Which country characteristics attract sovereign wealth funds investments

Abstract

According to Rozanov (2005), the investments made by Sovereign Wealth Funds (SWF) have grown in the last years.Afterward, Jen (2007) writes that globalization, altered the balance of power between public and private sector SWF is away which public sector can gain influence over financial markets. With these two premises, the aims of our work are studyif some economic, financial, political, social and geographic variables impact the investments made by SWF. We use datafrom Government Pension Fund Global in 99 countries during 1998 to 2016 to apply a Gravity Model (GM). Tinberg (1962)was the first to apply a GM to international flows of trade, he defines real Gross Domestic Product (GDP) and distance asbase variables that we use in our model. Anderson (1979) added a dummy to describe the existence of a common border,and we adopt too. Beyond these variables, we have the Stock Market Capitalization (SMC), Human Development Index(HDI), Corruption Perception Index (CPI), Political Stability and Absence of Violence (PSAV), as dependent variable wehave the total of Assets Under Management (AUM), composed of equities, fixed income and real estate. Then in STATA,we perform tests and regressions. First, we check data with summarize and in terms of correlation, heteroskedasticity andif is balanced. Then we test which type of estimation to use Random Effects, Fixed Effects or a simple Ordinary LeastSquares (OLS) and we conclude that OLS is the model that fits better also, Anderson and Wincoop (2001) concludes thesame in their study. The application of GM gives us the following conclusions, GDP, SMC, CPI, PSAV, and distance arecountry characteristics that attract investments of SWFs, the existence of a common border is significant only with a tenpercent confidence. Just HDI didn’t are significant for our dependent variable.