Sovereign wealth funds : how its controversies affect ownership choice in cross-border acquisitions

Sovereign Wealth Funds:

how its controversies affect ownership choice in cross-border acquisitions

Master Thesis

Msc. in Business Administration, International Management Student: Pieter Schrijver

Student number: 10249257 Thesis Supervisor: Dr. V.G. Scalera

Date: June 22, 2018

Statement of Originality

This document is written by Pieter Schrijver who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

Table of Contents

Abstract ... 5

1. Introduction ... ... 6

2. Literature Review... ... 9

2.1 Sovereign Wealth Funds ... 10

2.2 Current Relevance of SWFs ... 11

2.3 Controversial Aspects ... 12

2.3.1 Transparency ... 13

2.3.2 Politicization ... 15

2.3.3 Strategic Industry Investments ... 17

2.4 Entry Mode Theories ... 18

2.4.1 Transaction Cost Economics ... 20

2.4.2 Ownership Choice ... 24 2.5 Financial Crisis of 2008 ... 25 2.6 Research Gap ... 27 3. Hypotheses ... 28 3.1 Transparency ... 28 3.2 Politicization ... 29

3.3 Strategic Industry Investments ... 30

3.3 Financial Crisis ... 31 4. Methodology ... 32 4.1 Data Collection ... 32 4.2 Sample... 33 4.3 Variables Description ... 34 4.3.1 Dependent Variable... 35 4.3.2 Independent Variables... 35 4.3.3 Moderator Variable ... 36 4.3.4 Control Variables ... 37 5. Results ... ... 40 5.1 Normality Check ... 40 5.2 Descriptive Statistics ... 41 5.3 Correlations ... 42 5.4 Regression Analyses ... 44

5.4.1 OLS Regression Analysis ... 44

5.4.2 Binomial Logistic Regression Analysis ... 48 6. Discussion ... 51 6.1 Academic Relevance ... 54 6.2 Managerial Implications ... 55 6.3 Policy Implications ... 56 7. Conclusion ... 57 Acknowledgments ... .. 58 References ... 59 List of Figures Figure 1:Entry modes………...………18

Figure 2:Expected revenue & uncertainty………...………….22

Figure 3: Transaction Cost Economics………..…………..23

Figure 3: Research framework……….32

List of Tables Table 1: Cross-border acquisitions………...………34

Table 2: Variables………..………..…39

Table 3: Correlation matrix………..………43

Table 4: OLS regression analysis………..………...47

Abstract

A salient global player in the financial market nowadays is the Sovereign Wealth Fund (SWF). These government-owned investment funds all combined are estimated to control 7.4 trillion USD and are gaining attention because of both their increasing size and conceived ambiguous appearance. The obvious goal for an investment fund is to maximize profits. However, since SWFs did substantial investments in large Western firms during the most recent financial crisis, the concerns have risen regarding their political entanglements. This research aims to provide insight into how the controversial aspects that are revolving around SWFs affect its ownership choice in cross-border acquisitions. These controversies are determined to be transparency, politicization and strategic industry investments. To gain understanding of the role of the financial crisis, it is researched how this period changed the relationship between the controversial aspects and ownership choice. The sample consists of 594 cross-border acquisitions that have been done between 1998 and 2013. The results are obtained by conducting two different quantitative analyses and give insight into SWFs’ ownership choice. The main attribution of this study is the finding that SWFs with political managers present obtain more ownership in cross-border acquisitions made within the crisis period than SWFs that do not have such managers. Additionally, future research should be done to this conspicuousness finding.

Key words: sovereign wealth funds, ownership choice, cross-border acquisitions, transparency, politicization, strategic industry investment, financial crisis, transaction cost economics

1. Introduction

At the European Parliament in 2008, former president of France Nicolas Sarkozy said: “I do not want European citizens to wake up in several months’ time and find that European companies belong to non-European capital, which bought at the share price’s lowest point (Debarsy, Gnabo & Kerkour, 2017)." This quote from Sarkozy is referring to the long-lasting fears and reluctance regarding the appearance of state-owned investment funds in the

Western World due to some of their controversial aspects. This major new type of investment fund is a sovereign wealth fund (SWF); a state-owned investment organization, arising primarily in emerging and frontier markets (Backer, 2010). Gieve (2008) defines a SWF as a government investment vehicle that manages foreign assets with higher expected returns and a lower risk aversion than official reserves do. Monk (2009) came up with the following definition: “SWFs are government-owned and, directly or indirectly, controlled investment funds that have no outside beneficiaries or liabilities (beyond the government or the citizenry in abstract) and that invest their assets, either in the short or long term, according to the interests and objectives of the sovereign sponsor”. Nowadays, SWFs are salient global players due to their recapitalization of most of the Western banking system. Ever since, they have been top players in several markets, such as natural resources, transportation, utilities and real estate, because of their investments (Aguilera, Capapé & Santiso, 2016). An example of a SWF is the Norwegian Government Pension Fund Global (GPFG), the world’s largest SWF, managing approximately 900 billion USD in assets and owning three percent of the publicly-listed shares in Europe (Kimmitt, 2008). The example of the GPFG shows that SWFs are already large enough to be systematically significant in the world, and they are likely to grow larger over time in both relative and absolute terms (Kimmitt, 2008). SWFs are shaping today's global capital market, and their presence will only rise in the years to come (Aguilera et al., 2016). These funds are growing incredibly fast, increasing ten-fold between 1990 and 2012 from $500 billion to $5 trillion (Bernstein, Lehrner & Schoar, 2013). By 2015, these investment organizations managed $7.4 trillion worth of assets (Sovereign Wealth Fund Institute, 2016; Ngoc, 2015), having surpassed the total worth of hedge funds and private equity combined in less than a decade (Megginson & Fotak, 2014).

During his speech at the European Parliament, Sarkozy expressed his concerns about the cross-border capital inflows into both the advanced and emerging economies over the past decades and in the years to come (Debarsy et al., 2017). He spoke about the controversial aspects that are inseparably connected to SWF. These controversial aspects are the lack of transparency and the political ties that SWFs have (Truman, 2007). Bernstein et al. (2013)

state: "Sovereign wealth funds are particularly interesting because of the potential interaction between mission and ownership structure." The mission usually states that

financial returns have to be maximized, a logical, long-term, mission for an investment fund. However, the quasi-public ownership structure of these funds creates political

interference. The first controversial aspect to be discussed is the often visible presence of political managers at SWFs, conflicting with the mission to maximize financial returns and the long-term goals, as their goals are rather political and short-termed (Bernstein et al., 2013).

Another controversy revolving around SWFs is their typical lack of transparency. According to Truman (2007), investment operations' mechanisms require transparency in pursuance of horizontal accountability among all the involved stakeholders as well as

vertical accountability within the policy process. The reality is that, except for the Norwegian GPFG, not a single SWF had a fully functioning public mechanism until 2008. Ever since, progress concerning transparency has been booked, although many have fallen substantially short (Truman, 2013). The main problematic consequence of the opaque character of SWFs is that little is known about their investment objectives, the performance of their investments and their asset allocation (Bortolotti, Fotak, Megginson & Miracky, 2009).

