Economics of Sovereign Wealth Funds

Chapter 9 Sovereign Wealth Funds and Recipient-Country Investment Policies: OECD Perspectives

Udaibir Das, Adnan Mazarei, and Han Hoorn
Published Date:
December 2010
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Sovereign wealth funds (SWFs) have much to offer. They can contribute to the economic development of their home countries by, for example, helping to diversify income sources for commodity-dependent economies and improving the risk-return profile of government-controlled portfolios. In recipient countries, SWFs’ investments stimulate business activity and create jobs. So far, SWFs have shown themselves to be reliable, long-term investors.

As one of the world’s main proponents of an open investment system, the Organisation for Economic Co-operation and Development (OECD) welcomes the increasing prominence of SWFs as visible, important international investors. Since its creation in 1961, the OECD has been a strong advocate of free capital movements and their long-term benefits. The OECD is the primary multilateral forum for dialogue and the development of guidance on good practices in the field of investment. This guidance sometimes takes the form of authoritative, even legally binding, government-backed investment instruments.

Because of its unique role in the investment policy field, the OECD was asked by the October 2007 Group of Seven Finance Ministers meeting and by the OECD Council to develop guidance for recipient countries’ policies toward investments from SWFs. Responsibility for developing this guidance was given to the Freedom of Investment (FOI) Roundtables, hosted at the OECD. At the FOI Roundtables, OECD and non-OECD countries participate as equal partners in investment policy discussions.2 The project resulted in guidance on recipient-country investment policies toward SWFs, which is described in this chapter. The guidance complements the Santiago Principles, developed by SWFs with the support of the IMF, which provide guidance on transparency and governance for SWFs. Taken together, the two sets of guidance provide a robust framework for improving trust and confidence, and for facilitating investment flows between SWFs and recipient countries for the benefit of both home and host societies.

This chapter describes the OECD guidance for recipient-country policies toward SWFs and also OECD-hosted follow-up on this guidance. The guidance has two parts: (1) a reaffirmation of the relevance of long-standing OECD investment principles (e.g., openness, nondiscrimination, and transparency) for treatment of SWFs; and (2) guidance on how national security concerns should be handled in an investment-policy context so as to ensure that these security-related policies are effective in their intended purpose and not a disguised form of protectionism. OECD-hosted follow-up includes peer monitoring of countries’ adherence to these principles and deeper discussions of special issues raised by SWF investments (e.g., whether foreign state immunity leaves gaps in legal accountability).


The OECD is uniquely well-positioned to contribute principles for recipient-country policies because its existing investment instruments already contain fundamental principles needed for the required guidance. Through their adherence to these instruments, members and nonmember adherents commit to transparency, nondiscrimination, and liberalization of investment policies. The first component of the OECD guidance for recipient-country investment policy reaffirms the relevance of these long-standing investment principles for the treatment of SWFs. These principles, which apply to all categories of foreign investment, are summarized in Box 9.1.

The OECD investment instruments (1) express a common understanding regarding fair treatment of foreign investors, including SWFs; (2) commit adhering governments to build this fair treatment into their investment policies; and (3) provide for notification of investment policy changes and peer review of adhering governments’ observance of these commitments. Nonmembers are also invited to subscribe to these principles (e.g., 12 nonmembers3 adhere to the OECD Declaration on International Investment and Multinational Enterprises) or are incorporated into OECD-based investment dialogue in other less formal ways.

BOX 9.1Investment Policy Principles Established in the OECD Acquis

The key OECD investment instruments are the OECD Code of Liberalisation of Capital Movements, adopted in 1961, and the OECD Declaration on International Investment and Multinational Enterprises of 1976, as revised in 2000. These instruments contain procedures for notification and multilateral surveillance under the broad oversight of the OECD’s governing Council to ensure their observance. The instruments embody the following principles:

  • Transparency. Information on restrictions on foreign investment should be comprehensive and accessible to everyone.
  • Progressive liberalization. Members commit to the gradual elimination of restrictions on capital movements across their countries.
  • Nondiscrimination. Foreign investors are to be treated not less favorably than domestic investors in like situations. While the OECD instruments directly protect the investment freedoms of those SWFs established in OECD member countries, they also commit members to using their best endeavors to extend the benefits of liberalization to all members of the IMF. Experience has shown that, in practice, OECD governments nearly always adopt liberalization measures without discriminating against non-OECD countries—investors from nonmember countries reap the same benefits of free market access as OECD residents. Outright discrimination against non-OECD-based investors would be a major departure from OECD tradition.
  • Standstill. Members commit to not introducing new restrictions.
  • Unilateral liberalization. Members also commit to allowing all other members to benefit from the liberalization measures they take and not to condition them on liberalization measures taken by other countries. Avoidance of reciprocity is an important OECD policy tradition. The OECD instruments are based on the philosophy that liberalization is beneficial to all, especially to the country that undertakes the liberalization.


