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How Do We Know that Innovation is a Good Investment?

By Nzinga Broussard, Senior Director (Analytics)  |   Posted 1st April 2021

Despite the potential high social returns of investing in innovations to benefit the poor, spending on innovation for international development is low, particularly for bilateral development assistance.

A recent study by the Organization for Economic Cooperation and Development (OECD), for instance, estimated concessional finance to science, technology, and innovation represents only about six percent of total concessional finance by members, multilateral organizations, and other countries.

Resources available for development assistance are scarce. If we want them to be directed toward an explicit innovation agenda, we must provide credible evidence that the impact, or social returns generated by funding innovation, will justify the expense.

For GIF, “innovation” means any new business model, policy practice, technology, behavioral insight, or way of delivering products and services that benefit the poor in developing countries — basically, any solution that has potential to address an important development problem more effectively than existing approaches.

To help provide this justification, GIF’s Analytics team, working with our CEO Alix Zwane, adapted and applied the approach to measuring portfolio-level impact returns developed for USAID’s Development Innovation Ventures set out by Kremer et al. (2019). We looked at the social impact GIF has already created in 38 investments to provide a conservative estimate, or lower bound, for the social rate of return on GIF’s early investment portfolio. Of those 38 investments, seven have each reached at least one million people and 14 have each reached over 100,000 people.

In this paper, we show, with modest assumptions, GIF’s early portfolio will have generated a social rate of return of roughly 35 percent in ten years. It’s a strong number, for sure, so let’s run through how we arrived at it.

We are able to conservatively estimate the social rate of return by looking at just five of the early innovations – SafeBoda, One Acre Fund, Development Media International, Paga, and Education Initiatives – which reflect the diversity of GIF investments through a combination of grant and risk capital investments. These five are also the ones we can make credible estimates of both the stream of benefits and costs of service delivery.

  • First we calculated the total benefit streams generated by the five innovations but allocated only a share of that to GIF’s credit based on the share of overall funding provided by GIF. By allocating benefits in proportion to funding, we avoid each donor or funder taking credit for the same achieved success.
  • Then, to ensure we are estimating a lower bound, when calculating the cost-side of the equation we include not just GIF’s funding for these five innovations, but all GIF’s costs for the other 33 early investments even if those are still on their path to scale.

We found that the five GIF investments we looked at have generated over $53 million in discounted social benefits attributable to GIF’s investment. Compare this benefit stream of just five investments to the total cost of the GIF’s 38 investments of $68 million, it is clear that these investments have already covered three-quarters of GIF’s total portfolio costs.

With modest assumptions, we can project out another five years when these five GIF investments we are looking at will generate at least an estimated $134 million in discounted social value. This amount of social benefits more than covers the $68 million in costs of GIF’s total early portfolio.

This corresponds, as noted, to a social rate of return of roughly 35 percent. Compared to the baseline rate of return on official development assistance, estimated to be about 10 percent, and financial returns on impact investment funds, estimated to be between 11 and 18 percent, GIF’s early portfolio is outperforming these alternative forms of development investment based on this social rate of return methodology. Similarly, the paper authored by Kremer et al estimated a high social rate of return of 77 percent for DIV’s early portfolio after eight years.

We sought to contribute to this important work of Kremer and his colleagues by expanding his approach to include risk capital investments. The goal is to add to the body of work by demonstrating the social benefits generated by supporting early-stage innovation in a different context.

Because GIF’s estimates are only for impact accrued after 5 years, as opposed to the eight for DIV, we are helping make the case “innovation pays” by showing successful innovations can start generating social benefits even earlier in their development process as they continue to refine their product and scale.