A third controversy regards SWFs’ cross-border acquisitions done in what are considered strategic industries. Because of their government-owned organizational nature, there are concerns when a SWF gets involved in specific target industries abroad. Next to transparency and internal political influences, this is considered a primary concern

surrounding SWFs. Previous studies already pointed out that returns on investments done by SWFs in strategic industries are likely lower than investments in other industries (Bernstein et al., 2013; Bortolotti, Fotak, Megginson & Miracky, 2010).

Bortoletti et al. (2010) and Megginson, You and Han (2013) report that nearly 70% of the SWFs' acquisitions is set outside the home-country, which is a stark contrast with other funds such as mutual funds and pension funds which show figures that are strongly

homebound. Interesting to study is how the previously mentioned controversial aspects regarding SWFs affect their cross-border acquisitions regarding ownership choice. It will be investigated how transparency, politicization and investments in strategic industries affect SWFs' cross-border acquisitions. To make the cross-border acquisitions measurable, this study will examine the ownership choice. The extent of equity ownership is an excellent form of measurement in foreign markets due to its implications for resource commitment, risk, returns, and control (Anderson & Gatignon, 1986; Luo, 2001).

One event in time deserves extra attention in this study because of its seemingly great deal of impact on this study's variables. The three mentioned controversial aspects that have been revolving around SWFs for several decades all became increasingly urgent ever since a specific event took place: the financial crisis of 2008. SWFs helped to overcome the financial crisis by supporting Western companies that were of vital importance for national economies by acquiring them fully or partially (Bremmer, 2010). SWFs got hold of more stock in the financial world than ever before, raising even more concerns about their transparency, politicization, and investments done in strategic industries. Although critique on SWFs concerning these aspects was incrementing throughout the decades already, the financial crisis of 2008 will be used as a critical moment in time for this study due to its impact but also because of the extensive increased regulation and supervision of entities in the financial business ever since (Cecchetti, 2008).

Multiple studies have been conducted regarding the investment pattern of SWFs, the majority of them dating from 2007 until present (e.g. Bortolotti et al., 2009; Fotak, Bortolotti, Megginson & Miracky, 2008; Knill, Lee, Mauk, 2012; Johnson, 2007; Truman, 2007; Truman, 2009). Despite the financial crisis being mentioned as an essential moment in time for SWFs in most of these articles, this has scarcely been a critical element in the research itself. Although there is an abundant amount of articles explaining the financial crisis itself (e.g. Brunnermeier, 2009; Mishkin, 2011; Mizen, 2008; Taylor, 2009), it did not get the attention in the study of SWF investment patterns it deserves, except in a small amount of studies (Backer, 2010; Fei, Xu & Ding; 2013). The first is about SWFs being a potential danger for the independence and sovereignty of financial markets and testing if both SWFs and state-owned enterprises serve as a catalyst to initiate a transformation in policy and regulation. Backer (2010) concludes that policy and regulation have been changing since the rise of SWFs due to its nature of being both public and private, although the new rules differ per country. The latter article by Fei et al. (2013) finds that SWFs’ acquisitions in the recent financial crisis brought about losses, but also created a possibility for a better environment because the nerves of the recipient countries’ governments were eased.

Interesting to see is how the three controversial aspects of SWFs, politicization, transparency and strategic industry investments, influence SWFs' cross-border acquisitions concerning ownership choice. The research question for this study therefore is the following:

How do sovereign wealth funds’ controversial aspects affect ownership choice in cross-border acquisitions, and how did the 2008 financial crisis change this relationship?

This research question is going to be tested statistically by conducting two ways of measuring the ownership choice in cross-border acquisitions. The models will contain the controversial aspects as variables, accompanied by multiple control variables. To determine the importance of the financial crisis in how SWFs changed these aspects, this study is executed by data from the years just before, during and after the financial crisis. This way it can be studied what the value of the financial crisis in this development has been. The results come up with interesting findings, especially for the period of the financial crisis in which political managers seem to have an unexpected deal of impact on ownership choice.

Governments and managers alike could gain relevant knowledge by learning what impact these controversial aspects have on SWFs' cross-border acquisitions. Previous research has shown that lower performance numbers are achieved when political ties are present in SWFs because the focus is not solely on profit maximization. This study operates in the same field where controversial influences affect SWF's business decisions. Another practical implication for both governments and managers is the creation of awareness. As the global impact of SWFs is growing, the awareness of its implications should be growing with it. This study will contribute to the question if political influence from within SWF is desirable. If proven not to, then SWFs may have to intervene and change their structure and strategy. Target firm managements could also become more hostile versus potential

acquisitions from SWFs once they know there are political strings or influences attached. The organization of this paper is as follows. First, relevant literature on SWFs will be discussed from which a research gap with a research question is developed. Next is chapter 3 in which hypotheses will be developed, based on the conducted literature review. This is followed by chapter 4 which is going to cover the methodology. The results are given in chapter 5 and these will be discussed in the following chapter, chapter 6. Lastly, a conclusion will be given, based on the thesis as a whole.

2. Literature Review

In this chapter, work of accredited scholars and researchers will be reviewed to gain insight into relevant topics. First, SWFs will be defined. After that, it will become clear what the current relevance of SWFs is. Third, the controversial aspects concerning SWFs will be studied. Fourth, the entry modes and ownership choice will be addressed, followed by paragraph five which will elaborate on the financial crisis and its role for SWFs. Sixth, the

gap in the literature will be addressed and the research question is formulated.

2.1 Sovereign Wealth Funds

"Sovereign wealth funds are a fairly new name for something that has been around for quite a while: assets held by governments in another country's currency. All countries have foreign exchange reserves (these days, they are typically in Dollars, Euros, or Yen). When a country, by running a current account surplus, accumulates more reserves than it feels it needs for immediate purposes, it can create a sovereign fund to manage these ‘extra resources’ (Johnson, 2007). SWFs have been around for multiple decades, yet not as the funds as we know it nowadays (Jen, 2009). The descriptive term ‘sovereign wealth fund' has been developed about three decades ago, before that it was known as a ‘stabilization fund.' The initial purpose of these funds was revenue stabilization. Governments with revenues that are dependent on underlying commodity value engaged in the diversification of investments to stabilize revenues. Most SWFs are established in countries that are rich in natural

resources, with oil countries being the most common ones (Bortolotti et al., 2008). Such funds have evolved from ‘stabilization funds’ to ‘wealth accumulation funds’ throughout the years. The first SWF, at the time a stabilization fund, dates back to 1953 when, according to the Kuwait Investment Authority, the “Kuwait Investment Board was set up with the aim of investing surplus oil revenues to reduce the reliance of Kuwait on its finite oil resource” (Beck & Fidora, 2008). More recently established SWFs are the, mainly Asian, funds that have accumulated their official reserves in recent years for liquidity purposes through non-commodity business (Jen, 2009). The number of countries that have SWFs is growing, and multiple new SWFs were created to accumulate foreign assets as well as to improve the return on traditional foreign exchange reserves (Beck & Fidora, 2008). A generally accepted, fully operational definition for SWFs does not exist. This is due to governmental entities having different histories, different sources that they derive their funding from, and by having different objectives for their funds. SWFs are separated from the official national reserve pools and avoid inclusion in the International Monetary Fund’s reserves transparency systems (Blackburn, DelVecchio, Fox, Gatenio, Khayum & Wolfson, 2008). It can be said that the difference between official reserves and SWFs is that the latter makes more risky investments with a higher expected return instead of just investing in bonds (Jen, 2009). A SWF is also defined as a special purpose investment fund or arrangement owned by the government (Götz & Jankowska, 2016). The US Treasury Department adopts the following definition for a

SWF: “government investment vehicles funded by foreign exchange assets and managed separately from official reserves” (Kimmitt, 2008). Whereas the International Monetary Fund defines SWFs as: “A special investment fund created and owned by a government to hold assets for long-term purposes” (Balding, 2011).

