Taxation and the Competitiveness of Sovereign Wealth Funds: Do Taxes Encourage Sovereign Wealth Funds to Invest in the United States? – Article by Michael S. Knoll

From Volume 82, Number 4 (May 2009)

Sovereign wealth funds (“SWFs”) have been making headlines. In 2008, SWFs made major investments in Morgan Stanley, Citigroup, Blackstone, Carlyle, and Merrill Lynch, most of which sought large infusions of cash in the wake of the credit crunch. SWFs have also made substantial investments outside of financial services, but those investments have generally not been as large or as visible.

Investments by SWFs are highly controversial. Press reports talk of the United States selling off its assets and mortgaging its future. Less colorfully, critics argue that foreign governments are expanding their influence over U.S. economic and foreign policy. Commentators and policymakers are concerned that foreign governments might use their SWFs to advance their own national interests to the detriment of those of the United States. Among the potential actions most frequently mentioned are transfers of technology and explicit or implicit threats to divest if the United States pursues policies at odds with the investor’s interests. There is another side. Proponents emphasize the economic benefits of reducing the cost of capital by attracting foreign capital. Still other commentators point to various social and economic benefits from the greater economic integration that comes when foreign investors, including foreign governments, invest in the United States.