Sovereign Wealth Funds' Internationalization Strategies: The Use of Investment Vehicles

In this paper, we examine the strategies used by sovereign wealth fund (SWF) investments in their cross-border investments. We investigate how SWFs internationalize their activities, specifically whether the use of investment vehicles as signal of passive investment approach to access foreign markets is influenced by SWF- and deal-specific characteristics and the presence of bilateral trade agreements between the SWFs and the target country. Our probit and multinomial logit estimates show that fund opacity, fund politicization, strategic industry targets, and majority ownership choices lead to a more likely use of vehicles, while bilateral trade agreements negatively affect such investment strategy. We also find that fund opacity increases the likelihood to use SWF-controlled vehicles, while fund politicization, strategic industry targets, and majority ownership choices increase the likelihood to use a corporate vehicle. Bilateral trade agreements reduce the use of corporate vehicles. Our results also indicate that politicized foreign SWFs are more likely to invest through vehicles located in third countries. On the other hand, when strategic industries are targeted, investment vehicles are likely to be located in the target country. Our results control for SWFs' strategic goals, SWF experience (reliance on external managers or advisors, fund size), type of funding sources, crisis period, deal-specific effects, and legal and institutional differences across countries and over time.