2.2 Current Relevance of SWFs

In sum, SWFs are the second biggest investor in company stock of all the worldwide entities, following the United States Government (Bortolotti et al., 2009). According to Heflin and Shaw (2000), SWFs are known for always purchasing stock directly from public firms through friendly transactions. Usually, this purchase consists of a takeover of more than 5% of a firm's outstanding shares, giving the SWF a blockholder ownership. The most important benefit that SWFs gain by obtaining blockholder ownership is that they receive significant influence at managerial level (Heflin & Shaw, 2000).

Nowadays, SWFs operate on an extensive business scale where they have increasing influence due to these significant acquisitions. Public attention rose ever since SWFs started purchasing substantial amounts of stock, thereby raising concerns over a potential sale of strategic assets from the companies to SWFs. Besides that, vital industrial knowledge, expertise, and issues of public security got in the hands of foreign SWFs (Kern, Speyer, Kaiser & Walter, 2008). The sheer size of the funds makes them capable of making cross-border investments which could lead to ownership or control of foreign companies. Target country's governments are concerned that SWFs seek to gain ownership or control of companies in specific strategic sectors which are related to national security, such as high-technology or oil and gas sectors, or the aerospace and defense (Lenihan, 2014).

According to Kern et al. (2008), the world as we know it is being turned upside down. The world in which private investors are making investments all around the world from wealthy, industrialized, countries seems to be changing towards a world in which emerging market governments become the most significant shareholders in Western companies. This sellout of critical strategic assets to SWFs from emerging countries creates fear in the

Western economies as we know it. The policy issues that arise with this range from concerns over a lack of transparency and a reversal in privatizations, to considerable risk of losing our global financial stability (Beck & Fidora, 2008). "A global industry of state-owned funds almost twice the size of the hedge-fund segment, with discretionary asset management strategies and virtually no transparency vis- à-vis the outside world" (Kern et al., 2008).

Policymakers, commentators and market participants their attention in this scenario has been increasing. This industry is increasingly perceived as a potential source of challenges to the current financial world. Policy action has been announced, working groups have been formed, and the shout from experts is becoming louder (Kern, 2007). It becomes clear from the literature that the rise of SWFs is causing concerns for multiple parties, but where exactly do these concerns come from?

2.3 Controversial Aspects

Although SWFs have been around since the 1950s, their total size worldwide only started increasing substantially since around the year 2000. The majority of the savings in SWFs has accumulated throughout the centuries in the form of foreign currency reserves, with the traditional investment vehicles being debt instruments, mainly government bonds from industrialized nations (Fernandes, 2011). Due to low returns on these bonds, SWFs started investing in equities and other instruments so that higher returns could be achieved. This change in investment strategy has led to concerns that SWFs are capable of destabilizing financial markets and with that the global economy if their investments have a political motivation rather than a profit-maximizing consideration (Fernandes, 2011).

An excellent example of how rapidly SWFs are trying to increase their stake in the equity market and the additional controversy it brings along is provided by the article of Summers (2007) in the Financial Times in which he sums up the SWF activities over the past month back then. In July that year, Chinese SWFs took the largest external –non-voting– stake in Blackstone, one of the largest indirect employers in the US. The Qatar government yearns control of one of the largest supermarket chains in the UK, J. Sainsbury. Gazprom (a state-owned enterprise often seen as a SWF) was aiming to acquire strategic positions in energy sectors in several countries and a stake in Airbus, and Chinese and Singapore SWFs were doing a collaborate offering to gain a substantial stake in Barclays, which at that time was entangled in the world's largest banking merger with ABN AMRO. All such controversial acquisitions done by entity-controlled corporations make other governments wonder whether the primary objective is driven purely by financial considerations (Summers,

2007). These are mere examples of the concerns that have arisen throughout the decades: questionable financial considerations, low transparency, the possible breach of national security, the influence of SWFs in firms' management, and obscure reasoning behind the purchase of strategic assets (Fernandes, 2011). On top of that, SWFs are willing to do bigger,

riskier, investments over the years. The market meltdown during the financial crisis of 2008 resulted in massive state spending to save companies from the financial implosion. This massive state spending was done through SWFs mainly from the Middle East and Asia, partially shifting power from the Western World to emerging countries. Not a bad moment for the SWFs to ‘help' in a time where they were searching for an entrance into the Western financial world (Bremmer, 2010).

In 2007, Philipp Hildebrand spoke on behalf of the Bank for International Settlements in Geneva at the International Center for Monetary and Banking Studies where he explained why SWFs are considered to be challenging for conventional views (Hildebrand, 2008). Hildebrand spoke about the enhancement of the free global market throughout the past couple of decades and the market's attempt to reduce the input of governments. SWFs are being perceived as an intruder in the free market process as they make investments which potentially trigger national protectionism in the host countries. The fact that SWFs are

government-controlled investment companies raises questions in the host-countries: are these investments solely pursuing profit or is there a hidden political objective? The policy issues that arose around the year 2007 ranged from political questions due to the reversal in

privatizations and the accompanying lack of transparency, to the global financial liability as a result of the risk taken by governmental organizations (Beck & Fidora, 2008).

This thesis will focus on three controversial aspects which result from the literature regarding SWFs. This chapter will elucidate these controversial aspects to create a better understanding of its meaning and impact. Firstly, the lack of transparency for which SWFs are infamous will be evaluated. Secondly, the politicization aspect which has been becoming more controversial throughout the years will be treated. Lastly, it is researched whether cross-border acquisitions done in strategic industries affect ownership choice.

2.3.1 Transparency

For multiple decades, SWFs have been showing the feature of low transparency in their behavior and company structure from which suspicion and controversy arises (Gieve, 2008; Johnson, 2007; Murtinu & Scalera, 2016; Summers, 2007). Compared to hedge- or mutual funds, they have always disclosed little about their business. SWFs are state-owned, and the home-countries have always been unwilling to be more transparent about acquisition details to the public. Big SWFs like the Abu Dhabi Investment Authority and China Investment

Corporation were entitled ‘mysterious' for many years due to their operations

below the radar (Fei et al., 2013). This low degree of transparency is one of the primary causes of the experienced fear by target countries for SWFs' cross-border acquisitions (Megginson et al., 2013). Not only does this lack of transparency create fear and does it give room to question the motivation of the SWFs' investments, but it also aggravates

protectionism from the target-country because the entering SWF is perceived as a national risk (Beck & Fidora, 2008; Gieve, 2008; Johnson, 2007; Summers, 2007). SWFs' acquisitions are regularly highly secretive, with little-disclosed information about the nature, size, and strategy of the ongoing acquisitions towards the outside world (Bernstein et al., 2013).

