONTROLLED ENTITIES? Chapter 11 Sovereign Wealth Funds and Regulation: Some Conceptual Issues 297 Introduction 297 A. The Emergence and Extent of Sovereign Wealth Funds 298 B. Why Sovereign Wealth Funds? 302 C. Analysis of Regulation and Sovereign Wealth Funds 303 D. Examples of Matrix Positioning 304 E. Regulation, Foreign Direct Investment, and Sovereign Wealth Funds 306 Conclusions 309 Chapter 12 The Evolution of the Essential Security Exception in U.S. Trade and Investmt Agreements 310 Introduction 310 A. General U.S. Policy on the Relationship between International Agreement: Essential Security 311 B. Experience in the GATT/WTO 314 Security Exceptions 315 C. Experience under U.S. Treaties of Friendship, Commerce, and Navigation ; D. Experience under BITs before E. The NAFTA Negotiating Experience Stage One Stage Two Stage Three Stage Four Stage Five 333

7 xiv ; Detailed Table of Contents 6. Stage Six Stage Seven 333 F. Developments after G. Summary of the Current State-of-Play of the Essential Security Provisions in U.S. Trade and Investment Agreements 341 H. Implications for CFIUS CFIUS Procedures and Practice Potential Claims Whether CFIUS Actions Fall Within the Scope of the Exception How a Tribunal Might Review the Matter 350 Conclusions 350 Annexes 352 Annex 1. Essential Security Provisions In Post-1945 U.S. Treaties of Friendship, Commerce, and Navigation and Similar Treaties 352 Annex 2 Essential Security Provisions In U.S. Bilateral Investment and Similar Treaties 365 Annex 3 Essential Security Provisions In U.S. Free Trade Agreements with BIT-Type Investment Protections 393 Annex 4 U.S. Investment Agreements, Categorized by Type of Essential Security Exception 400 Chapter 13 Do the Rules Need To Be Changed for State-Controlled Entities? The Case of Sovereign Wealth Funds 404 A. A Two-Pronged Approach to SWFs: Reciprocal Responsibility 405 B. Comprehensive Regulatory Approach 407 C. Alternatives to a Comprehensive Approach 408 Concluding Remarks 411 Chapter 14 The U.S. Approach to Sovereign Wealth Funds and the Role of CFIUS 413 A. Global Financial Context 413 B. Sovereign Wealth Funds 414 C. U.S. Treasury Response 415 D. Generally Accepted Principles and Practices 416 E. Recipient Country Policies: The Committee on Foreign Investment in the United States, and Regulations 418 Conclusion 420 Chapter 15 Lessons from CFIUS for National Security Reviews of Foreign Investment 422 Introduction 422 A. The U.S. National Security Review Process 423

8 Detailed Table of Contents xv B. Lessons 428 Conclusion 430 Chapter 16 The Canadian Policy Response to Sovereign Direct Investment 431 Introduction 431 A. Nature and Effects of Foreign Direct Investment, Be It Private or Sovereign 431 B. Sovereign Direct Investment: Nature and Effects 433 C. The Debate in Canada Headquarters' Effects National Security 437 D. The Organizational Form for Intervention 447 E. The Credit Crisis and FDI 450 Chapter 17 Sovereign Wealth Funds and the German Policy Reaction 453 A. Sovereign Wealth Funds in the German Political Debate 453 B. Tightening of the German Investment Rules 456 C. The New Law Does It Make Sense? 459 Chapter 18 The Regulation of Sovereign Wealth Funds in the European Union: Can the Supranational Level Limit the Rise of National Protectionism? 462 Introduction 462 A. The SWF Phenomenon in the European Union Operations of SWFs in Europe European Concerns about SWFs 466 B. The Supranational Efforts to Maintain an Open Environment to SWFs The EU Common Approach: Design and Main Features The EU Support for a Multilateral Solution 475 C. The Risk of Uncoordinated Protectionism at the National Level Application of Existing EU Law Monitoring and Coordinating National Regulations 486 a. Control of Foreign Takeovers in the United Kingdom 488 b. Control of Foreign Takeovers in France 489 c. Control of Foreign Takeovers in Germany 491 Concluding Remarks 493 Chapter 19 Foreign Government-Controlled Investors and Host Country Investment Policies: OECD Perspectives 496 Introduction 496 A. Pursuit of Political, rather than Commercial Objectives How Credible are Government Commitments to Pursue Only Commercial Objectives 500

9 xvi : Detailed Table of Contents 2. How Can Governments Enhance the Credibility of Such Commitments? 501 B. National Security 502 C. Competition-Related Concerns 505 D. Foreign State Immunity and Possible Gaps in Legal Accountability 506 Summary and Future Work 510 Annex OECD Guidelines for Host Country Investment Policy Relating to National Security 511 Chapter 20 Sovereign Wealth Funds and the IMF 514 Introduction 514 A. SWFs: Objectives and a Taxonomy 515 B. Some Issues Surrounding SWFs 517 C. The IWG and the Development of the Santiago Principles 520 D. The Key Features of the Santiago Principles Legal Framework, Objectives, and Coordination with Macroeconomic Policies Institutional Framework and Governance Structure Investment and Risk Management Framework 527 The Road Ahead 528 CONCLUSIONS Chapter 21 Foreign Direct Investment by State-Controlled Entities at a Crossroad of Economic History: Conference Report of the Rapporteur 533 A. At the Crossroads of Economic History 533 B. What Are SWFs and Why Do They Matter? 535 C. Key Policy Concerns: Investment Motivations, National Security, and Transparency 536 D. Geopolitics: "The West Versus the Rest" or "The Rise of the Rest"? 537 E. Existing, Emerging and Changing Regulatory Responses to FDI by State-Controlled Entities National Responses Regional Responses International Responses: Intergovernmental Organizations International Responses: Bilateral and Multilateral Treaties 540 F. FDI by State-Controlled Entities: The Way Forward 540 INDEX 543