Chapter 12: The governance and regulation of sovereign wealth funds and foreign exchange reserves in a post-GFC world
In recent years, largely as a result of globalisation, states have been building up substantial portfolios of assets in other countries. Most of these holdings have been of bonds and marketed equities but some are direct ownership. These funds are normally labelled sovereign wealth funds (SWFs). The initial growth in such funds came from oil-rich countries which wanted to convert at least some of the sales of their oil into other assets that could be used in the future rather than simply into current consumption. A well-managed fund of that form might be able to sustain living standards once oil was depleted. In the early years such funds were small compared with global assets and their holders tended to spread their ownership so they were not a threat to the management of firms or countries and could be treated like any other institutional investor (Truman, 2010; Xu and Bahgat, 2010; Shemirani, 2011) Nowadays the funds are no longer trivial and in some cases result in control of foreign enterprises. Furthermore such funds have become a form of strategic development for some countries, allowing them to exploit the openness of other countries while protecting their own firms through restrictive entry conditions.
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