According to Murtinu and Scalera (2016), opacity reduces market rumors and thus hides SWFs' strategies, which may be an advantage for SWFs. On the other hand, this opacity jeopardizes the cross-border acquisitions since SWFs are likely to face hostility from the host country's government and conflicting public opinion. SWFs do have their reasoning to create a lack of transparency and face this increased hostility though. The opaqueness makes it almost impossible for other investors to copy the SWF's investment strategies. Too much disclosure would have real costs since it leads to increased imitation by other investors (Bernstein et al., 2013). Whenever a prominent institution invests, this can trigger a rush of capital seeking to gain access to the same investment type. This creates instant competition and possibly a lost chance of investment. A lack of transparency would have been a

successful strategy in such a situation (Bernstein et al., 2013).

Also, cross-border acquisitions that seem unremarkable when executed by ordinary investors can create international fuss whenever undertaken by a SWF. There are examples of SWFs that had money invested into companies which were accused of perpetrating child labor, international ambassadors and courts would then accuse the nations in dispute of knowingly dealing with child labor. Another example is that GPFG, along with multiple hedge funds, sold short the shares of Icelandic banks in 2006, this caused a significant

diplomatic uproar because Norway would have acted against Iceland (Bernstein et al., 2013). SWFs can keep their country out of lousy media attention by operating under the radar as many other SWFs do.

It becomes clear from the literature that transparency creates too much insight into SWFs' cross-border investments, resulting in imitation by competitors and international conflicts. It is no coincidence that most findable examples in the literature regarding setbacks due to open transparency concern GPFG since they are assuredly the most transparent SWF worldwide (Truman, 2007). The world wants to know what these investment funds bring about. Hence, a code of conduct concerning SWF was requested at the IMF meeting in 2007

by the G-7 finance ministers to create more transparency (Drezner, 2008), resulting in more introduced public mechanisms for all kind of institutions, including SWFs. This code of conduct was named the ‘Santiago Principles.' The only SWF that had a fully functioning public mechanism before 2008 was the GPFG. It provided, and still provides, the general public with extensive information on its investment strategies and results on a quarterly basis, including month-by-month returns and annual reports on its holdings of the bonds and

equities of individual countries and corporations (Truman, 2007). Other SWFs relied, fully or partially, on sovereign monitoring. This means that multiple executives were political

celebrities with a double agenda and that annual reports which gave full disclosure of the company's acquisitions were exceptional. After the financial crisis, the pressure from the media and the general public forced SWFs to a more transparent governance mechanism. It became a routine for many SWFs to publish interim and annual reports, thus creating more transparency (Fei et al., 2013). Despite this progress, Bagnall and Truman (2013) are not convinced by the SWF transparency. Truman first developed a SWF scoreboard in 2007 to keep track of SWFs' transparency and accountability and did so in 2013 as well. According to this scoreboard, substantial progress has been made regarding transparency and

accountability since the Santiago Principles were introduced in response to demands at home and abroad about their activities. This progress, however, has not been uniform. It became evident that most of the newer SWFs did not follow the leading example of the older funds, resulting in transparency still being controversial for SWFs (Bagnall & Truman, 2013). From a legal point of view, SWFs are not obliged to disclose information about their acquisitions (Keller, 2008). A result of this is that the SWFs originating from the emerging economies, being Arabian countries, China and Russia, score low on fund transparency (Truman, 2009).

2.3.2 Politicization

The second controversial aspect regarding SWFs that has been increasingly questionable is the politicization aspect. The current concern with SWFs is that they can act in a way that jeopardizes a country's national security due to politicians being involved. SWFs and their nation's politicians, which are often represented in the SWF's management, assure regulators that their investments are purely based on economic reasoning. It can, however, be that a SWF is used as a vehicle to apply subtle political pressure on the recipient country (Rose, 2008). The fact that SWFs are often home-based in countries such as China, Russia, or Middle Eastern countries, makes that they are to be considered suspicious

according to Rose (2008). The presence of politicians in a SWF is considered to be

suspicious due to the possibly present underlying political motives. Presence of one or more politicians in the SWF management is called politicization in this study.

Especially since SWFs provided invaluable liquidity during the 2008 financial crisis to both global and domestic capital markets, most governments have actively courted SWFs’ cross-border investments (Fotak et al., 2016). Albeit having been of utter importance for the capital markets, this widespread acceptance of SWFs' international investments has its downsides, which are not to be ignored. We are entering a new era of state capitalism where governments increasingly tend to share their ownership with non-governmental owners and where governments provide strategic support to private firms in the form of state protection or subsidies (Musacchio & Lazzarini, 2014; Bruton, Ahlstrom, Stan, Peng & Xu, 2015). Political authorities have always had a close connection to SWFs, but this interaction between SWFs and politicians could create cronyism (Bernstein et al., 2013). SWFs with political leaders on their boards could be tempted to pursue political strategies over business strategies, thus leading to investments that do not maximize shareholder value. Board members and company executives of SWFs worldwide were and still are mostly officers in the Monetary Authorities or the central government, raising concerns whenever cross-border investments are made because financial and political reasoning is mingled (Fei et al., 2013). Business strategies might be subordinate to political strategies, although it is difficult to determine the boundaries between the pair in the case of a SWF (Murtinu & Scalera, 2016). Any position that a SWF takes other than being purely passive investors could create political pressure or resistance from the host country government (Dinç & Erel, 2013).

Politicized SWFs are under the supervision of their country's government. The

government may impose political objectives on SWFs' cross-border activities, shifting their focus away from profit maximization goals (Fotak et al., 2016). Bernstein et al. (2013) and Fotak et al. (2016) state that SWFs with a significant presence of politicians lead to international investment strategies that are more likely to target key industries or countries instead of economically and politically less essential industries or countries. Bernstein et al. (2013) also state that the active presence of politicians on the board could generate hostility in the host country. According to Bortolotti et al. (2015), one concern that leads to this hostility is that the host country is afraid that political influence will be exerted in the target firm. Although most stakeholders assume that SWFs have a passive role in the (partially) acquired firm abroad, multiple critics dispute this and say that politicized SWFs do exert their power over the (partially) acquired firm (Fernandes, 2014). Karolyi and Liao (2010) state that

this might be the result of agency problems, making politicians susceptible to bribes.

2.3.3 Strategic Industry Investments

Related to the politicization risk due to the presence of politicians in the SWFs, is the fear of whether SWFs will always invest to gain financial returns or rather use investments in the pursuit of other government interests (Cox, 2007). This third controversial aspect regards

strategic industry investments and refers to investments in strategic industries. Some fear that the governments may exert inappropriate influence in both political and private spheres (Weisman, 2007). For instance, if a major bank in which a SWF is invested gets into trouble, what is to stop the SWF political manager from getting involved in the case (Summers,

2007)? Take note that the previous chapter regarding politicization concerns politicians' presence in SWF management, whereas this chapter regarding strategic industry

investments is about the strategic industries in which SWFs invest.

