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Investment Facilitation Revisited

CSIS, CrossBoundary Group

The report updates the understanding of country and firm-level barriers to investment (macro-level constraints, lack of capital for risk/return profile, transaction costs, and information asymmetries), and nuances the suggested interventions to address them. With a particular focus on neglected firm-level barriers, the report describes how supporting pioneer investors and companies with expertise, surge bandwidth, geographic presence, and neutral intermediation can unlock stalled investment opportunities. Buttressing their findings with recent development literature, the report highlights that transaction costs in frontier markets remain high and typically put first movers at a disadvantage in new sectors or geographies. It also emphasizes how information gaps, which can be solved through diligence and analysis, and information asymmetries, which stem from underlying trust and incentive problems, are distinct investment challenges and should be approached as such.

Blended finance has received increased attention as a way to mitigate these challenges. The core idea of blended finance is using catalytic capital from public or philanthropic sources to increase private sector investment, particularly in developing countries and for sustainable development. It makes the risk/return profile of uncertain investments palatable to private investors by subordinating patient and concessional (and often first-loss) funding. In this way, blended finance can compensate for country-level or sector-level barriers—including currency volatility, a weak business environment, and challenging asset classes, such as rural agriculture. Most commonly, investment firms use the term “blended finance” to refer to structures that improve returns through concessional capital, or that protect returns through insurance or guarantees. However, in some definitions, blended finance can also include grant-funded transaction assistance and ongoing technical support. Ultimately, blended finance is an important complementary intervention to investment facilitation.

Using case studies from CrossBoundary's work using blended finance in Africa and Asia, the authors stress the need for investment facilitation led by highly skilled intermediaries with deep local knowledge. They also suggest potential improvements in the model to ensure further integration of local advisory actors into the investment process, and the development of intelligent metrics to evaluate progress and align incentives.

    Date
    20 Sep 19
    Type
    Policy and Research Reports
    Region Focus
    Global