Diversification, Khashoggi, and Saudi Arabia’s Public Investment Fund

Author: Oliver MacPherson-Smith

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Despite the sizeable economic clout of Saudi Arabia’s Public Investment Fund (PIF), the academic literature on the PIF is relatively nascent. How do domestic and international political considerations shape the PIF’s investment policies? This article contends that the PIF’s current domestic investments constitute the latest incarnation of an historic pattern of development policies in Saudi Arabia. This pattern challenges the PIF with balancing market‐driven development and satiating the preferences of political leaders. Meanwhile, the PIF’s international investments are subject to a novel form of political risk. While international political risk has previously emanated from public regulation and oversight, the Khashoggi incident has given rise to unparalleled private sector‐led, non‐regulatory political risk. For other sovereign wealth funds, the PIF’s experience is indicative of potential future non‐regulatory political risk in western markets. By using the PIF as a case study to explore how domestic and international factors influence the behavior of a sovereign wealth fund (SWF), this article contributes to a growing literature on the non‐economic drivers of SWF investments.

Policy Implications

  • Although Saudi Arabia’s Vision 2030 reform agenda commits to private sector development, large state‐led projects will continue to attract significant public investment due to the policy preferences of the country’s leadership.
  • Policy makers in Saudi Arabia should be mindful of how this long‐held preference may hinder the development of the Saudi private sector.
  • Sovereign Wealth Fund (SWF) managers must recognize the emergence of private sector‐led non‐regulatory political risk. Even when foreign authorities do not take action, private companies have demonstrated the propensity to withdraw cooperation in protest of domestic economic, social, or security policies.
  • Policy makers in western economies must be conscious that their decision not to retaliate against human rights or copyright violations may be superseded by actions on the part of private western companies against SWFs.