Foreign investment is usually very welcome, but what if the investor hopes for more than a financial return? Roland Koch, Minister-President of Hesse, speculates on the ambitions of sovereign wealth funds, and discusses how they should be supervised

State-controlled investments from overseas – the so-called sovereign wealth funds – are now the subject of intensive discussions in countries worried about threats to their domestic industries. The United States and France in particular have made their fears known. In Germany, where the matter has been a hot topic among business people and politicians, the debate can be summarised in one question: What politico-economic significance do sovereign wealth funds have for the future of Germany?

Everyone who takes a view in this debate accepts that the problem, once no more than an academic one, has been exacerbated by the growing wealth of a number of countries, some of them formerly run by socialist or communist regimes. China, Russia, India and the Gulf States have integrated their wealth into the global economy, to the immense benefit of world trade. My own country, an export leader, has been a beneficiary through growth, high employment and investment both by Germans abroad and investments by foreign companies in Germany.

The openness of Germany’s markets makes them especially attractive to global trade, contributing to the country’s development as economically successful and politically influential. This openness will not change, yet in the current debate about sovereign wealth funds there are those who speak of the need for new safety fences, in other words of protectionism. For example, Russian investors are interested in taking a massive share in the German-French aerospace company EADS that would exceed the 5% share already acquired by a Russian bank. For many people, this proposal has made it clear, perhaps for the first, time that, along with the dynamically developing international capital markets, the behaviour of investors has begun to undergo a change. We need to look at what exactly this change is.

Sovereign wealth funds are not new. They have been around for years. Among the first countries to invest their considerable state-owned funds were Kuwait, the United Arab Emirates (UEA), Norway and Singapore. They invested, and still invest, their budgetary surpluses worldwide in government bonds and state-owned enterprises. Industrialised countries like the United States and Japan also have so-called “reserve funds”. Some of these funds are huge. In the UEA, the Abu Dhabi Investment Authority has estimated capital assets of $875bn, making it probably the world’s largest state-owned investment company. In July 2007, another rich fund, the UEA’s Dubai International Capital, bought 3% of EADS, and before that in January 2006 it took a stake of almost 2% in the automotive manufacturer Daimler. And Kuwait Investment Authority, also a state-owned fund, has a shareholding in Daimler of some 7%. Singapore possesses two sovereign wealth funds – Temasek-Holdings, founded in 1974, with capital assets of about $100bn, and the Government of Singapore Investment Corporation with approximately $330bn. Both funds are invested worldwide, including with the port operator PSA. Some funds are subject to considerable restrictions. Investments by the Government Pension Fund of Norway (formerly the Government Petroleum Fund of Norway) follow ethical and ecological guidelines and are limited to a 3% maximum in foreign enterprises. Japan limits its state investments overseas to bonds, mostly those issued by the United States.

Until recently, this was the policy of China, which holds foreign currency reserves of more than $1.2 trillion, the world’s largest. But now that policy has changed. A $3bn investment by the Chinese sovereign wealth fund in the US investment firm Blackstone marked the beginning of a more active investment policy. Like a number of countries with money to spend, China’s investment policy appears to have become worryingly strategic, advancing its own industrial interests in certain markets. Russia, where the line between state controlled and privately controlled companies can often be blurred, has demonstrated this strategy in European countries. In Germany, we have become concerned by Russian investments in aerospace, telecommunications and, most of all, in the energy sector.

Are state-controlled investors now many of them aiming primarily for a strategic rather than purely financial return? Because the means of sovereign wealth funds are so substantial, it is advisable to take precautions to avoid being the target of politically motivated manipulations of the market, or of becoming economically and psychologically dependent on the decisions of foreign governments.

A common European approach, ideally in common with the United States, would be desirable. But I am concerned that the need for coordination between countries with different interests, as is generally the case in Europe, makes quick solutions impossible. Realistically, I believe that each country’s interest, after carrying out an intensive assessment of the situation, is to act independently, at least for the time being. Most western industrial nations already have a number of instruments at their disposal to deter foreigners from making potentially unwanted investments, not only in the defence industry but in many other sectors too. Germany’s Foreign Trade and Payments Act protects against takeovers in the defence industry, even though it in fact needs to be strengthened. Elsewhere, though, Germany has no system for examining investments by sovereign wealth funds that may be strategically motivated.

The International Monetary Fund is now aiming to encourage more transparency by foreign investors, and has plans for a code of conduct. Voluntary agreements for more transparency are also favoured by the EU Commission, and at the same time there is clearly a willingness of some sovereign wealth funds to engage in constructive dialogue.

But assessing potential threats is not easy. Most investments are seen to benefit a country’s economy, if not its security. We in Germany need the means to distinguish one from the other. Bills have been drafted that amount to amendments to the Foreign Trade and Payments Act and the foreign trade and payments regulations. While strengthening the act, they seek to avoid affecting the openness of the German economy because that has contributed significantly to the country’s wealth. Now, under proposed new legislation, if a foreign investment in a German company amounts to more than 25%, an assessment can be made of whether public order or safety might be threatened. In my view, this would deal with worries about sovereign wealth funds, while not generally impeding investment because it will only apply in very few cases.

Germany has also drawn up a plan to protect its industries that is modelled on US regulation. Since 1988, the President of the United States can prohibit foreign direct investment if it is seen as a threat to national security. An additional control was introduced last year, so now all direct investments in which a foreign government is involved are scrutinised by the Committee on Foreign Direct Investment.

The principle of reciprocity should clearly apply to transnational investments. Germany is open to foreign investors, but in return we Germans demand the same market access abroad. Much remains to be done on this scope even in Europe, as Germany’s own experiences with France and Spain have shown. And in China and almost all Middle Eastern countries, foreigners are restricted to taking minority shareholdings, and also have to contend with high customs duties on imports and numerous non-tariff barriers.

It seems worth emphasising that protective measures must remain the exception, and not become the rule. Even well-meant protective measures too often result in deterrence. We must accept the challenges of global competition, and transnational investments are the basis of thriving economic development both at home and abroad. Nevertheless, we in Europe are not the passive economic playthings of other nations, or of big state-owned enterprises. We want to play an active part in the shaping of globalisation, and that means we have to shape appropriate rules.