Development Policy Centre Discussion Paper No. 36
22 Pages Posted: 30 Aug 2014
Date Written: August 1, 2014
Enterprise challenge funds use overseas aid to subsidise private investment in poverty-reducing business ventures in developing countries, where such ventures have good medium-term prospects of commercial viability but would probably have been left on the shelf without subsidies. These funds are viewed with instinctive affection by politicians and international development agencies and have a standard set of characteristics, which we describe. Nevertheless, there is considerable confusion about what international development agencies should be seeking to achieve by means of them, and how. We argue the main source of confusion is a failure to distinguish clearly between what we term enterprise development and business modification objectives, and the rationales and instruments appropriate to each. Enterprise development, in this context, involves reducing risks which impede the establishment or expansion of innovative, poverty-reducing, small- to medium-scale business enterprises. Investment projects should be managed and outcomes assessed on a portfolio basis, without excessive post-financing engagement and with a concentration on certain countries and/or sectors. Business modification, by contrast, involves strengthening incentives for the adoption of poverty-reducing business strategies by established (often multinational) firms, through changes at the margin. Here public subsidies do not reduce risk; rather they provide incentives for firms to take pro-poor investment decisions, and thereby facilitate changes in corporate strategy. In this case, proposals should be solicited from the widest possible field and projects supported should be few, substantial and closely managed. We do not seek to assess claims as to the impact of past and present enterprise challenge funds — the evidence base is too slim — but we argue future such mechanisms are more likely to succeed if they single-mindedly pursue one or the other of the above objectives, and shape themselves accordingly.
Keywords: Development, foreign aid, challenge funds, private sector
JEL Classification: F35, O1
Suggested Citation: Suggested Citation
Davies, Robin and Elgar, Kerri S., Enterprise Challenge Funds for Development: Rationales, Objectives, Approaches (August 1, 2014). Development Policy Centre Discussion Paper No. 36. Available at SSRN: https://ssrn.com/abstract=2488835 or http://dx.doi.org/10.2139/ssrn.2488835