Explaining sovereign wealth fund variation: the role of domestic politics in small open economies

The emergence of sovereign wealth funds (SWFs) — large state owned investment funds – is attracting increasing attention from academics and policy makers. However, this research begins by pointing out that SWFs can differ considerably. The research question is: What accounts for the establishment of different types of SWFs across and within countries? This research analyses the role of domestic state-society structures in policy-making processes and their effects on policy choices regarding SWFs. It empirically investigates whether and how policy networks affect decisions regarding the types and choices of SWFs. Particular emphasis is placed on SWFs with savings mandates, and SWFs with development mandates. Using process tracing on qualitative data, the research identifies key actors and interests involved in policy processes, and offers causal mechanisms that connect policy networks to decisions about the creation of different types of SWFs. Acknowledging the particular regional and historical contexts helps to account for the effects of networks within countries and across domains, and within domains across countries. Using a case study on the ‘types and choices of SWFs in Hong Kong and Singapore between the late 1960s and 1980s’, this research examines whether domestic policy networks affect national decisions about SWF creation. These are hard cases for theories that emphasise the importance of domestic state-society structures. After all, over this period Hong Kong and Singapore were extremely exposed to international diffusion and economic pressures, and existing research emphasises a set of important factors (e.g. macro-economic characteristics, international economic pressures, diffusion). The present research draws attention to four key findings between the 1960s–1980s: there were external pressures to which Hong Kong and Singapore had to respond and different policy choices were available and discussed; policy networks included and excluded actors that were making these decisions; there were systematic linkages between the type of policy networks and the type of SWFs; these had important implications for actors and created winners and losers. Thereby this research adds to the ongoing debate on whether policy networks matter in explaining policy choices. It is doing that in four ways. To date, policy network approaches provide rather crude hypotheses on the effects of policy networks on a broad set of state strategies and forms of adjustment. These are difficult to verify because they are very broad. The present study offers a critique of policy network literature and develops policy network analysis with regard to causal mechanisms and hypotheses