Challenges to impact investing in a developing country: evidence from Chile

ABSTRACT

This study discusses the impediments and challenges to the growth of impact investing in a developing country. The authors define a set of 7 possible obstacles by establishing a conceptual framework for impact investing. The obstacles are tested through 24 interviews with different players within the Chilean entrepreneurial ecosystem, confirming impediments such as the early stage of market development, the scarcity of suitable investment deals, overdependence on public funding, a paucity of intermediaries and specialised business supports, and the lack of impact measurement practices. Our findings represent a step forward in understanding and supporting the growth of impact investments in developing countries.

KEYWORDS:

• Impact investing
• developing countries
• social entrepreneurship
• entrepreneurial finance
• qualitative research

1. Introduction

Obtaining adequate funding to operate and grow is one of the major challenges faced by social enterprises¹ (Arena et al. 2018; Farhoud et al. 2021; Ingstad, Knockaert, and Fassin 2014). This challenge is often heightened in risky economic contexts with a lack of structural support and institutional or legal safeguards, such as those of developing countries (Bocken, Fil, and Prabhu 2016; Mair, Marti, and Ventresca 2012; Mersland, Nyarko, and Sirisena 2020; Muñoz et al. 2021). From this perspective, it is increasingly clear that conventional finance does not always offer the type of capital needed by social enterprises (Moore, Westley, and Nicholls 2012; Tirumalsety and Gurtoo 2021). Supporting the growth of impact investing in developing countries can represent the solution to the lack of investments in social enterprises operating in those countries. Defined as an intentional investment providing financial capital to support organisations in pursuing social or ecological purposes while also generating economic returns for the investors (Hebb 2013; Hehenberger, Mair, and Metz 2019; Höchstädter and Scheck 2015; Jackson 2013; Wilson 2014), impact investing represents a market-driven solution, which has opened doors to new forms of capital for social enterprises (Botelho, Mason, and Chalvatzis 2022; Croce et al. 2021; Ingstad, Knockaert, and Fassin 2014; Lehner and Nicholls 2014; Mendell and Barbosa 2013).

Impact investing is growing rapidly, and the amount invested is forecasted to continue growing, with an estimated market size of USD 1.164 trillion (Hand, Ringel, and Danel 2022). Hand in hand with the growth of impact investing, a diverse range of analytical reports and articles has emerged (e.g., Croce et al. 2021; OECD 2019; Siefkes, Bjørgum, and Sørheim 2023; Toschi, Ughetto, and Fronzetti Colladon 2023). Nevertheless, there are several open issues in the field (Agrawal and Hockerts 2021; Islam 2022). For instance, few authors have provided conceptual work or a systematic analysis of any emerging empirical problems of impact investing (Evans 2013; Glänzel and Scheuerle 2016; Ormiston et al. 2015; Zeidan 2020). In addition, the peculiarities of impact investing vary considerably across legal and regulatory environments, investor geography, and time (Barber, Morse, and Yasuda 2021; Islam 2022; Wood, Thornley, and Grace 2013). Therefore, it is reasonable to expect that any impediments and challenges also vary between developed and developing countries. However, only a few preliminary works have started to explore the peculiar impediments and challenges of impact investing in developing countries (e.g., ANDE 2020; Brazilian Impact Investment Taskforce 2015; Huppé and Silva 2013). Building on the mentioned gaps, it is possible to deduce that new studies about the impediments and challenges to the growth of impact investing in developing countries are necessary.