Rose (2008) compares the investment of a SWF in a specific sector to a Trojan horse; the SWF is used as a vehicle to get inside an industry to acquire sensitive technology,

expertise, or to further geopolitical motives. Such sectors comprise high tech companies, defense firms, financial institutions, or energy resources. Access to such cross-border

industries could offer governments a way to acquire research and development. According to Keller (2008), there is fear that an emerging economy could invest in a high-tech U.S. firm through SWFs in order to augment that expertise in its low-cost manufacturing industry, or that such an investment is made in a financial firm with the goal of absorbing the financial skills and then implement these in the home-country in order to develop its financial markets. Former U.S. Treasury Secretary Larry Summers explains that the premise of capitalism is that shares are owned to maximize value. However, if one thinks of state funds buying shares in certain sectors, there could be multiple motives. Such motives are however hard to detect because political, commercial and strategic objectives are closely intertwined for many SWFs (Keller, 2008). Summers also warns that SWF investments create a disadvantage for ordinary investors due to the asymmetrical information regarding non-public knowledge (Keller, 2008). Cox (2007) goes as far as to warn for governments being able to offer the ultimate tool of information; their national intelligence services. If regular investors come to believe that they are actually at a disadvantage in their critical sectors, their confidence in our capital market could collapse (Kimmitt, 2008).

2.4 Entry Mode Theories

Concerning international expansion, entry mode choice is a critical ingredient that has been examined extensively in the IB field. Besides a firm's concern which foreign markets to enter and which activities to execute in those markets, there is also the question of how to enter: through export, licensing or foreign direct investment? (Chang & Rosenzweig, 2001). This entry mode choice has substantial implications for the degree of organizational control over foreign operations, investment risk involved, and resource-commitment required (Zhao, Luo & Suh, 2004; Chari & Chang, 2009). When examining the hierarchical model of market entry modes by Kumar and Subramaniam (1997), as depicted below this paragraph, a

distinction is made between equity-based entry modes and non-equity based entry modes. At the second level, non-equity modes are split into export and contractual agreements whereas equity modes are divided into equity joint ventures (JVs) and wholly-owned subsidiaries (Pan & David, 2000). These four types of organizational control all vary significantly in terms of risk and resource commitment, with equity-based control ownership offering the highest level of control (Anil, Tatoglu & Ozkasap, 2014).

Figure 1: A Hierarchical Model of the Mode of Entry Decision (Kumar & Subramanian, 1997)

When a firm plans to invest in a foreign country, it has to think of the described two related but distinct strategic issues. In the extant literature, the choice regarding entering a foreign market by either full or shared ownership modes is called the ownership choice, whereas the entry mode concerns getting involved by acquiring an existing domestic firm

(acquisition) or by establishing a new firm (greenfield investment).

In IB literature numerous theories can be applied to find the appropriate foreign entry mode and ownership form for a company when intending to make a cross-border investment. According to Zhang, Zhang and Liu (2007), leading theories concerning foreign entry mode choice are the knowledge-based view, the Uppsala internationalization model and the transaction cost economics (TCE). Following is an introduction to these three theories.

The knowledge-based view looks at a firm as “a social community that serves as an efficient mechanism for the creation and transformation of knowledge” (Kogut & Zander, 1993, p. 627). The theory is built on the assumption that critical knowledge is embedded in the employers of a firm. The firm itself is a reservoir of knowledge that composes the

ownership advantage which is to be exploited in the entered market. Costs of transactions are not the primary boundary to the expanding firm, the primary metrics for this are the cost of coordination, communication, and combinations (Kogut & Zander, 1993; Conner &

Prahalad, 1996). The appropriate entry mode for a firm is the mode that creates the adequate way of coordinating and knowledge transferring activities between all members of the firm community (Kogut & Zander, 1996) or cherishes and improves capabilities in new markets (Chang, 1995; Silverman, 1999).

The Uppsala internationalization model is built on the process of increasing

involvement in international operations (Johanson & Vahlne, 1977; Chang & Rosenzweig, 2001). The theory was developed in 1977 by Johanson and Vahlne at the University of Uppsala, where they did empirical research to test their theory. The model focuses on the development of the internationalizing firm with particular interest for the gradual acquisition, integration, use of knowledge regarding markets and operations abroad, and growing level of commitment to foreign markets. The central assumption of this theory is that lack of

knowledge is the obstacle blocking development of internationalization. The only way to obtain this knowledge is by gradually increasing operations abroad (Johanson & Vahlne, 1977).

The last theory to be discussed is the theory of TCE. At its core, TCE is a theory of organization efficiency, looking at how a complex transaction should be structured and governed to minimize waste and create transactional value. If a recurring risky and complicated transaction is expensive to manage for a firm because of an insufficient

exporting contract, vertically integrating the transaction could offer a better deal than market exchange (Ketokivi & Mahoney, 2017). According to TCE, the primary factor to be

considered while making a cross-border investment is the required level of control within a

firm. A high degree of control requires a more considerable investment, whereas this also increases the risk exposure for the investor. On the other hand, a lower investment gives the investor a lower level of control, yet the risk exposure is also lower. A higher level of control does not only give the investors more to say on a management level, but it also entails a higher return (Deng, 2003). If the investor opts for an entry mode with high control, it has to make a forecast of whether the cost of gaining this level of control is equivalent to the return it is supposed to realize. If the high rate of return is not within reach, then there is no need to opt for a high control entry mode (Deng, 2003).

Looking at these three entry mode theories with relation to SWFs’ ownership choice in cross-border investments, the theory of TCE is regarded the most suitable and will therefore be the leading entry mode theory in this study. Reason for TCE to be the most suitable theory is because of its ‘uncertainty’ dimension with an ‘opportunistic’ element in this. Many studies are focused on TCE due to this element which is an effort to realize individual gains, most

commonly recognized in the form of gains through asymmetrically distributed information (Williamson, 1975). If opportunism risk is high, resources must be spent to maintain control and monitoring. Also, opportunism risk includes opportunity cost because valuable deals could be missed out on (Wathne & Heide, 2000). Hence, the reason for the theory of TCE to be the most suitable is its focus on the right level of control, risk and return. As the level of ownership choice is determined for a SWF cross-border investment, level of control, risk and return are leading indicators, making TCE a relevant theory in this study's context of analysis. The next chapter will elaborate on the prevailing TCE theory.

2.4.1 Transaction Cost Economics

Throughout the decades, TCE has developed from solely a ‘make-or-buy’ decision towards a theory that is also applicable in conceptual and empirical research to prove governance problems in alliances (Kogut, 1988). The core was developed by Williamson, an economist, and explains the boundaries of a firm concerning economic assessment: "How should a complex transaction be structured and governed to minimize waste?" (Ketokivi & Mahoney, 2017). TCE is based on Williamson’s theory that asset specificity, frequency and uncertainty predict the governance structure that will be adopted by the involved parties, with the underlying central premise that the chosen governance structure will be the one that minimizes transaction costs (Chiles & McMackin, 1996; Parkhe, 1993; Spicer, 1988; Williamson 1975; Riordan & Willamson, 1985). Applying TCE to entry mode and ownership

choice, the theory propounds that an entry strategy is primarily based on the issue of control. The degree of control can then vary from minimum control to full control.

