Country factors and the investment decision-making process of sovereign wealth funds

Abstract : We examine in this paper the complex decision-making processes that lead to investment location choice of Sovereign Wealth Funds (SWFs). Using a two-tiered dynamic Tobit panel model, we find that country-level factors do not have the same impact on the investment decision and the amount to invest and that SWFs tend to invest more frequently and with higher amounts in countries in which they already have invested. More specifically, we find that SWFs prefer to invest in countries with higher political stability, whereas they are more prone to investing for large amounts in countries that are less democratic and more financially opened. Our results also lend support to the idea that SWFs are prudent in the choice of target country concerning their investment decision but behave as more opportunistic investors concerning the amounts to be invested.