This study responds to this need by providing insights drawn from practitioners on the challenges and impediments to the growth of impact investing in Chile. Chile has been one of Latin America’s fastest-growing economies in recent years (Espinoza et al. 2019), proving to be an ecosystem able to generate successful economic and social initiatives (Atienza, Arias‐Loyola, and Phelps 2021; Domanski et al. 2015). According to IFC - International Finance Corporation (2022), for instance, the Chilean market assisted laudable initiatives, such as the creation of some venture capital funds focused on strategic sectors; however, there is a need for new institutional initiatives able to drive the sustainable growth of the market. Advancing on a fund-of-funds initiatives could be one of the solutions to stimulate the growth of the Chilean market (IFC 2022). As in other developing countries, entrepreneurship plays a crucial role in Chile’s development, but the accrual of knowledge regarding entrepreneurship in Chile is still necessary (Bruton, Ahlstrom, and Obloj 2008; Espinoza et al. 2019; Leporati, Marin, and Roses 2021; Romaní, Atienza, and Amorós 2009). Players operating in the Chilean social economy are young and constitute a growing proportion of the economic activities in the country (Universidad del Desarrollo 2016). Today, studies on the Chilean social investment landscape are still few in number and mainly focused on social enterprises rather than on investors (e.g., Broota 2015; Del Giudice et al. 2019; Escuela de Administración UC 2012; Gatica 2015; Muñoz et al. 2021). For instance, Giovannini and Nachar (2017) identified different types of social enterprises in Chile, showing not only the relative importance of these players in the country but also the apparent organisational variety and complexity of the Chilean ecosystem. For all these reasons, the Chilean case represents one of the most suitable by which to study the impediments and challenges to the growth of impact investing in developing countries.²

Building on previous literature, this study presents a conceptual research framework able to support the identification of potential obstacles to the growth of impact investing and their links. The research framework is divided into 5 areas (4 for analysis): investors and intermediaries, social enterprises, enablers, processes and methodologies, and beneficiaries. The identified issues are tested through semi-structured interviews with 24 different players relevant to the Chilean social investment landscape. Our findings confirm a set of 7 obstacles to the growth of impact investing in a developing country. Obstacles such as the lack of intermediaries and specialised business supports, the early stage of development of social enterprises, the overdependence on public funding, the lack of impact measurement practices, and the absence of a distinct regulatory framework for social enterprises all contribute to limiting the growth of impact investing activity in the country. Additionally, our study contributes to highlighting the link among identified obstacles, also providing suggestions for addressing the challenges faced by impact investing in a developing country.

The following section presents a literature review on impact investing and the obstacles to its development. The authors then detail the methodology used to conduct this study and set the objectives pursued through the research. Finally, the results and conclusions are discussed, as well as considerations for future research and implications.

2. Impact investing: an overview

2.1. Definition of impact investing

Although investing capital to achieve social or ecological goals is not new (Nicholls 2010), leveraging venture capital mechanisms for social purposes is relatively recent and a growing field of practice and research (Barber, Morse, and Yasuda 2021; Croce et al. 2021; Islam 2022; Siefkes, Bjørgum, and Sørheim 2023). Evidence of the relevance of this recent research area can be found in the fact that there is an emergent and pivotal literature in entrepreneurial finance exploring the particular peculiarities of novel players operating in impact investing all around the world (e.g., Barber, Morse, and Yasuda 2021; Botelho, Mason, and Chalvatzis 2022; Croce et al. 2021; Siefkes, Bjørgum, and Sørheim 2023; Toschi, Ughetto, and Fronzetti Colladon 2023). Given the novelty of this research area, precise conceptual boundaries and terminology related to such investing are still under discussion (Agrawal and Hockerts 2021; Islam 2022); however, some distinct traits of impact investing are shared by both practitioners and academic scholars (Höchstädter and Scheck 2015). For instance, a prominent part of the literature refers to impact investing as the deployment of financial resources for economic and social or environmental returns (Daggers and Nicholls 2016; Evans 2013; Moore, Westley, and Nicholls 2012). Specifically, most of the definitions coined describe impact investing as investments that create intentional and measurable social or environmental benefits while also generating economic return (Hebb 2013; Hehenberger, Mair, and Metz 2019; Höchstädter and Scheck 2015; Jackson 2013; Wilson 2014). Other terms such as “social impact investments” (e.g., OECD 2019), “social investments” (e.g., Daggers and Nicholls 2016; Wilson 2014), and “social venture capital investments” (e.g., Meadows and Pike 2010) are used to define comprehensively similar approaches (Glänzel and Scheuerle 2016). As mentioned, two characteristics have been identified as relevant for non-financial returns in defining impact investing: intentionality and measurability. The first highlights the importance of the presence of an explicit and proactive willingness to generate a potential social or environmental benefit (Hebb 2013; Hehenberger, Mair, and Metz 2019; Nicholls 2010). Indeed, an incidental positive impact of a commercial deal is unsuitable to classify the investment as an impact one (Brest and Born 2013). The second characteristic points out that the potential social or environmental benefit generated should be demonstrable and, consequently, regularly tracked or measured (Hehenberger, Mair, and Metz 2019; Höchstädter and Scheck 2015; Jackson 2013; Wilson 2014).

