S4 Ep53: The role of evidence at development finance institutions
Dec 19, 2024
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Chris Woodruff, a University of Oxford professor and non-executive director at British International Investment, shares insights on the intersection of research and investment. He highlights the challenges BII faces in promoting sustainable growth in emerging markets. The discussion dives into evidence-based strategies for businesses, using randomized control trials to address hurdles faced by micro and large enterprises. Woodruff also reevaluates the significance of external validity in investment decisions, advocating for a thorough understanding of general equilibrium effects to enhance DFI impact.
British International Investment leverages academic research on business growth constraints to inform impactful investment decisions in low-income countries.
The podcast highlights the importance of understanding spillover effects and general equilibrium impacts to assess the true development impact of investments.
Deep dives
The Role of British International Investment (BII)
British International Investment (BII) is focused on fostering sustainable economic development in low-income countries, primarily in Africa and South Asia. As a development finance institution, BII aims to make impactful investments while achieving modest financial returns, enabling them to reinvest capital. The organization's unique structure, with a single shareholder in the UK government, allows for greater willingness to take risks that can lead to significant developmental outcomes. By predominantly investing in equity rather than debt, BII prioritizes investments with a higher potential for developmental impact, especially in underfunded sectors.
Research's Influence on Investment Strategies
The academic research conducted on private sector development in low-income countries informs BII's investment decisions significantly. Understanding the constraints to business growth helps BII target its resources effectively, thereby enhancing economic growth and poverty alleviation. Innovative research methods, such as randomized control trials, have provided valuable insights, particularly in enhancing income for micro-enterprises. Despite substantial progress, challenges remain in translating research findings into widespread application within the microfinance sector.
Addressing General Equilibrium Effects in Research
There is a growing need to incorporate general equilibrium effects into research that explores investment impacts, as local investments can have broader market implications. While investments may directly create jobs in individual companies, they can simultaneously disrupt existing businesses, highlighting the complex dynamics of market interactions. Understanding these spillover effects is critical for assessing the true development impact of an investment. Future research agendas should focus on combining modeling with experimental approaches to capture these broader market shifts, ultimately leading to more informed investment strategies.
Chris Woodruff has pioneered academic research into businesses, large and small, in low-income countries, He is also a non-executive Director of British International Investment (BII), a development finance institution and impact investor that partners with more than 1,500 businesses in emerging economies, with assets of £8.1 billion. Chris talks to Tim Phillips about what he has learned from his association with BII into how research can inform policy and investment – and whether economists worry too much about external validity.