Domestic Jockeying For Legitimacy Driving SWF Behavior

Ashby Monk

Larry Catá Backer has another interesting essay up on his blog. He takes up the idea of whether or not SWFs should be viewed as “extensions of the state,” which is a position held by Daniel Drezner. In the view of Backer, the Drezner approach includes an unrealistic assumption:

“…that the state is a unitary actor in which all of its ministers and departments work together for a singular purpose. But of course, even a short reflection tends to suggest the error of this assumption.”

Backer argues that the operations of SWFs are, in some cases, driven by internal contests for control and power among actors and institutions within the government apparatus. As such, SWFs are not extensions of the state, they are competitors within the state apparatus!

In justifying his claim, Backer offers up two case studies (China and Brazil). On the China side of things, he says:

“…in the aggregate, the flow and direction of investments may be as pointed to acquiring advantage over internal rivals as it is focused on acquiring dominance in foreign private markets in those sectors deemed important by the state.”

This is a more nuanced way to think about SWFs’ behavior. For some SWFs, operations are driven by a variety of factors, which (as the above suggests) includes domestic political considerations in addition to its commercial and state motives.

I’m not all that surprised by this, as many SWFs are still in the process of building their domestic and international legitimacy. As we know from institutional theory, there are lots of different types of “institutional work” needed to ensure the long-term survival of an organization. Domestic jockeying is all part of this, in my view.

Still, I think Drezner’s original point that SWFs are extensions of their sponsoring governments remains, in general,  true. After all, governments set SWFs up to invest their assets in accordance with their interests. So, I still don’t see how these funds can be anything but extensions of the government, even if Backer has illustrated another set of non-commercial considerations that may be driving SWF operations. For certain funds embedded in a large governments, as in China, this is a very important nuance to highlight.

Backer thus offers an important level of detail on our growing ‘map’ of SWFs, pointing out where generalizations are inappropriate and where appreciation to local details is necessary. In this sense, Backer would make a fantastic economic geographer; sign him up!

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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