In the context of geopolitical tensions and highly disrupted global trade, it is natural to think that globalisation, institutional investment, and international flows will continue to suffer. However, we see signs of hope and certain trends that will contribute to the future of the symbiotic relationship between foreign direct investment (FDI) and sovereign wealth funds (SWFs).

Unctad data shows that FDI grew globally by 3% to around $1.4tn in 2023, driven mostly by large swings in the Netherlands and Luxembourg, which serve as ‘conduit’ economies. High interest rates and economic uncertainty affected global investment elsewhere and flows in emerging markets (EMs) over the course of the year decreased by 9% to $841bn.

But our figures show that SWFs invested $125bn in 2023, which is 20% less than in the previous year, despite the high level of activity displayed by Middle Eastern funds. In the same period, investment by public pension funds (PPFs) fell by 26% to $80.4bn. However, EMs bucked the trend. They received $65bn from both SWFs and PPFs in 2023, up by 17% from 2022 and the highest figure in a decade.

This is an important trend that is explained by the increasingly important role of strategic SWFs in the development of their domestic economies. Particularly in the Middle East, SWFs have been deploying increasing resources to support domestic economies, their development and transition towards more sustainable models. 

The likes of the Public Investment Fund in Saudi Arabia and Mubadala in Abu Dhabi have raised equity and debt among foreign investors to boost investment into their domestic economies. 

In Turkey, the Turkey Wealth Fund is channelling strong regional support and interest into the development of the country’s state assets. 

These funds were established with the goal of getting other SWFs and pension funds to co-invest in specific projects. As such, they act as major FDI funnels into local economies as they raise equity and debt among foreign states and private investors, and deploy it into strategic projects for their national economies. 

These funds are nothing new. The Russian Direct Investment Fund pioneered this model in 2011; it attracted $24bn in joint funds before the start of the war in Ukraine. 

However, Asian funds have perfected the formula over the years. In 2015, India set up the National Investment and Infrastructure Fund with a limited scale, but a very clear rationale and proposition for interested foreign investors. In 2021, Indonesia set up the Indonesia Investment Authority, which has already channelled $4.3bn into the country. And at the end of 2023, the Philippines launched the Maharlika Investment fund, with similar goals. 

These examples demonstrate the importance of local partners for cash-rich funds. The Canadian pension funds, Australian superannuation funds, and Middle Eastern and east Asian SWFs have one thing in common: they need to diversify and deploy capital in new countries, and they need partners they can trust on the ground. Ultimately, the ability of a SWF to attract investments rests, among other factors, on their perception as professional and trusted partners. 

Given the scale of SWFs and other state-owned investors and the struggle for FDI at global level, we expect that new vehicles with a catalysing function will continue to play an important role in connecting capital and opportunities, especially in developing economies. 

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Diego Lopez is the founder and managing director of Global SWF, an industry specialist with presence in New York, London, and Singapore. X: @GlobalSWF

This article first appeared in the December 2023/January 2024 print edition of fDi Intelligence