Asset specificity enables the acquiring firm to comprehend whether the necessary contract requires individually-tailored solutions or standardized investments which can be easily be found in the market (Williamson 1985).

Frequency is described by Williamson (1985) as the sales volume of the goods and services contracted. Throughout the decennia, it has been questionable if this is the proper definition, however, when considered jointly with asset specificity it provides researchers with a broader understanding of the subject (Chow, 2008). An example of when this becomes visible is when higher repeatability of the transaction increases the probability of investing in unrecoverable assets abroad (Williamson, 1985). Although presumed to be a vital part of TCE, many studies tend to ignore the frequency dimension when applying TCE to entry mode (e.g. Dietrich 1994; Bremen, Oehmen, Alard & Schönsleben, 2010; Nicita & Vatiero, 2011).

Uncertainty comes forth out of imperfect information being available (bounded

rationality), the fact that partners may behave opportunistically and the probability of external conditions such as changes in the legal and economic environment (Bremen et al.,

2010; Mroczek, 2014; Williamson, 1985). Besides the entry mode and ownership choice being influenced by uncertainty, it also determines the distribution of expected revenue as can be seen in figure 2. An acceptable uncertainty level y leads to a revenue amount of p. This revenue will decrease when the partner makes opportunistic attempts or external

conditions cause a considerable impact. Contrarily, the firm itself can seize opportunities that the market presents and increase its revenue. The SWF’s choice of ownership choice is highly dependent on its strategic goals set as these determine the tolerable level of

uncertainty the fund can accept. When the uncertainty level exceeds set boundaries, higher control in the foreign company may be required (Mroczek, 2014).

Figure 2: Expected Revenue and Uncertainty Level (Mroczek, 2014)

This study incorporates the social-context variable of trust into TCE so that governance-structure predictions of the theory can be made from a managerial control perspective. Trust is chosen as this variable because it is related to both bounded rationality and opportunism in the literature, as is done in the study of Chiles and McMackin (1996). Bounded rationality and opportunism are determining factors in uncertainty, which in turn is decisive for ownership choice (Mroczek, 2014). Bounded rationality in relation to trust has received minor attention (Lincoln, 1990; Powel, 1990) whereas opportunism has a widely established relationship with trust (e.g. Bradach & Eccles, 1989; Larson, 1992). Incorporating trust in the TCE model was proposed by Williamson himself who acknowledged that despite transaction-cost economizing being the focal point of TCE, “the costs need to be located in the larger context of which they are a part…[including] the social context in which the transactions are embedded (Williamson, 1985, p. 22).” To clarify how all the discussed elements are related, a figure has been created which is depicted below. The transaction cost in the figure represents ownership choice for this study.

Figure 3: Transaction Cost Economics

The relation of trust to opportunism is defined by Zand (1972) as: "Increasing one's vulnerability to the risk of opportunistic behavior of one's transaction partner, whose behavior is not under one's control in a situation in which the cost of violating the trust is greater than the benefits of upholding the trust." Dasgupta (1988) does give two conditions: A certain degree of risk must be present to test trust, and vulnerability to the risk of

opportunism needs to be present to require trust.

Chiles and McMackin (1996) argue that information, influence, and control mediate the relationship between trust and bounded rationality. The presence of trust in a contractual relationship should lead to (a) more accurate information exchange between the parties that is more accurate, timely, and comprehensive; (b) more susceptibility to other party’s influence; and (c) the relaxation of control over the other party. Lincoln (1990) and Powell (1990) support this and made similar arguments, yet less complete than this argumentation by Chiles and McMackin (1996). All of these arguments advocate for an improved bounded rationality and a more optimal governance structure.

As this study is looking at the ownership perspective of transactions done by SWFs, the trust element is incorporated in the TCE model in which it influences the bounded rationality and opportunism elements of uncertainty and thus the ownership choice. Acquiring SWFs can then assess what their optimal governance structure is from a profit-maximizing perspective.

As in many IB literature theories, TCE embraces profit-maximization as its primary objective. Although transactions can create other benefits, these are often not within the scope of TCE. Maximizing shareholder wealth is theoretically unrealistic due to external conditions and bounded rationality, yet it should be a firm's goal to at least increase

shareholder value by creating good contracts and running good governance at a respectable price for the investor (Ketokivi & Mahoney, 2017). Ketokivi and Mahoney (2017) describe this as creating a choice where one decision could be chosen over others because of a higher increase in shareholder value. Thus, TCE aims for the most applicable form of governance to ultimately increase shareholder value. The perceived uncertainty essentially determines the correct level of ownership choice.

2.4.2 Ownership Choice

Ownership choice concerns the level of ownership that is obtained by the approaching firm in a cross-border investment, thus via an acquisition, a greenfield investment or a joint venture (Barkema & Vermeulen, 1998; Chari & Chang, 2009; Chen & Hennart, 2004). According to Chari and Chang (2009), cross-border acquisitions are by far the most dominant form of cross-border investment, and a significant number of these acquisitions is partial rather than full. Based on this information from the research of Chari and Chang (2009), this study will focus on the ownership choice in acquisitions done by SWFs. According to multiple scholars, full acquisition of a firm requires an acquisition of the full 100 percent whereas an acquisition accounting for less than 100 percent is regarded a partial acquisition (e.g. Barkema & Vermeulen, 1998; Chen & Hennart, 2004). Contractor, Lahiri, Elango & Kundu (2014) underscore that the choice for full or partial cross-border acquisitions has received insufficient attention despite this entry mode being used most of the possible cross-border investments (Chari & Chang, 2009). Chen (2008) and Jakobsen and Meyer (2007) point out that research into full versus partial acquisitions has been missing in most previous studies and is overlooked in ownership choice literature. Hence, the literature is rich in topics concerning entry modes and ownership choice, yet it does not seem to capture the importance of the level of ownership regarding acquisitions.

Zhao, Luo, and Suh (2004) state that there are three implications concerning ownership choice which are of major importance: organizational control over foreign organizations, the associated investment risk and the resource commitment required. As stated previously, this study will apply TCE as the underlying theory that leads to ownership choice. As SWFs are expected to ensure a steady cash flow level and guarantee resources for long-term investments, their general strategy is considered to be to generate maximum profit against a minimum risk level (Bernstein et al., 2013). Chen (2008) askes the under-researched question: "Why would a foreign company stay short of 100% ownership of the target firm?"

An incentive is given to the former owners and managers to help the acquiring company in its new business and country by leaving some shares in their hands; this reduces uncertainty. No one within the acquired company has a better understanding of the business networks,

customer preferences, local customs and regulations than they do, thus making them valuable human assets.

