Analytical Study of Sovereign Wealth Funds’ Strategies and Policies: A case study of Oman Sovereign Wealth Fund A thesis submitted for the degree of Doctor of Philosophy By Majid Al-Saidi Brunel Business School Brunel University April, 2012 ABSTRACT This thesis documents a study of the factors affecting the sustainable growth and performance of the Sovereign Wealth Funds (SWFs). Despite the increased interest of governments, analysts, central bankers, academics and SWF managers and the unprecedented growth in the last two decades, SWFs research is still in its infancy. Two main problems are: current debate between sponsoring and investee countries about governance and transparency of major SWFs including Oman SWF; and how these SWFs can manage their sustainable growth, performance and success rate. These two issues are addressed in this thesis. An extensive review of the industry and academic literature was done in order to find the relevant facts about the domain of SWFs. The case study research strategy was adopted and primary data were collected by questionnaire survey and semi-structured interviews from employees and other stakeholders of Oman SWF. Norway SWF was analysed for the purposes of data triangulation, comparison and validation. The theoretical framework comprising factors affecting growth, performance and success rate was proposed and tested using multiple evidences from secondary data, interviews and statistical analyses of the questionnaire responses. The literature reveals that existing theories of trade, finance, economics and management are able to resolve conflicting issues within SWFs and between sponsoring and investee countries. Results reveal that qualitative factors such as governance, policy and planning and quantitative factors such as structure, investment strategy and decision making ultimately affect the long term growth and success rate of global SWFs. It is also found that external or investee country laws do not affect the SWFs as much as issues within the SWFs. Findings suggest that Oman SWF has issues of concern in many aspects such as governance, transparency, accountability, investment strategy, organisational structure, asset allocation, updating laws and policy mechanisms; thus requiring overall restructuring and transformation of Oman SWF into a professional organisation. This thesis makes a significant contribution by linking theories to SWFs, an extensive literature review, a theoretical proposition comprising factors affecting the growth of SWFs, methodological combination and creating further research streams in the SWF domain. 2 ACKNOWLEDGEMENT First of all, I am very much grateful to Brunel University and Brunel Business School and Government of Oman for giving me this opportunity to carry out the doctoral research study. I also want to thank and express my gratitude to Prof. Zahir Irani – Head of Brunel Business School, Prof. Ray Hackney – Director of PhD programmes and my supervisors - Dr. Sarmad Al-Shawi and Prof. Adrian Woods for giving me continuous guidance and helping me to solve any issue regarding research or the PhD programme. I am particularly grateful to Government of Oman for providing scholarship for doctoral studies. I would also like to thank my family members, friends and colleagues who have been supporting and infusing confidence into me to reach the finish line. I would also like to acknowledge the support extended by executives from parliament, councils, Central Bank of Oman, Ministry of Finance, Ministry of Trade and Industry and Oman sovereign wealth fund for being the critical part of the project as respondents to interviews and questionnaires. I dedicate this thesis to my mother‘s spirit who had instilled the right values in me for the life which has brought me to the current status of doing this research. 3 TABLE OF CONTENTS Title page 1 Abstract 2 Acknowledgement 3 Table of contents 4 List of figures 9 List of tables 10 Key words and abbreviations 11 1 Introduction 14 1.1 Research context 1.2 Background of sovereign wealth funds (SWF) 1.3 Current trends and management of SWF 1.3.1 Current trends 1.3.2 Management issues 1.4 Oman Economy and SWF 1.5 Problem statement 1.6 Aim and objectives 1.7 Focus and significance of the study 1.7.1 Focus of the study 1.7.2 Significance of the study 1.8 Research methodology 1.9 Structure of the thesis 1.10 Conclusion 2 Literature review 31 2.1 Introduction 2.2 Definitions, history and concept of sovereign wealth funds 2.2.1 Definitions of SWF 2.2.2 History of SWF 2.2.3 Concept of SWF 2.3 Theoretical foundations of sovereign wealth funds 2.3.1 International trade theory 2.3.2 Financial management theory 2.3.3 Economics theory 2.3.4 Agency theory 2.3.5 Stewardship theory 4 2.3.6 Resource based view and resource