Demonstration effects of DGGF: a deep dive
By investing in the missing middle, DGGF - Financing local SMEs (DGGF2) assumes greater risk than traditional financing institutions (DFIs) and investors in emerging markets. This allows it to demonstrate that investing in the missing middle can generate both financial returns and positive impact. Therefore, DGGF2 was one of the first investors to explicitly include ‘demonstration effects’ as part of its strategy and investment process. As such, DGGF2 stands out by incorporating demonstration effects into its core strategy, paving the way for other institutions.
What is a demonstration effect?
A demonstration effect can be understood as additional investments, generated by DGGF2 activities, that otherwise would not have materialized. A distinction can be made between financial and non-financial demonstration effects. Financial demonstration effects occur when investors realize that risk-adjusted returns are higher than initially expected. Non-financial demonstration effects, which can be triggered by DGGF2's business development support activities, relate to the behavior of other investors through new practices, such as improved ESG activities or the adoption of a gender perspective.
The demonstration effects of DGGF2 can be observed in several ways
For funds, DGGF2 is proving to be effective in supporting their legal set-up and strategy. This directly contributes to the reduction of risks for other market players. The presence of DGGF2 also sends a strong positive sign to other potential investors. With respect to SMEs, there is evidence that DGGF2 generates better access to financing from traditional venture capital funds in Egypt, India and Colombia. Also, DGGF2-supported funds in Egypt and India are active contributors to the entrepreneurial ecosystem. DGGF2's investments contribute to the continuation of these activities.
Want to know more about the demonstration effects of DGGF2?
To gain a better understanding of the demonstration effects of DGGF2, Ecorys conducted a study on this topic. This report summarizes the findings of this study and draws lessons for DGGF2 and other market players, along with a series of recommendations. In this way, DGGF2 is contributing to further knowledge development in the field of demonstration effects.