Thematic deep dive: why, how and to what extent does DGGF contribute to inclusive growth?

The concept of inclusive growth is increasingly central to economic development due to rising economic inequality and its effects on human well-being and prosperity. For DGGF, enabling inclusive growth is an impact objective and a precondition that is crucial for meeting DGGF’s other core impact objective of reducing poverty. Since 2020, DGGF has made major steps forward in better steering for, and tracking its, contribution to inclusive growth. To continue learning about the effectiveness of DGGF’s investment strategy and its contribution to inclusive growth, Steward Redqueen has performed a deep dive study on this theme. A summary of the results and case studies are presented in the publication in this newsitem. 

Why focus on inclusive growth to begin with?

Sustainable economic growth requires inclusive growth as high levels of inequalities limit the effectiveness of economic growth by depriving lower-income households to stay healthy and accumulate physical and human capital. As 71% of the global population lives in countries with increasing income inequality, there is an international consensus on the importance to promote equal access to opportunity for all. By ensuring economic growth is fairly distributed across society and creates opportunities for all, inclusive growth supports this objective. 

Financial inclusion is crucial for inclusive growth, as it provides disadvantaged groups with the required capital to achieve social mobility. Access to finance promotes employment, productivity, and innovation, therefore boosting economic growth. However, access to finance should be inclusive to ensure that all benefit from these outcomes through empowering disadvantaged groups to meet basic needs, such as nutritious food, clean water, housing, education, and healthcare. This allows individuals to participate fully and effectively in economic life by accumulating physical and financial assets needed to perform medium- and long-term financial planning. 

Image: ©Sahaas Waste, iBridge, iBridge.

The role of SMEs and inclusive growth

SMEs are particularly crucial to boost productivity and foster more inclusive growth, and their productivity translates into job creation and employment opportunities. SMEs are effective against informality, providing marginalised and low-skilled groups with improved access to healthcare and other social services. SMEs also contribute to value creation by supplying new or niche products which respond to diverse customer needs. For instance, social enterprises bring innovative solutions to the problems of poverty, social exclusion, and unemployment. SME Poa Internet (see report below) is an excellent example of such an enterprise. Poa provides low-cost, high-speed, unlimited broadband internet connectivity to homes and SMEs in low-income urban and peri-urban areas in Kenya.

Changes in DGGFs approach in recent years

DGGF’s focus on SMEs is therefore in itself an important potential driver of contribution to inclusive growth. DGGFs objective has always been to support youth and women entrepreneurs, and SMEs in fragile states. But the deep dive reveals that since 2020, the focus on inclusive growth has been better defined, targeted and integrated through sharpening of the definition along four dimensions, renewing the Theory of Change and integrating inclusive growth materialisation. Moreover, a new target has been added and ex-ante investment are measurement against their potential to contribute to inclusive growth. Nonetheless, the deep dive shows that it is still too early to see the results of the enhanced analysis, sub strategies and strategic prioritisation of inclusive growth.

The four inclusive growth dimensions of DGGF – Financing local SMEs
Inclusive growth dimension Definition
Inclusive finance Increasing access to finance for youth and women entrepreneurs and entrepreneurs in fragile states
Inclusive employment Increasing access to decent jobs for women and youth, low-skilled workers, and marginalised groups
Inclusive products and services Increasing access to products and services tailored to the Bottom of the Pyramid and marginalised groups
Inclusive outreach Promoting business operations and accessibility of products in semi-urban and rural areas

Insightful findings

One of the most interesting findings of the deep dive is that for DGGF’s portfolio there is no consistent real trade-off observed between impact performance and Intermediary Funds’ gross return. Therefore, DGGF should thus not let the financial performance hold back its focus on inclusive growth. Other interesting conclusions are: 

  • DGGF’s gender/youth substrategy development and strategic prioritisation of VCs and FIs are good measures
  • The current focus on inclusive growth in DGGF’s mandate and practices makes it a leading actor on the theme
  • Funds and SMEs cannot tick all-inclusive growth elements, and this should also not be the objective
  • Based on the SME cases, the IFs’ strategies and practices integrating inclusive growth have led to impactful investments
  • Case studies show that although the average wage paid within a company may meet the living wage, wage differences can be quite high, particularly for tech companies

Want to read more about the findings, the FI and SMEs and their solution to inclusive growth challenge? Download the report here.