Sovereign wealth funds and technology transfer

John Kemp of Reuters posted a concise, helpful overview of the issues facing sovereign wealth funds last week, writing:

There is no evidence SWFs have wielded their non-traditional assets for political or military purposes, or to achieve technology transfer, according to the IMF. But the fact that they might do so in future has made investments by funds with a “sovereign” label much more controversial than those by institutions which are notionally private.

This is one of the topics covered in The End of Influence: What Happens When Other Countries Have the Money, the excellent recent book by economists Stephen Cohen and Brad DeLong.  The authors aren't much worried about governments using these funds to advance military aims, but they do think attempts to transfer technology and innovation are a possibility.  What exactly does this mean?  Here's a relevant passage in the book:

In the real world, scale and especially technological knowledge were key causes of wealth—and the acquisition of your technological knowledge by others might well diminish your terms of trade and standard of living.  Recall that at least half of American economic growth comes from technological and organizational progress in the form of innovation.  These gains from better knowledge of technology and organization are not all seized by those who pioneer the innovations that turn out to be most useful, but rather spill over into the broader economy usually quite nearby.

It is here that sovereign wealth funds may threaten to become a serpent in the garden.  Governments would pursue objectives—for technology transfer, for strategic political advantage, for the redistribution of rents, for the differential acquisition of markets—that would lead them to different decisions that would have been made by profit-oriented market agents. ...

Here is another:

And what will happen when governments with ownership stakes in [foreign] firms think that it would be nice if they would tune things so that the spillovers happen not where the operations are currently located, but rather where the government would prefer the spillovers to be?  And this growth can be shifted.  Money helps.  It can try to shift many things, including the generators of yet more  money.  It can take totally new technologies out of the start-up companies that create them and attempt to shift them back home for next stage development into yet newer products and processes.  Some such efforts will succeed.  Most will probably fail.  But when they fail, they will still have inflicted damage on the innovating economy. 

Of course, it's possible that nothing like this will come to pass, or perhaps it will but not on such a scale that we'll notice.  Maybe sovereign wealth funds will simply continue to invest passively and look for good investment opportunities.

The only additional point I'll make is that there's nothing especially pernicious about a country that uses its money to buy foreign companies seeking to capture for itself any new innovations—even if most such attempts are bad ideas and likely to fail.  Americans would probably treat such efforts with suspicion of evil motives, but in reality it's exactly what you'd expect from an investor who just wants to get maximum value out of its investment.

Regardless, there's probably not much we can do about this.  As Cohen and DeLong explain, for the government to vet every foreign investment in an American company would be an inappropriate reaction.  Our government just isn't very well suited for that kind of role and would be as likely to filter out the kinds of benign investments we should encourage as anything that would threaten our prosperity.

*****

— I highly recommend The End of Influence, which is about a lot more than just sovereign wealth funds.  James Kwak's review of it is here; Matthew Yglesias reviews it here.  The notes to the book are here.

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