The Impact of Political Economy on Practices of International SWFs
There is a significant influence of political economy on International SWFs (Yi-Chong, 2010). Yi-Chong pointed out that two-thirds of the world’s SWFs are based in countries influenced by various degrees of political economy. Alhashel (2015) discovered that the $6.65 trillion-dollar global SWF ecosystem had conflicting results in terms of increasing value. A review of research conducted by Chhaochharia and Laeven (2008) took a cautionary
position stating that the SWFs might have political objectives and could be infringing in national interests.
The research reveals that the SWFs invested with the goal to diversify away from the core industries of their home countries. Still, they were biased in terms of investing only in the countries that shared the same culture and values, raising further questions as to whether their activities were limited to maximizing the return on their investments. Further, Chhaochharia and Laeven (2008) found that the SWFs invested in firms that were in financial trouble, and these SWFs offered only a short-term positive outlook, while their long-term return on investment, diversification of portfolio and corporate governance remained poor.
Hatton and Pistor (2011) offered a third set of perspectives of International SWFs. Based on their study, Hatton and Pistor found that the political economy played a key role in defining the motivation for International SWFs. The researchers suggested that most of the SWFs they studied fell somewhere in between the spectrum of the SWF behaviors that Alhashel (2015) and Chhaochharia and Laeven (2008) presented. Hatton and Pistor (2011) explained this factor as the influence of the political economy. Hatton and Pistor’s (2011) study on political economy is relevant and insightful in terms of understanding how the political economy influences the
motivation of SWF managers. Hatton and Pistor concluded that the SWFs that they studied were not entirely motivated by the economic incentives, nor were they influenced by the motivation to exert their political views and policies on the receiving nations.
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The Governance Structure of International SWFs
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