The Role of Foreign Capital and Global Public Investors
Sovereign wealth funds, foreign state managed social security plans, foreign currency reserve funds, foreign government employee pension funds, state-controlled operating companies and other foreign investing vehicles today collectively control trillions of dollars in assets and are projected to maintain significant growth over the next decade. These disparate foreign government entities－characterized in this report as Global Public Investors (“GPIs”)－are becoming increasingly influential players in the world economy. In the volatile contemporary global financial environment, the investment strategies of these foreign entities will impact capital flows and affect markets around the world.
Despite their growing salience in the international economy, policy-makers and political leaders in the United States have only a partial understanding of the investing practices, management and governance of these sources of foreign capital. There is finite knowledge regarding their strategic, political and regulatory implications and limited appreciation of their enhanced role in the deployment of global capital.
In this report, participants in the Brookings Institution Project on Foreign Capital and Global Public Investors have drawn on a variety of resources regarding how this class of international financial actors defines its core objectives, assesses and manages risk, and deploys capital. We attempt to analyze what foreign capital and GPIs mean for the United States and what regulatory, political, and governance issues flow from their expanding size and pace of investment activity. In preparing this report, project participants interviewed senior investment professionals from sovereign wealth funds and other GPIs; consulted investment bankers who originate and execute investment opportunities for GPIs on a global basis; engaged some of the world’s leading public policy researchers tracking the activities of sovereign wealth funds; held off-the-record conversations with former senior U.S. government officials; and also analyzed government data, surveyed think-tank literature and reviewed recent media and academic articles. Based on these disparate sources, we seek to discern broad patterns of response by GPIs to the recent financial crisis and to assess the impact on long-term American interests.
Our goal is to fill the gaps in understanding within the policy and political communities. We aim to look beyond current paradigms of foreign direct investment in the United States to explore new models of how international entities, including sovereign wealth funds and other GPIs, might invest capital that would earn competitive risk-adjusted returns and also fund vital public priorities during a protracted period of budget deficits and dramatically enlarged national debt. With America’s 2009-10 federal budget deficit projected to total $1.5 trillion and its public debt expected to rise to about $13.5 trillion this year, the need for foreign investment－properly focused and thoughtfully structured is high. This report therefore identifies potential approaches to address long-term financial needs in partnership with foreign capital.
Participants in this study understand the anxiety triggered by certain kinds of foreign capital investment in the United States. Many worry about the influence of non-U.S. money and question the investment strategies and goals of foreign entities. It was not long ago, for example, that an attempted investment in America’s shipping infrastructure by DP World, a state-owned company in the United Arab Emirates, sparked a nationwide backlash as critics emphasized the potential national security risks of a foreign entity managing maritime trade hubs. This report acknowledges that there are certain sectors that may be perceived as particularly sensitive, such as the military and defense industries, as well as selective natural resources and technology sectors and some U.S. infrastructure assets.
Yet there is an economic logic for expanding global capital investment in the U.S. According to the Congressional Research Service, foreign investment declined sharply after 2000, when $300 billion was invested in U.S. businesses and real estate. In 2008 foreign investment in the United States had surged to $351 billion but fell in 2009 to $269 billion, far below its peak. In the aftermath of the financial crisis and a severe recession, the United States has pervasive capital needs for infrastructure development to enhance U.S. economic competitiveness, business investment to spur job creation, and technological innovation to fuel growth. There are multiple examples of other nations, such as Canada, the United Kingdom and Australia, that leverage foreign investment in infrastructure and other projects to finance andadvance critical national priorities. While state governments generally preclude direct control or full ownership of those assets by foreign entities, minority investment agreements have proven both durable and mutually advantageous.
Our research dispels a number of myths and misperceptions about foreign capital practices and investment priorities. Based on the multitude of data-points we examined, this analysis concludes that the preponderance of sovereign wealth funds and other Global Public Investors are inherently cautious, focused on capital preservation, asset diversification, predictable returns, and the mitigation of political risk. As noted, most limit their equity ownership stake in public companies, financial institutions and private businesses to minority status and eschew direct management responsibility.