Understanding the decision-making process of sovereign wealth funds: The case of Temasek

Research output: Contribution to journalArticle

Abstract

Sovereign wealth funds (SWFs) have been increasingly active over the past decade, with governments raising concern regarding their actual motives and the potential for cross-border interest in national strategic sectors. The aim of this paper is to contribute to the existing literature by improving our understanding of the decisions being taken by this new class of investors. The decision-making process informing such investments is complex in the sense that it involves several levels of decision that may potentially interact. In this study, we investigate the determinants of SWFs’ foreign investments, while considering in a single model the sequence of choices involved in their decisions, specifically (i) the decision to invest abroad or not, (ii) the decision to invest in a listed versus unlisted firm, and (iii) the decision to take large versus small stakes. Using a nested logit approach on one of the largest SWFs, the Singaporean fund Temasek, over the period 1990–2010, we provide clear evidence of dependence in the three levels of decision making considered. In addition, we show that the probability of Temasek's cross-border investment increases with the excess of foreign exchange (FX) reserves, that the SWF tends to target unlisted firms when asymmetry of information is low between the target company and its home country, and that its involvement in large stakes depends on a firm's financial characteristics.

Original languageEnglish
Pages (from-to)91-106
Number of pages16
JournalInternational Economics
Volume152
DOIs
Publication statusPublished - 1 Dec 2017

Fingerprint

Sovereign wealth funds
Decision-making process
Foreign exchange reserves
Foreign investment
Home country
Cross-border investment
Nested logit
Decision making
Asymmetry of information
Investors
Cross-border
Government

Keywords

  • Foreign Investment
  • Nested Logit model
  • Sovereign Wealth Funds

Cite this

@article{ceb298e5dcb6433188e53a6b622d1a6c,
title = "Understanding the decision-making process of sovereign wealth funds: The case of Temasek",
abstract = "Sovereign wealth funds (SWFs) have been increasingly active over the past decade, with governments raising concern regarding their actual motives and the potential for cross-border interest in national strategic sectors. The aim of this paper is to contribute to the existing literature by improving our understanding of the decisions being taken by this new class of investors. The decision-making process informing such investments is complex in the sense that it involves several levels of decision that may potentially interact. In this study, we investigate the determinants of SWFs’ foreign investments, while considering in a single model the sequence of choices involved in their decisions, specifically (i) the decision to invest abroad or not, (ii) the decision to invest in a listed versus unlisted firm, and (iii) the decision to take large versus small stakes. Using a nested logit approach on one of the largest SWFs, the Singaporean fund Temasek, over the period 1990–2010, we provide clear evidence of dependence in the three levels of decision making considered. In addition, we show that the probability of Temasek's cross-border investment increases with the excess of foreign exchange (FX) reserves, that the SWF tends to target unlisted firms when asymmetry of information is low between the target company and its home country, and that its involvement in large stakes depends on a firm's financial characteristics.",
keywords = "Foreign Investment, Nested Logit model, Sovereign Wealth Funds",
author = "Gnabo, {J. Y.} and M. Kerkour and C. Lecourt and H. Raymond",
year = "2017",
month = "12",
day = "1",
doi = "10.1016/j.inteco.2017.06.003",
language = "English",
volume = "152",
pages = "91--106",
journal = "International Economics",
issn = "2110-7017",
publisher = "Elsevier",

}

Understanding the decision-making process of sovereign wealth funds : The case of Temasek. / Gnabo, J. Y.; Kerkour, M.; Lecourt, C.; Raymond, H.

In: International Economics, Vol. 152, 01.12.2017, p. 91-106.

Research output: Contribution to journalArticle

TY - JOUR

T1 - Understanding the decision-making process of sovereign wealth funds

T2 - The case of Temasek

AU - Gnabo, J. Y.

AU - Kerkour, M.

AU - Lecourt, C.

AU - Raymond, H.

PY - 2017/12/1

Y1 - 2017/12/1

N2 - Sovereign wealth funds (SWFs) have been increasingly active over the past decade, with governments raising concern regarding their actual motives and the potential for cross-border interest in national strategic sectors. The aim of this paper is to contribute to the existing literature by improving our understanding of the decisions being taken by this new class of investors. The decision-making process informing such investments is complex in the sense that it involves several levels of decision that may potentially interact. In this study, we investigate the determinants of SWFs’ foreign investments, while considering in a single model the sequence of choices involved in their decisions, specifically (i) the decision to invest abroad or not, (ii) the decision to invest in a listed versus unlisted firm, and (iii) the decision to take large versus small stakes. Using a nested logit approach on one of the largest SWFs, the Singaporean fund Temasek, over the period 1990–2010, we provide clear evidence of dependence in the three levels of decision making considered. In addition, we show that the probability of Temasek's cross-border investment increases with the excess of foreign exchange (FX) reserves, that the SWF tends to target unlisted firms when asymmetry of information is low between the target company and its home country, and that its involvement in large stakes depends on a firm's financial characteristics.

AB - Sovereign wealth funds (SWFs) have been increasingly active over the past decade, with governments raising concern regarding their actual motives and the potential for cross-border interest in national strategic sectors. The aim of this paper is to contribute to the existing literature by improving our understanding of the decisions being taken by this new class of investors. The decision-making process informing such investments is complex in the sense that it involves several levels of decision that may potentially interact. In this study, we investigate the determinants of SWFs’ foreign investments, while considering in a single model the sequence of choices involved in their decisions, specifically (i) the decision to invest abroad or not, (ii) the decision to invest in a listed versus unlisted firm, and (iii) the decision to take large versus small stakes. Using a nested logit approach on one of the largest SWFs, the Singaporean fund Temasek, over the period 1990–2010, we provide clear evidence of dependence in the three levels of decision making considered. In addition, we show that the probability of Temasek's cross-border investment increases with the excess of foreign exchange (FX) reserves, that the SWF tends to target unlisted firms when asymmetry of information is low between the target company and its home country, and that its involvement in large stakes depends on a firm's financial characteristics.

KW - Foreign Investment

KW - Nested Logit model

KW - Sovereign Wealth Funds

UR - http://www.scopus.com/inward/record.url?scp=85022100317&partnerID=8YFLogxK

U2 - 10.1016/j.inteco.2017.06.003

DO - 10.1016/j.inteco.2017.06.003

M3 - Article

VL - 152

SP - 91

EP - 106

JO - International Economics

JF - International Economics

SN - 2110-7017

ER -