The Strategic Logics of State Investment Funds: Beyond Financialization

State capital has increasingly taken on marketized forms. From state enterprises to sovereign wealth funds, it is increasingly difficult to find much difference at the operational level with cognate organizations in the private sector. Manager cadres have become professionalized, with many having spent significant time honing their skills in the private sector before taking up their positions in state entities. Business practices and corporate governance standards typical of private capital and the syllabi of elite business schools have become the norm. This includes, as to be expected, an embrace of a shareholder value logic. State entities in doing so are becoming increasingly financialized, not dissimilarly to their peers in the private sector.

As state enterprises and sovereign wealth funds form an increasingly important tool for states to shape development (at home and abroad), this implies, by extension, that state-led development has become financialized. An active example of this are new (or reformed) strategic investment funds – a class of sovereign wealth fund. These have appeared in the last decade or so in countries ranging from Ireland, Kazakhstan, and Senegal, to Morocco, Russia, and Nigeria, to name a few, with the much older funds of Singapore (Temasek) and Malaysia (Khazanah) held as a gold standard to follow. These new strategic investment funds (also referred to as sovereign development funds), are designed to operate no differently than a private equity or venture capital fund. They typically have few constraints on how they invest, with capacity to invest in different parts of the capital structure of a firm or project (supplying debt or equity), and at different time horizons. In some instances, board seats may be taken. Even where not, there is still an expectation (and this may be explicitly helped along by the fund) that investees reform and improve to achieve their financial targets. While strategic investment funds are motivated to advance and catalyze additional developmental outcomes, such as fostering new industries or reforming old ones to make them more competitive on global markets, the achievement of a financial return for the fund is still paramount.

This embrace of high finance fits the narrative, as popularized by Daniela Gabor, of an emerging Wall Street Consensus. In many ways, referencing financialization is an accurate means of making sense of what we are observing in global development. There is a clear convergence on global financial norms and increasing organizational isomorphism of state financial institutions with the private sector. As compelling as the financialization explanation may be, we should still be cautious in how easily we apply this to state entities and new forms of economic governance. There are two reasons for such caution, one is analytical and the other is normative.

First, in applying financialization as an analytical frame, this necessarily places the focus of inquiry on finance, potentially at the expense of other explanations or observance of other underlying empirical phenomena. Obviously, debates about financialization have always discussed political and social dynamics. Hence, I am not trying to employ an informal fallacy. Rather, my word of caution is a tactical one. My concern is simply that in viewing the world through the lens of financialization as a primary frame, we may unnecessarily afford too much agency (and thus influence) to finance and financial actors in driving economic processes and economic change.

Second, by explaining what we are seeing as financialization, this serves a legitimation function. There is certainly a raw economic logic at play; this is capitalism we are discussing after all. The embrace of a shareholder value logic is also about maximizing returns for the state. Yet, the political sponsors of a strategic investment fund (and other marketized state-capital hybrids) also want them to be seen as no different than private sector counter parts. Seeing them as financialized is the point. That serves to deflect attention from the fact that these are still entities of the state, which sets them apart from a similar private sector actor.  

To be sure, private sector entities are entangled with the state and state power in a myriad of complex ways. Even if we can (and should) dismiss the state/market dichotomy as simplistic, it still matters to perceptions in the real world (at least at a global level). In that regard, state entities are different. The presumption is that they have attributes and capabilities not afforded to a private sector organization. At the least, the links with political authority and policymaking are more explicit (and legally codified). This inherent inseparability demands greater scrutiny to understand what separates a state entity from a private sector entity in the context of financialization.

In a recent open-access paper in the Journal of Contemporary Asia, I offer a set of three, what I call, logics that underpin state-controlled strategic investment funds and precede the explicit financial logics that manifest in their organizational design and behavior. In other words, these logics precede the financialization of these organizations. To bring these logics to life, the paper examines the evolution of strategic investment funds in Kazakhstan, Singapore, and Malaysia. For Kazakhstan, the experience of Singapore and Malaysia serve as a model for the development and reform of its strategic investment fund Samruk-Kazyna.

Now certainly there is an oddity in saying that a financial institution becomes financialized; it appears tautological. There is some truth to this, but the point in applying the financialization frame is to emphasize the convergence and professionalization of these organizations following the same pattern as cognates in the private sector. The set of logics I unpack in this article is part of an effort to articulate the differences with the latter, focusing on the political and organizational rationalities that these organizations embody as a state entity.

The three logics offered are a developmental logic, a regime maintenance logic, and a geo-political legitimacy logic. The developmental logic is simple. The state, through a strategic investment fund, mobilizes the tools and logics of finance as a political strategy to achieve policy objectives that adhere to and are subordinate to a logic of development. It is a form of financialized industrial policy, where modern financial practices and the state and (global) private capital become entangled. Inasmuch as the logic of development is about fostering economic growth, this is crucial for legitimizing and sustaining the extant structure of political authority. Hence, the strategic investment fund is an additional tool for maintaining power. At play as well in this regard, is an effort to retain a closer link with the state and capital where private capital is still expected to take part. An example here is increasing mixed ownership, where the state retains a shareholding in partially privatized firms (often seen as strategically significant). This leads to the third logic at play: geopolitical legitimacy. The embrace of a shareholder value logic is certainly about maximizing returns, but it is also necessary for a state player to minimize concerns of private actors as well as other state actors that investments are made for political reasons.

Although these logics are discussed and applied easily to state investors, the often and increasingly blurred lines between state and private sector actors across capitalist economics, there is no reason they cannot be considered in relation to the private sector. Understanding how these logics are embraced (implicitly or explicitly) in the private sector and how this is fomented by state actors would add further understanding to the mediating role of the state in processes of financialization, and the state’s embrace of financialization as a tool of statecraft.

Adam Dixon is Associate Professor of Globalization and Development at Maastricht University. He is the principal investigator of the SWFsEUROPE project funded by the European Research Council (grant No. 758430).     

Photo: Nur-Sultan in Kazakhstan, where a strategic investment fund has recently been established. Photo credits: Алексей Тараканов.

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