The OECD investment instruments recognize the right of countries to take actions they consider necessary to protect national security.4 Moreover, the instruments stipulate that security concerns are self-judging—the country determines its security concerns and its strategy for dealing with them in an investment context. However, although addressing genuine security concerns is a fundamental responsibility of governments, security-related investment policies might also be used to disguise protectionism. Participants at the FOI Roundtables carefully explored the role of security concerns in participating governments’ investment policies. This examination culminated in the development of the OECD Guidelines for Recipient Country Investment Policies Relating to National Security. These guidelines, which are described in the next section, are the second part of the OECD response to providing guidance for recipient-country investment policies toward SWFs.

Surveys of FOI participants’ practices regarding security-related investment policies reveal two major developments. First, there is a trend toward shared practice in the area of national security strategic planning, including the development of a widely shared and broad view of national security concerns. In particular, the tendency over several decades has been to expand the number of risks covered by national security plans. Earlier views of security risk were limited to preserving national boundaries and the integrity of the state against foreign attack. Now, national security plans tend to cover all major sources of threat to the security of a nation’s people and its way of life (e.g., attack by foreign governments, natural disasters, pandemics, large-scale terrorism, and human negligence leading to large-scale accidents or breakdowns in critical infrastructure).

The second trend is toward greater use of investment policy—defined as discriminatory policies that focus on foreign-controlled or nonresident investors—as a tool for the management of national security risks. However, this trend coexists with continued wide variation in countries’ uses of investment policy for this purpose. Many countries make no use of investment policy for security purposes. Key findings of the survey include the following:

  • Of the 41 countries that responded to the survey, 12 report that they do not depart from national treatment5 of foreign investors on security grounds (among them, Belgium, the Czech Republic, Hungary, Ireland, Italy, and the Netherlands).
  • Among the remaining 29 countries, several make what could be viewed as minor departures from national treatment (e.g., most Nordic countries have partial restrictions in a narrow range of defense industries; Egypt restricts inward investment in defense and radioactive material, and Portugal only in maritime cabotage).
  • Several countries (e.g., Canada, France, Germany, Japan, the Republic of Korea, Mexico, and the United States) have in place extensive policy mechanisms for restricting foreign investment on national security grounds. These may involve all three types of investment policy measures (reviews, bans, and sectoral measures).

Thus, national practice continues to vary widely in this area, but countries have generally shown growing interest in the use of investment policy to safeguard national security. Over the period 2005–09, Canada, China, France, Germany, Japan, the Republic of Korea, the Russian Federation, and the United States revised their policies in this regard. In 2009, Canada introduced its first security-related investment review and Germany expanded the scope of its reviews.


The growing recourse to investment policy as a tool for managing security risks attests to heightened concerns about security in a globalizing world, but also underscores the risk that such policies might be abused for protectionist purposes. The culmination of the FOI Roundtable’s consideration of security-related investment policies was the issuance, in October 2008, of Guidelines for Recipient Country Investment Policies Relating to National Security (see Box 9.2 for the complete text6). The OECD guidelines were presented at the IMF and World Bank Fall 2008 meetings in conjunction with the adoption of the Santiago Principles.

The guidance seeks to help countries to meet their genuine security needs while preserving their reputation for fair treatment of foreign investors, including SWFs. The guidelines recommend that governments design their security-related policies to be

  • Nondiscriminatory. Although the security exception may allow countries to violate the nondiscrimination principle, the guidelines emphasize that nondiscrimination is still a value to be respected, even for policy measures taken under the security exception.
  • Transparent and predictable. Rules should be codified, should be subject to prior notification, and should be enforced with attention to procedural fairness and predictability.
  • Proportionate to the objective pursued. Measures should be tailored to the specific risks posed by specific investments, and enforcement should bring to bear appropriate national security expertise and rigorous risk-management practices. Investment policy measures should be used only as a last resort, when no other policy tool is available.
  • Accountable in their application. Policymakers should be accountable to citizens of the country, to the international community, and to foreign investors.

In May 2009, the OECD governing Council raised the legal status of these guidelines by entering them into the OECD acquis, which makes them a more authoritative source for international law.


Countries’ adherence to these principles as related to national security is being monitored using the OECD’s trademark peer review process in the context of the FOI Roundtables. Peer reviews enhance international transparency by improving information about countries’ policies; they also provide a forum for experience sharing and for exerting peer pressure. As noted earlier, OECD and non-OECD countries participate as equal partners in these Roundtables. The Roundtables have routinely benefited from the participation of some 50 countries. All members of the International Forum of SWFs have a standing invitation to participate in the discussions.

