Week 3 Seminar – Foreign States in Domestic Markets

Ladislav Charouz, St Antony's College -

On the 25^th of October 2022, the European Studies Centre’s very own Tim Vlandas and Mark Thatcher (LUISS, Rome) presented their new book Foreign States in Domestic Markets, published by Oxford University Press and available here. The event was chaired by ESC Director Othon Anastasakis, who welcomed two discussants: Pepper Culpepper (Blavatnik School of Government and Nuffield College) and Jane Gingrich (Department of Politics and International Relations and Magdalen College).

Vlandas and Thatcher’s book discusses the relatively recent phenomenon of foreign states entering domestic markets as financial investors. The main question this book addresses is how policy makers in recipient countries react to foreign state investments. Do they treat purchases as a threat and impose restrictions or see them as beneficial and welcome them? And what are the wider implications for debates about state capacities to govern domestic economies in the face of internationalisation of financial markets?

Vlandas and Thatcher argue that investments by foreign states, represented most prominently by Sovereign Wealth Funds, have led to the birth of “internationalised statism.” Governments welcome the use of foreign state investments to govern their domestic economies, providing policy makers in recipient states with new allies and resources. In their book, Vlandas and Thatcher examine policies towards non-Western Sovereign Wealth Funds buying company shares in the US, UK, France, and Germany, looking at variation across time and between these case studies. 

With regards to their findings, the authors contrasted dynamics in the USA and the UK. Contradicting the popular view that the US has a very open economy, they argued that Sovereign Wealth Funds are more circumscribed in the USA than in the other countries studied, and the level of internationalised statism is therefore very low. According to Vlandas and Thatcher, this is due to the dynamics of the relationship between the US executive and legislative branches. 

In the US, especially under the presidency of George Bush Jr., the executive has been keen to attract SWFs regardless of country of origin. Nevertheless, controversy arose in 2006 over Dubai Ports World’s planned purchase of several port management services. The move was criticised by Congress, with Charles Schumer and Hillary Clinton arguing that the purchase was a security threat, even linking Dubai to terrorism and nuclear threats. Not only did Congress pass a motion stopping the purchase; it also passed the Foreign Investments and National Security Act of 2007. According to this piece of legislation, the mere fact of foreign ownership raises the problem of national security. 

The UK, on the other hand, has actively sought out SWF investments from all over the world, regardless of their origins. The authors used the analogy of “Wimbledon” to describe this strategy: inviting the best around the world to the UK, with few homegrown talents ever winning the competition. Foreign SWFs are invited to invest in all sectors, including strategic ones such as water, electricity, and air travel. In the 2002 Enterprise Act, the government in fact made it more difficult to intervene in purchases, with the main barrier to takeover being competition rather than security. 

Vlandas and Thatcher show that the explanatory factors in these cases were not primarily economic. Germany, for example, seeks investment despite its substantial domestic trade surplus. Rather, what varies from country to country are executive-legislative relations. Legislatures tend to be suspicious of SWFs, and more-so in the US than in Europe. Executives, on the other hand, derive advantages from their relationships with SWFs, which bring investments and jobs, and in some cases even deals for politicians. Indeed, the Germans and the French are more concerned about hedge funds than SWFs, which provide patient investment. 

What is more, SWFs help states enact updated versions of their traditional industrial policies. For example, they enable France to practice its dirigisme, while in Britain, they support traditionally high-performing finance, legal, and accountancy services. In Germany, SWFs provide a new source of manufacturing capital, playing to one of Berlin’s traditional strengths.  

In his response to the talk, Pepper Culpepper asked the authors to think more about why states might refuse SWFs. It is important to investigate the relationships between SWFs and the states that own them, and what non-market motivations could lurk behind their strategies. He also argued that in pursuing investment, states do not act from a position of strength but a position of weakness. Setting the ground rules for investment is the bare minimum of what a state can do, rather than an indication of fully fledged statism. 

Jane Gingrich raised Farrell’s and Newman’s concept of “weaponised interdependence,” asking whether we can think of statism absent a theorisation of what threats SWFs pose. Another question she asked is what the authors mean by the very word statism. What does successful statism look like, and does answering this question require an articulation of deeper industrial policy aims? She pointed out that much of what SWFs do is buy up real estate, which can hardly be considered part of a coherent strategy to revitalise the state.  

The authors responded to several of these points. Vlandas pointed out that the optimistic message of the book is not that the state is strong, but that it adapts. He argued that there is already extensive literature on the role of foreign states and that their initial motivations, investment strategies, and geopolitical context all vary. This variation, however, does not explain the way recipient states act. Thatcher added that the fundamental approach of the book would not be changed by looking at whether state actors are right or wrong in how they assess SWFs. 

The Questions and Answers session raised a number of interesting issues, such as how public narratives impact the way states make decisions, what the debates will look like after Russia’s invasion of Ukraine, and whether EU integration might lead to a change in the dynamics at play in the European case studies. More theoretical questions were asked about the divide between the executive and the legislative branches: given the frequent contradictions between, for example, finance and defence, can either of these branches truly be seen as a unitary actor? And are they responsive to voters or lobbyists? 

One audience member also raised the recent case of the Chinese company Cosco wanting to buy shares in the Hamburg port terminal. She pondered on why the decision was likely to go ahead despite public outcry and opposition from multiple ministries, positing that it may be due to the German business community, with its many investments in China. Thatcher agreed with the assessment that business and policymakers are exceptionally close in the country, but also highlighted that there is some tension between the manufacturing and financial sectors, with the latter somewhat more wary of foreign state investments.  

Foreign States in Domestic Markets: Sovereign Wealth Funds and the West. By Mark Thatcher and Tim Vlandas. Oxford and New York: Oxford University Press, 2022.