According to Contractor et al. (2014), a downside of not having acquired full ownership is that no entirely independent decisions can be made and no 100% of the, potential, profits can be cashed. According to the opportunism aspect of TCE, the acquiring firm aims to pursue opportunities as much as possible and thus often as much capital as possible. A full acquisition brings along increased costs and risk due to the high capital cost and resource-commitment. The local supportive advantage as described for a partial

acquisition is absent in a full acquisition. The acquiring company is on its own in the host country, undoubtedly having more difficulty in gathering local knowledge and support

(Brouthers, Brouthers & Werner, 2003; Chen & Hennart, 2004; Collins, Holcomb, Certo, Hitt & Lester, 2009).

Hence, it is essential for SWFs to think carefully about the consequences of this tradeoff in ownership choice. The ownership level has a high impact on the success of an investment, and when planned correctly, this can result in significant economic benefits through asset synergy and integration. On the other hand, whenever the right ownership level in an acquisition is not met, this may lead to a mismatch in risk share, return, control and resource commitment (Chari & Chang, 2009). Scholars' knowledge concerning

ownership choice is still limited, let alone the knowledge available in the field of SWFs that have been actively making cross-border acquisitions over the last decade. It is therefore important to enrich our knowledge and find out why and how SWFs execute these cross-border acquisitions.

2.5 Financial Crisis of 2008

The financial crisis of 2008 has been mentioned several times in this thesis so far, due to its significant position in the development of SWFs' cross-border acquisitions over time. To signify the relevance of the financial crisis for the development of SWFs, the financial crisis will first be discussed, based on corresponding literature.

The United States' mortgage market was the initial cause of the financial crisis. House buyers without adequate income or credit profiles were given high mortgages for them to buy

houses, leading to high growth in house sales (Mizen, 2008). The risks taken with the mortgages turned out to be too high, the house buyers were unable to pay their mortgages, and a liquidity shortage among banks and other financial institutions was developed. Bear Stearns, an American investment bank, was the first victim of the default on subprime

mortgages. It went bankrupt in 2008. The fourth-largest investment bank in the United States, Lehman Brothers, was the next to go bankrupt in that same year. Consequently, banks and financial investors realized that something had to change and they reduced the amount of lending (Taylor, 2009). Many scholars agree that the subprime mortgages situation and following bankruptcy of Bear Sterns and later Lehman Brothers was the start of the financial crisis in the Western economies (Brunnermeier, 2009; Mishkin, 2011; Taylor, 2009).

The financial crisis crossed towards Europe and other developed economies. By the end of 2009, multiple European countries were facing negative results in their GDPs. To counteract these sovereign debts in multiple countries, also in favor of Europe as a whole, vast amounts of funding was required (Lane, 2012). This required amount was so high that conventional IMF loans failed to cover. Therefore substantial investments by SWFs were made during the financial crisis of 2008. Non-Western SWFs were the main contributors and acquired a significant amount of stock from firms in Western economies (Lee, 2010). The reason that SWFs did this was that it was necessary and no one else could do it (Bremmer, 2010). Until this moment in time, SWFs from emerging economies had never acquired stock in such significant numbers and in such a short timeframe, leading to controversies

concerning a lack of transparency and political involvement in the Western economies. The home countries of the SWFs, at the other hand, took a risk by investing in countries that were unstable at that moment (Fernandes, 2014; Lee, 2010; Megginson et al., 2013). These SWFs, mainly from countries in Asia and the Middle East, provided a helping hand to Western financial firms by placing substantial investments in them (Gieve, 2008). The risk aversion changed when SWF investors shifted from bond investment and index fund risk towards investments that carry a much more substantial risk (Drezner, 2008). Jen (2009) estimates that the entire group of SWFs worldwide incurred a paper loss of USD 18%-25% during 2008, although this is hard to estimate due to the opaque character of SWFs and part of the value of these losses might recover if the prices of the underlying assets recover.

Governmental responses were at first wary, criticizing SWFs as a potential threat to the sovereignty and independence of national markets, yet the demand of national economic sectors’ attitude quickly shifted. Market responses were mainly focused on policy and law in order to protect the integrity and workings of the domestic and international markets by

decentralizing the sovereign element of the sovereign investment (Backer, 2010). The main response to align SWFs' cross-border investments with recipient country norms were the Santiago Principles. The International Working Group of Sovereign Wealth Funds developed this series of ‘generally accepted principles and practices' to avert further

protectionism and create guidelines to keep politics and finances separated. By establishing the Santiago Principles, it was hoped that the developed economies would be guided into dealing with these relatively new funds in their regulatory frameworks (Monk, 2009).

From literature, it appears as SWFs' controversial aspects' impact on cross-border acquisitions has changed as a result of the financial crisis (Fei et al., 2013). The financial crisis will serve as a moderator in this research so that its impact can be studied.

2.6 Research Gap

According to literature, SWFs have always been mysterious, and these controversial entities have evolved throughout the decades into significant global financial players. It becomes evident from academic work that SWFs are taking a prominent position in developed economies' financial market, yet SWFs did not get the attention they deserve (Beck & Fidora, 2008; Gieve, 2008; Gilson & Milhaupt, 2007; Johnson, 2007). To date, the interaction between state capitalism as opposed to market capitalism is still searching for the right balance, and this situation creates controversy (Gilson & Milhaupt, 2007). The current literature does not sufficiently justify how and why SWFs are making cross-border

acquisitions and how its controversies affect this process. To measure the size of cross-border acquisitions, ownership choice will be used as tools of measurement, due to its implications for resource commitment, risk, returns and control (Anderson & Gatignon, 1986; Luo, 2001). Interesting to study is whether this ownership choice is affected by the aspects for which SWFs are controversial. These controversial aspects, transparency, politicization and strategic industry, theoretically all seem to affect cross-border acquisitions, yet in different degrees. By developing a method to scale levels of transparency, politicization and strategic industry investments as well as a method to scale SWFs’ cross-border acquisitions, this data’s interaction effect can be analyzed.

Moreover, the financial crisis of 2008 will act as a moderator in this study due to its appearing significance. The role of SWFs and the impact of its controversial aspects seem to have altered in this period as a vast amount of cross-border acquisitions was made. In favor of taking a closer look at the impact of the financial crisis as well, this study will extend the

years before and after the financial crisis so that the impact of this event will become evident. Hence, this study will resolve the following research question:

How do sovereign wealth funds’ controversial aspects affect ownership choice in cross-border acquisitions, and how did the financial crisis of 2008 change this relationship?

3. Hypotheses

The following chapter concerns the developed hypotheses and clarifies these. Note that acquisitions are looked at from a managerial ownership choice perspective in terms of control and not from a corporate finance perspective which is focused on profit versus risk. By applying both academic theory and TCE as the underlying theoretical framework, it is expected that the observed controversial aspects affect ownership choice of SWFs' cross-border acquisitions. What makes the development of these hypotheses challenging, is that the ownership choice is a collaborative decision from both the acquirer and the target company. From the SWF’s acquirer-perspective it follows that a higher level of external and internal uncertainty desires a more controlling ownership choice (Williamson, 1991). As for the target company, a certain level of trust between the two entities is required to give away a higher level of control (Chiles and McMackin, 1996). As this research is focusing on SWFs' controversial aspects, ‘trust' is a critical element in the ongoing controversy. According to Tsai and Ghoshal (1998), a propensity to trust promotes cooperative behaviors and

trustworthiness, thus reducing uncertainty and transaction costs which results in a better cooperative performance at long last.