BOX 9.2Guidelines for Recipient Country Investment Policies Relating to National Security

Non-discrimination: Governments should be guided by the principle of non-discrimination. In general governments should rely on measures of general application which treat similarly situated investors in a similar fashion. Where such measures are deemed inadequate to protect national security, specific measures taken with respect to individual investments should be based on the specific circumstances of the individual investment which pose a risk to national security.

Transparency/predictability – while it is in investors’ and governments’ interests to maintain confidentiality of sensitive information, regulatory objectives and practices should be made as transparent as possible so as to increase the predictability of outcomes.

  • Codification and publication. Primary and subordinate laws should be codified and made available to the public in a convenient form (e.g. in a public register; on internet). In particular, evaluation criteria used in the review should be codified and made available to the public.
  • Prior notification. Governments should take steps to notify interested parties about plans to change investment policies.
  • Consultation. Governments should seek the views of interested parties when they are considering changing investment policies.
  • Procedural fairness and predictability. Time limits should be applied to review procedures for foreign investments (30 days for an initial review is a benchmark). Commercially-sensitive information provided by the investor should be protected. Where possible, rules providing for approval of transactions if action is not taken to restrict or condition a transaction within a specified time frame should be considered.
  • Disclosure of investment policy actions is the first step in assuring accountability. Governments should ensure that they adequately disclose investment policy actions (e.g. through press releases, annual reports or reports to Parliament), while also protecting commercially-sensitive and classified information.

Regulatory proportionality – restrictions on investment, or conditions on transaction, should not be greater than needed to protect national security and they should generally be avoided when other existing measures are adequate and appropriate to address a national security concern.

  • Essential security concerns are self-judging. Each country has a right to determine what is necessary to protect its national security. This determination should be made using risk assessment techniques that are rigorous and that reflect the country’s circumstances, institutions and resources. The relationship between investment restrictions and the national security risks identified should be clear.
  • Narrow focus. Investment restrictions should be narrowly focused on concerns related to national security.
  • Appropriate expertise. Security-related investment measures should be designed so that they benefit from adequate national security expertise as well as expertise necessary to weigh the implications of actions with respect to the benefits of open investment policies and the impact of restrictions.
  • Tailored responses. Restrictive investment measures should be tailored to the risks posed by proposed investments. This would include providing for policy measures (especially risk mitigation agreements) that address concerns, but fall short of blocking the investment.
  • Last resort. Restrictive investment measures should be used as a last resort when other policies (e.g. sectoral licensing, competition policy, financial market regulations) cannot be used to eliminate security-related concerns.

Accountability – procedures for internal government oversight, parliamentary oversight, judicial review, periodic regulatory impact assessments, and requirements that important decisions (including decisions to block an investment) should be taken at high government levels should be considered to ensure accountability of the implementing authorities.

  • Accountability to citizens. Authorities responsible for restrictive investment policy measures should be accountable to the citizens on whose behalf these measures are taken. Countries use a mix of political and judicial oversight mechanisms to preserve the neutrality and objectivity of the investment review process while also assuring its political accountability. Measures to enhance the accountability of implementing authorities to Parliament should be considered (e.g. Parliamentary committee monitoring of policy implementation and answers or reports to Parliament that also protect sensitive commercial or security-related information).
  • International accountability mechanisms. All countries share a collective interest in maintaining international investment policies that are open, legitimate and fair. Through various international standards, governments recognise this collective interest and agree to participate in related international accountability mechanisms (e.g. the OECD notification and peer review obligations in relation to restrictive investment policies). In particular, these help constrain domestic political pressures for restrictive and discriminatory policies. Recipient governments should participate in and support these mechanisms.
  • Recourse for foreign investors. The possibility for foreign investors to seek review of decisions to restrict foreign investments through administrative procedures or before judicial or administrative courts can enhance accountability. However, some national constitution’s allocation of authority with respect to national security may place limits on the scope of authority of the courts. Moreover, judicial and administrative procedures can be costly and time-consuming for both recipient governments and investors, it is important to have mechanisms in place to ensure the effectiveness, integrity and objectivity of decisions so that recourse to such procedures is rare. The possibility of seeking redress should not hinder the executive branch in fulfilling its responsibility to protect national security.
  • The ultimate authority for important decisions (e.g. to block foreign investments) should reside at a high political level. Such decisions require high-level involvement because they may restrict the free expression of property rights, a critical underpinning of market economies, and because they often require co-ordination among numerous government functions. The final decision to prohibit (or block) an investment should be taken at the level of heads of state or ministers.
  • Effective public sector management. Broader public sector management systems help ensure that the political level officials and civil servants responsible for security-related investment policies face appropriate incentives and controls for ensuring that they exercise due care in carrying out their responsibilities and are free from corruption, undue influence and conflict of interest.

