Helping Diaspora Investors Make a Difference in their Home Countries

A money transfer service where people can receive remittances in Hong Kong. (Photo: Wikimedia Commons)
A shop in Hong Kong where people can receive money sent from abroad. Remittances accounted for more than 80 percent of foreign investment into mainland China from 1979 to 1995. (Photo: Wikimedia Commons)

“There is nothing more powerful than individuals motivated to invest in meaningful programs in their home countries,” said Eric-Vincent Guichard, the Founder and CEO of Homestrings, an online platform facilitating global diaspora investments.  The son of a Guinean father and an American mother, Eric spent most of his formative years in Guinea attending primary and secondary school before moving to the United States. From his personal experience, he knows the challenges that diaspora communities face when trying to invest in their country of origin.

Remittances comprise a significant portion of the foreign directed investment (FDI) in many countries. According to the World Bank, global remittances consistently dwarf foreign assistance by a factor of three, with $414 billion projected this year alone.  Even in countries that attract a lot of investment from global markets, the role of diaspora investment is substantial: between 1991 and 2001, the Indian diaspora was responsible for $2.8 billion of the $10 billion in foreign investment the flowed into the country. In China, diaspora investment accounted for the vast majority — 80 percent — of total FDI between 1979 and 1995.

Remittances have come to play this vital role as source of FDI despite various rules and regulations that make it difficult for individuals to invest in private companies back home. Traditionally, diaspora remittances have flowed mostly to family members, religious institutions, and non-governmental organizations.

These channels are invaluable when it comes to supporting charitable causes and small family businesses, but do not give investors much control over how the money is used or provide the opportunity to re-invest or make a profit. This significantly limits the potential of diaspora investment to develop larger, more productive businesses that can create jobs and economic growth back home.

Organizations such as Homestrings have emerged to fill this crucial market niche by offering ways for diaspora investors to finance organizations that have been vetted and meet certain management criteria. The Johns Hopkins Center for Strategic and International Studies recently organized a panel bringing together organizations supporting diaspora financing platforms including Homestrings, USAID, and the Aspen Institute.

USAID sees these diaspora investment platforms as critical to development and has acted as a conveyor and, more recently, development credit guarantor, for diaspora investment ventures. The Development Credit Authority loan portfolio is guaranteed by USAID, implemented by Homestrings with funds managed by the Small Enterprise Assistance Fund bringing together development, investments, and financial tools to foster the development of economic frameworks for social enterprises in immigrants’ and refugees’ home countries.  Investors share risk with others in the portfolio as well as USAID as a credit guarantor.

Another example of a USAID-backed platform for diaspora to funding is the India investment note offered through the Indian Diaspora Investment Initiative with the Calvert Foundation and financial institutions in India. These community investment vehicles use Calvert Foundation-developed due diligence tools to screen organizations, helping investors to support economic empowerment in their home countries.  Jennifer Pryce, Calvert Foundation president and CEO notes, “Diaspora members are playing an increasingly important role in economic development around the world. The initiative goes beyond remittances and beyond charity. Our work with USAID will enable us to connect member of the Indian-American diaspora to development in their country of heritage through investment.”

Diaspora investment portfolios effectively leverage crowdfunding tools and risk management instruments to attract investments from a demographic that may otherwise not be engaged to support social entrepreneurs in their home countries.

Liesel Riddle, Associate Professor at George Washington University’s School of Business, describes the value in mapping diaspora preferences to tailor targeted portfolios to diaspora market segments similar to traditional investment funds. In addition to being a sound business practice, understanding these sub-segments of the diaspora has the potential to empower groups of investors that are lucrative en masse but not necessarily as individuals, including women, minority ethnic groups, and young professionals.  Innovative business ideas that could benefit these market segments then gain the opportunity for market validation.

Alex Dixon, Director of the Diaspora Investment Alliance at Aspen Institute, remarked that over the long term these emerging diaspora fund disbursement platforms and investment tools will only be successful if they collectively cultivate an ecosystem for effective diaspora investment. Part of building such an ecosystem requires fostering transparency and stable local organizations through due diligence and capacity building to attract investors from the diaspora. CIPE’s publication Building Entrepreneurship Ecosystems describes how fostering economic pluralism is crucial to democratic development. Collectively, diaspora investors can be a powerful voice for institutional reforms at home.

With the first annual Global Diaspora Week coming up October 11-17th, the development community looks forward to what other investment tools and innovations will emerge from these global discussions to economically empower countries through the strong influence of their diaspora.

Laura Van Voorhees is a Program Officer for Global Programs at CIPE.

Published Date: October 01, 2015