3.1 Transparency

It becomes evident from the literature that SWFs have been struggling with

transparency ever since these entities were brought into existence. The most discussed topic related to SWFs is assuredly their transparency, mentioned in almost every article concerning SWFs. As common regulatory requirements do not cover SWFs, this results in concerns being voiced over the often unknown activities of SWFs with a size which could potentially destabilize the global financial markets (Kern, 2007). Contrary to privately-owned firms, they do not have to disclose information concerning their strategy and performance (Keller, 2008), resulting in SWFs generally choosing not to share any information concerning the origin, intent, and size of investments (Bernstein et al., 2013; Murtinu & Scalera, 2016).

The managerial-choice approach to TCE relies on an implicit view of costs as subjective (Chiles and McMackin, 1996). This means that economic costs are inherently subjective because various decision-makers sacrifice multiple investment alternatives based on different perceptions and preferences regarding opportunities and costs in an uncertain world (Chiles and McMackin, 1996). Transparency from the investing SWF creates a certain level of trust between the SWF and the target firm, resulting in lower perceived risk from the target company and thus the willingness to sell a larger share and hand over more

ownership. Based upon the abovementioned, the following is hypothesized:

H1: There is a positive relationship between the transparency of SWFs and ownership choice.

3.2 Politicization

According to Bernstein et al. (2013), if there is an active presence of politicians in the management boards of SWFs, then this potentially leads to shareholder value not being maximized due to political objectives being prioritized (Megginson & Netter, 2001; Shleifer & Vishny, 1994). As theorized by TCE, increasing shareholder's value should, however, be considered the primary objective of a firm (Ketokivi & Mahoney, 2017). A recurring concern at both target country and firm-level towards SWFs is that not all investments made by SWFs have a real financial and commercial driven goal, but could have a rather strategical and political background (Aguilera et al., 2016; Chhaochharia and Laeven, 2008; Keller, 2008). According to Rose (2008), SWFs intentionally structure their cross-border transactions so that they do not acquire a controlling interest in the firm on purpose to avoid political backlash. Also stating that such structures are designed to avoid future adverse regulatory consequences. A proposed acquisition by SWFs in the U.S. of a controlling interest would, for example, bring the transaction under investigation by the Committee on Foreign

Investment in the US, a committee that analyzes the national security impact of foreign acquisitions in the U.S. Just before and during the financial crisis of 2008, the most

prominent SWFs have avoided acquiring more than ten percent of a foreign company in the U.S. as not to trigger the definition of control and be investigated and regulated (Rose, 2008). As Norway's Minister of Finance Kristin Halvorsen said about the U.S. in 2008 concerning GPFG's cross-border acquisitions (Walker, 2008): "they do not like us, but they need our money."

When looking at the politicization controversy, it seems from the literature that both

target companies and countries are closely monitoring this particular element. Relating to TCE, the level of trust from the target company does not seem to be high when it comes to politicized SWFs. Also, politicized SWFs thoughtfully do not aim for controlling interest in their acquisitions. Hence, based upon the aforementioned, the following hypothesis is formulated:

H2: There is a negative relationship between the politicization of SWFs and ownership choice.

3.3 Strategic Industry Investments

A regularly criticized aspect of SWFs' cross-border investments in the existing literature is that they are often made in strategic industries. Solely the rumor of a SWF investing in a strategic industry is enough to be met with hostility or high-level concern by the government of the target country (Bortolotti et al., 2010; Drezner, 2008; Keller, 2008; Megginson et al., 2015: Murtinu & Scalera, 2016).

The industries that are considered strategic industries for this research are determined by Drezner (2008) who created a list of strategic industries which are classified as strategic due to these industries typically having political ties. This list of definitions for strategic industries has also been adopted for studies by Keller (2008) and Murtinu and Scalera (2016). Multiple studies conclude that what the SWF cross-border acquisitions in these strategic industries have in common is that they are typically not out of profit maximization

consideration. According to Drezner (2008) and Megginson et al. (2015), political purposes or legitimacy goals are present in such investments. Bortolotti et al. (2010) state that

investment returns for SWFs are significantly lower in strategic industries than returns from investments in other industries. Drezner (2008) made a similar conclusion after having done a survey test among financial institutions (SWFs included), which found that SWFs are indeed more likely to following political goals instead of profit maximization. This study does not investigate the performance of SWFs' investments, but applying this information to TCE gives us a theoretical framework for the hypothesis regarding strategic industry investments. Assuming that target companies and countries are aware of SWFs' political aspirations in strategic industries, they are not likely to trust the approaching SWFs too much and thus do not grant large share to be sold. It is expected that SWFs are not granted access to large portions of ownership in strategic industries, and therefore the following hypothesis is developed:

H3: There is a negative relationship between investments in strategic industries

and ownership choice.

3.3 Financial Crisis

Schwarzman, CEO of the Blackstone Group, states that it is frightening to think of how much worse we would have been off without SWFs during the financial crisis in his article in the Financial Times in 2008. The hits that were taken to the balance sheets of both commercial and investment banks were severe enough to ask for financial help from the ‘suspicious' SWFs, to the great benefit of their shareholders. According to Backer (2010), it was the moment that nations sought to extend current market share in all global markets for power in this period. The states have shifted their content from wielding traditional forms of public power to a more global form of economic power, grabbing their chance one could argue.

This global funding brought a particular focus on SWFs' cross-border activities. It was during this financial meltdown that these funds became more visible and more

aggressive in the scope and form of their global acquisitions in the financial markets. As the financial crisis both increased SWFs’ global activities and global attention, its controversial aspects are considered to have significantly more impact on the ownership choice than they had before. Based on this, the following hypotheses are developed:

H4: The financial crisis enhanced the relationship between transparency and

ownership choice.

H5: The financial crisis enhanced the relationship between politicization and ownership choice.

H6: The financial crisis enhanced the relationship between strategic industry investments and ownership choice.

The hypotheses are conceptualized in the research framework depicted below. Transparency Politicization Strategic Industry Financial Crisis of 2008

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Figure 4: Research Framework

4. Methodology

This study is executed deductively and has a quantitative approach to answer the research question. The hypotheses that have arisen from the academic literature are tested by observing quantitative data with which answers are obtained (Ormerod, 2010). Multiple secondary data sources are used which will first be discussed. This is followed by an explanation of the dependent, independent and control variables. The methodology is concluded by explaining the applied analytical models and the corresponding descriptive statistics. For the procedure of processing raw data into interpretable results, the statistical program SPSS from IBM is utilized with which various type of test will be run (Saunders & Lewis, 2012).

4.1 Data Collection

The primary source of data comes from Murtinu and Scalera (2016) who created a comprehensive dataset on SWF investments including determinants for both the acquiring SWF as deal-specific information. This dataset was created by identifying over 1000 SWF investments from 1998 until 2013 as recorded by Truman (2009) and the Sovereign Wealth Fund Institute. This set was complemented with data from Lexis Nexis, Bureau van Dijk's Zephyr, and relevant information from news sources (Murtinu & Scalera, 2016). The original