dependency view 2.3.7 Stakeholders management theory 2.3.8 Isomorphism view 2.3.9 Strategic leadership theory 2.3.10 New mercantalism theory 2.3.11 Autonomy maximization theory 2.4 Development of sovereign wealth funds in the last two decades 2.4.1 Early SWFs 2.4.2 Trade and regulators‘ view of SWF 2.4.3 Growth of SWFs in the last two decades 2.5 Investment strategies of SWFs 2.6 The role of SWFs for sponsoring and investee countries 2.7 Effects on SWFs from barriers by investee countries 2.8 Current trends and impacts on the global finance 2.9 Implications based on the challenges of SWF 2.10 Implications of SWF investment decisions 2.11 Factors affecting SWF growth 2.12 New policy initiatives for SWFs 2.13 Importance of SWFs in the GCC region 2.14 Major inferences from literature review 2.14.1 Theoretical links to SWFs 2.14.2 Inferences about operations of SWFs 2.15 Summary 3 The conceptual framework 103 3.1 Introduction 3.2 Gaps found in the literature 3.3 Integrative framework of the study 3.3.1 Legal aspects 3.3.2 Investee country laws 3.3.3 Environmental dimensions 3.3.4 Policy 3.3.5 Sponsoring country laws 3.3.6 Structure 3.3.7 Investment deal 3.3.8 Operations 5 3.3.9 Growth of SWF 3.4 Hypothesised theoretical proposition 3.5 Operationalization of variables 3.6 Socio-economic factors 3.7 Conclusion 4 Research methodology 122 4.1 Introduction 4.2 Research objectives 4.3 Research philosophy and approach 4.4 Research strategy: The case study method 4.4.1 The case study method 4.5 Triangulation 4.6 Sampling 4.7 Data collection and analysis techniques 4.7.1 Interviews 4.7.2 Questionnaires 4.7.3 Data analyses 4.7.4 Research ethics issues 4.8 Reliability and validity 4.9 Research design summary 5 Analysing case study evidence: Secondary data 149 5.1 Introduction 5.2 Case analysis strategy 5.2.1 Objectives of the case analyses 5.2.2 Structure of the case analyses 5.2.2.1 Reasons for doing Norway SWF analysis first 5.3 Norway SWF: Government pension fund global (GPFG) 5.3.1 History and background of the GPFG 5.3.2 Current status of the GPFG 5.3.2.1 Organisational structure 5.3.2.2 Management control and government support 5.3.2.3 Strategic vision and approach 5.3.2.4 Responsible and sustainability strategy 5.3.2.5 Investment strategy and asset allocation 6 5.3.2.6 Asset allocation fundamentals 5.3.2.7 Governance standards 5.3.2.8 Transparency 5.3.3 Key performance indicators 5.4 Oman SWF: State general reserve fund (SGRF) 5.4.1 Importance of SWF to Oman‘s economy 5.4.2 History and development of the SGRF 5.4.3 Current status of the SGRF 5.4.3.1 Organisational structure 5.4.3.2 Management control and investment strategy 5.4.3.3 Governance, transparency and accountability 5.5 Comparison between Oman and Norway SWF 5.6 Summary 6 Primary data analyses 184 6.1 Introduction 6.2 Links between interviews and questionnaire analyses Part –A: Analyses of interviews 186 6.3 Interview analysis method 6.4 Analysis of interview transcripts 6.4.1 Current situation within Oman SWF 6.4.2 Credibility of the fund: governance and transparency 6.4.3 Laws and treaties 6.4.4 Investment strategy and growth concerns 6.4.5 Decision making process 6.4.6 Changes to implement: policy, resources, people development, investment appraisal 6.4.7 Key growth criteria Part B: Analyses of Questionnaires 202 6.5 The field work reporting 6.6 Results of principal components analysis (PCA) 6.7 Regression analysis of dependent variable 1: Performance of SWF 6.8 Regression analysis of dependent variable 2: Success rate of SWF 6.9 Regression analysis results for dependent variables and possible solutions, changes and impacts on progress 6.10 Hypotheses testing 7 6.11 Progress, possible solutions and changes in Oman SWF 6.12 Final theoretical framework 6.13 Findings of this research study 6.14 Support of existing theories in resolving issues of concern in SWF 6.15 Reliability and validity of the findings 6.16 Summary 7 Conclusion 250 7.1 Research summary 7.2 Implications for theory and practice 7.3 Contributions of the research 7.4 Limitations 7.5 Recommendations for global SWFs 7.6 Recommendations for Oman SWF 7.7 The restructuring plan for Oman SWF 7.8 Future scope of research REFRENCES 264 APPENDICES 276 A Scale reliability test results B Principal component analysis results C Descriptive statistics and normality test results D Multiple regression test results E Interview transcripts F Final questionnaire for Oman SWF G Global sovereign wealth funds 8 LIST OF FIGURES 1.1 Proposed research stages 2.1 Developing countries & emerging markets contribution to world GDP 2.2 SWF deals quantity and value 2.3 Typical SWF transaction showing links to existing theories and factors affecting 2.4 SWF roots in EFIM Theories 3.1 Initial theoretical proposition for sovereign