In preparation for these discussions, the OECD Secretariat produces inventories of recent investment policy measures taken by participating countries. These inventories are made public and serve as the basis of Roundtable discussions about recent developments. They also serve as the basis of the investment parts of the quarterly reports on trade and investment policies made to the Group of Twenty Leaders by the World Trade Organization, the OECD, and the United Nations Conference on Trade and Development (UNCTAD).7

SWFs stand to benefit greatly from the general surveys of recent developments that are a central part of each Roundtable. These are question-and-answer sessions in which participants can review and eventually challenge each others’ investment policy measures against the principles of nondiscrimination and standstill and against the new OECD guidelines on national security. The OECD Secretariat makes public the summaries of these discussions under its own authority.

The Roundtables also explore emerging policy issues of interest to SWFs. For instance, recent FOI Roundtables have examined possible recipient-country concerns relating to foreign state immunity. Under the doctrine of foreign state immunity, one state is not subject to the full force of rules applicable in another state; the doctrine bars national courts from adjudicating or enforcing certain claims against foreign states. There are concerns in recipient countries that foreign state immunity could make it difficult for private parties to pursue legitimate claims against SWFs and other foreign government-controlled investors or could create regulatory enforcement gaps. The FOI Roundtables’ work in this area has focused on fact-finding; it seeks to document and clarify, from a comparative law perspective, national practices in the area of foreign state immunity. SWFs have been invited to participate in and comment on this work.

More generally, the FOI Roundtables aim to help build trust and confidence between recipient countries and foreign investors, including SWFs. They also aim to improve recipient-country investment policies with a view to facilitating the free flow of investment while effectively addressing genuine concerns that such investment might raise.


Inventory of Investment Measures Taken Between 15 November 2008 and 31 August 2009, October 2009 (

Status Report: Inventory of Investment Measures Taken Between 15 November 2008 and 15 June 2009, June 2009 (

Security-Related Terms in International Investment Law and in National Security Strategies, May 2009 (

Investment Policies and Economic Crises: Lessons from the Past, April 2009 (

Foreign Government-Controlled Investors and Recipient Country Investment Policies: A Scoping Paper, January 2009 (

Competition Law and Foreign-Government Controlled Investors, January 2009 (

Accountability for Security-Related Investment Policies, November 2008 (

Protection of ‘Critical Infrastructure’ and Role of Investment Policies Relating to National Security, May 2008 (

Transparency and Predictability for Investment Policies Addressing Essential Security Interests: A Survey of Practices, May 2008 (

Proportionality of Security-Related Investment Instruments: A Survey of Practices, May 2008 (

Governance and Investment of Public Pension Reserve Funds in Selected OECD Countries, May 2008 (

Competition, International Investment and Energy Security, March 2008 (

Economic and Other Impacts of Foreign Corporate Takeovers in OECD Countries, October 2007 (

Essential Security Interests Under International Investment Law, October 2007 (

OECD’s FDI Regulatory Restrictiveness Index: Revision and Extension to More Economies and Sectors, October 2007 (

Identification of Ultimate Beneficiary Ownership and Control of a Cross-Border Investor, March 2007 (

Foreign State Immunity and Foreign Government Controlled Investors, April 2010 (


OECD Declaration and Decisions on International Investment and Multinational Enterprises (

National Treatment for Foreign-Controlled Enterprises (

OECD Codes of Liberalisation of Capital Movements and of Current Invisible Operations (


The views expressed herein do not necessarily reflect those of the OECD or of its member countries.


The nonmember countries participating in the FOI project include the 12 nonmember adherents to the OECD Declaration on International Investment and Multinational Enterprises (Argentina, Brazil, Chile, the Arab Republic of Egypt, Estonia, Israel, Latvia, Lithuania, Morocco, Peru, Romania, and Slovenia). In addition, the Russian Federation attended all the discussions, and other countries (China, India, Indonesia, and South Africa) attended one or more.


As of February 2010, the 12 nonmembers are Argentina, Brazil, Chile, the Arab Republic of Egypt, Estonia, Israel, Latvia, Lithuania, Morocco, Peru, Romania, and Slovenia. Chile is, at present, a nonmember adherent; however, on January 11, 2010, it signed an accession agreement to become the 31st member of the OECD.


Article 3 (Public Order and Security) of the OECD Codes of Liberalisation of Capital Movements and Current Invisible Transactions.


National treatment means that foreign investors are accorded treatment that is not less favorable than the treatment accorded to domestic investors under like circumstances.


The text of the guidelines can also be found at


The second quarterly report, issued on March 8, 2010, can be found at

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