Development finance institutions (DFIs) and impact investors have long sought to create impact beyond the actual transactions they finance, and the idea that development finance should ultimately be judged by whether sustainable markets develop (rather than whether individual transactions succeed) is not new. IFC’s “Creating Markets” strategy was initially presented nearly a decade ago, as a then-distinctive approach to development finance.
There has, however, been an unmistakable and recent surge in the way these kinds of impacts are taking center stage in the sector. Neil Gregory’s ODI paper on new growth theories argues that DFIs should focus on potential spillover effects rather than direct impact, and recent CGD work by Sam Attridge and Mary Svenstrup on private capital mobilization reaches a similar conclusion (from a different direction), emphasizing that the central challenge is not a shortage of capital but the absence of investable opportunities, functioning local capital markets, and the institutions that connect the two.
It would not be too much to say that the sector, as a whole, has moved toward embracing this rhetoric. British International Investment’s newly released strategy is explicitly framed around “Building Markets,” FMO has been expanding its market creation program, initiatives such as the Private Infrastructure Development Group explicitly frame their work around market building, and networks such as the Catalytic Capital Consortium and the Growth Firms Alliance bring together foundations and investors around the idea that philanthropic and impact capital should be carefully deployed to address market-wide challenges.
All of this is a welcome development for the sector. Economic growth ultimately comes from functioning markets rather than isolated investments. Yet there is a substantial difference between adopting the language of market building and actually changing the nature of how investments are sourced, assessed, and measured. If institutions continue to operate with the same processes and incentives as before, market creation risks becoming old wine in a new bottle rather than a durable paradigm shift.
