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Abstract

Despite increasing inclination towards market liberalization and privatization observed over the last decade, the role of States has, in this period of time arguably grown in importance in some particular aspects of investment. Notably, investments from emerging economies have increased, and a large proportion of which was executed by State-owned enterprises (SOEs) and sovereign wealth funds (SWFs). Both forms of investments originate from State ownership and State activity, and are thus regularly referred to as investments by “state-controlled entities” (SCEs). Investment through the SWF route is not a recent phenomenon, but has been in operation for around five decades. The purpose of SWFs is to invest surplus State reserves in foreign currency to yield profits. The funds improve the liquidity of the financial markets, create long term growth and jobs and ensure stability for the companies they invest in. These responsible and reliable investors have pursued a long-term, stable policy that has certainly stood the test during the recent turmoil in the financial markets. SOEs are particularly important in emerging and transitioning economies such as China, India, Vietnam, Singapore, Malaysia, Czech Republic and Russia. Many SOEs are listed on the Fortune Global 500 list. Chinese SOEs figure most frequently in this listing, and count for 24 spots on the same. Due to the significance of foreign direct investment by Chinese SOEs, their characteristics have received particular attention. By far the largest outward investments by Chinese MNEs are made by SOEs, and all investment projects follow a scheme that ensures that they are strictly in line with government policies. The motivations of Chinese firms to internationalize and the government interest in this effort are to a large extent aligned and institutionally intertwined. This paper attempts to analyse the trends in SWF investment and the main obstacles they face. In particular, the analysis focuses on the major potential challenges for Indian SWFs, in case they come into existence. The analysis is arranged along the following lines. First the global SWF experience is reviewed, followed by the possibility of creating Indian SWFs. The subsequent analysis intends to identify the main regulations in the EU and the US markets that Indian SWFs might face. These regulations might function as potential obstacles in the sense that they incorporate conditions for any investment to enter their domestic markets. The analysis will then focus on the multilateral (IMF) guidelines on SWFs, which might, as well be perceived as an obstacle. However complying with these multilateral rules could be advantageous for Indian SWFs, if these regulations help them to avoid the EU and US obstacles to investment. On the basis of the analyses with respect to legal perspective, the policy conclusions on Indian investment strategies are drawn.

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