DFIs can contribute to economic transformation by making investments and creating jobs in higher productivity activities, such as manufacturing. In that way DFIs contribute to the process of “creative destruction”, which means that new higher productivity firms put older lower productivity firms out of business, so over time the average productivity of firms in the economy will increase.
Replacing unproductive units with more productive ones is certainly a contribution to economic transformation. But it is not transformational. Rather than transform economies one investment at a time, DFIs also aspire to make investments whose impact ripples out across the economy.
This paper considers the twin challenges facing DFIs: tracing the connections between DFI investments, economic transformation and inclusive growth, to make the right capital allocation decisions, and; finding ways to communicate those linkages to external audiences.