Sovereign Development Funds’ (SDFs) dual mandate of pursuing financial or commercial objectives alongside long-term strategic and developments goals presents several challenges. First, SDFs must identify why private capital are not allocated at sufficient scale to target sectors – which market failures result in underinvestment in areas that would otherwise contribute to sustained economic development. Second, if the financial returns on such investments are low or negative, capital allocations may be better pursued through conventional public spending channels. Third, policymakers face the dynamic, evolving challenge of defining the strategic focus areas of the SDF, identifying target industries, sectors, projects and businesses. Finally, policymakers need an empirically grounded process through which to monitor, assess and ultimately demonstrate value around the achievement of strategic and developmental objectives.
This paper provides an overview of the analytical tools from Economic Fitness literature, which we argue provides invaluable insights into the design, evaluation and periodic updating of SDF investments and strategies in a manner consistent with the recent literature’s emphasis on productive capabilities. Brief case studies are used to illustrate how the Economic Fitness framework, toolkit and data can both explain and predict the remarkable success of an economy like that of South Korea in sustained industrial-policy updating, which has seen the Korean economy progress through successive waves of industrialization and increasing economic sophistication since the early-1960s. Sector- specific case studies – focused on the electronics and computers sector in Malaysia, and the automotive sector in South Africa – of more moderately successful emerging-market economies, show how Economic Fitness tools can be used to understand the evolution of productive capabilities in specific sectors, and anticipate future directions and pathways for inter- and intra-sector industrial upgrading.
Our main contribution is to show how this toolkit can be used by SDFs to improve their performance and strategic focus. As a first step, Economic Fitness data can be used to establish investment- and portfolio-level screens to evaluate specific investment opportunities and assess whether SDFs are achieving the developmental aspects of their mandate, both at the individual-investment and portfolio level. More importantly, we discuss how Economic Fitness can bring rigor, consistency, and systematic analysis to efforts to define and periodically update the strategic focus of SDFs, in alignment with more general government industrial and sectoral development plans and policies.