Sovereign wealth funds (SWFs) are a breath of fresh air in the foreign investment landscape. They bring new capital and diversify its sources. Governments and their investment promotion agencies the world over are striving to sit down with these ever more prominent foreign direct investment (FDI) forces. But, in a world where geopolitics dictates the patterns of global investment, is everyone being just a bit too naive about engaging with hot money serving the purpose of its sovereign owners? 

Foreign investment typically follows the dynamics of capital accumulation. A look at current account balances over history gives a good idea of the world’s main source of capital. 

During the British empire, London was teeming with surplus money seeking profitable ways to be deployed. As detailed in the fascinating work of US scholar Mira Wilkins, hundreds of companies raised capital in London and elsewhere to chase ventures overseas, particularly in sectors like transport infrastructure and mineral extraction. Ms Wilkins refers to these entities as free-standing companies to emphasise their independence from existing domestic companies. Most lost all their investors’ money; a minority succeeded and survived through the years, becoming fully fledged multinational enterprises (MNEs). The likes of Rio Tinto, BP, Standard Chartered Bank all started out as free-standing companies.  

With the functional help of stock and debt markets, listed MNEs have strengthened their roles as natural conduits of FDI, deploying overseas the excess capital raised in their domestic markets. 

The global financial crisis (GFC) laid bare the excesses of that model, creating a void for a new breed of investors to fill. Since joining the World Trade Organization, China emerged as the new frontier of capital accumulation, posting burgeoning balance of payments surpluses year after year. In the wake of the GFC, Chinese conglomerates, mostly state-owned, set out looking for bargains in the West. For a brief season, they fared well as they got away with national manufacturing champions, strategic infrastructure and trophy assets. Soon, however, their affiliation with the political power in Beijing started raising eyebrows, prompting policymakers to introduce FDI screening regulations that would have made those deals impossible today. With Chinese investors caught in the geopolitical crossfire, other state investors, particularly those from the Middle East, stepped up, and have remained relatively undisturbed by screening regulations. 

The rise of sovereign investors as new conduits of FDI speaks volumes about the evolving nuances of globalisation. Capital accumulation has been shifting eastwards. Unlike listed MNEs, sovereign investors tend to funnel public resources mostly originating from trade surpluses that already sit with state-owned companies. As such, they don’t need to leverage financial markets to raise capital, and therefore comply with the disclosure requirements of public markets. While some like Saudi Arabia’s Saudi Aramco have listed in a push to boost profile and transparency, they remain an exception. DP World, for example, the UAE’s state-owned port operator with a sprawling network of ports worldwide, delisted from the stock market in Dubai in 2020.  

Countries are rolling out the red carpet for sovereign investors. But in the current fractious global order, fortunes can change on a dime. Chinese state investors have come to terms with it. Their Russian peers have, too. Ultimately, political affiliation and low transparency hardly sit well with stakeholders in recipient countries. Sovereign investors may well be the new conduits of FDI, but strategies to lure them should factor in the risks of engaging with capital pools that, ultimately, serve the purpose of foreign political entities. 

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This article first appeared in the April/May 2024 print edition of fDi Intelligence.