2.2. Challenges to impact investing

Impact investing is affected by a number of challenges, which represent significant barriers within the current mainstream economic structures for impact investors (Glänzel and Scheuerle 2016; Jackson 2013; Ormiston et al. 2015; Phillips and Johnson 2021). Indeed, investors interested in channelling private capital into innovative social or environmental impact initiatives are faced with disincentives and lack of support, hampering the growth of such investing (Agrawal and Hockerts 2021; Islam 2022; Mair, Marti, and Ventresca 2012; Moore, Westley, and Nicholls 2012). One of the main limitations to the growth of impact investing is the lack of organisations with consolidated business models and, therefore, ready to receive investments (Nicholls and Pharoah 2008; Wilson 2014). This limit could be related to the lack of training programmes for social entrepreneurs (Gupta et al. 2020). Moreover, the financial requirements of social enterprises are highly specialised (Nicholls and Pharoah 2008). Therefore, achieving a suitable investor-investee match is costly and frequently unfeasible (Gupta et al. 2020). In the eyes of potential investors, enterprises with a social or environmental aim are often perceived as riskier than mainstream businesses and, consequently, less attractive (Gupta et al. 2020; Ormiston et al. 2015). In addition, as discussed by some authors (e.g., Cosa and Urban 2023; Glänzel and Scheuerle 2016), investors tend to undervalue the non-financial returns created in social entrepreneurship, prioritising financial returns. This scenario is worsened by the existence of significant information asymmetries between investor and investee (André and Pache 2016; Arena et al. 2018; Nicholls and Pharoah 2008). Sunley and Pinch (2012) state that social entrepreneurs have the impression of speaking “a different language” to players from the business sector. Commercial investors are used to investing in traditional for-profit ventures and may be less aware of the characteristics of social enterprises, particularly those concerning their structure and governance (Chertok, Hammoui, and Jamison 2008). This lack of awareness may create a lack of understanding between organisations and potential investors. Since investors are less familiar with business models that generate both social and financial returns, they are cautious when investing in social enterprises (Brandsen and Karré 2011), applying to these organisations the same requirements as those applied to mainstream for-profit enterprises. For all these reasons, social enterprises often tend to spend their resources on the achievement of financial results, which tend to absorb their social mission (Evans 2013; Sud, VanSandt, and Baugous 2009). In addition, due diligence and monitoring in the social sector are more difficult (Desa and Basu 2013; Ormiston et al. 2015). Due to the absence of commonly recognised performance metrics, it is harder for social enterprises to demonstrate their social impact (Zeidan 2020) and, as a result, they often lack the necessary track record to prove their results (Huppé and Silva 2013; Jackson 2013; Nicholls and Emerson 2015). Therefore, it is not surprising that the costs and difficulties inherent in trying to quantify impact generally discourage social enterprises from measuring their social or environmental outcomes. Consequently, there is a lack of historical information and evidence on best practices (Hazenberg, Seddon, and Denny 2015). Overall, there is a perceived demand/supply mismatch in the sector (Evans 2013; Harji and Jackson 2012), with deals that neglect the social mission of ventures. Accordingly, intermediary organisations such as social impact funds and venture philanthropists can be critical levers for the growth of the market by aggregating sources of capital, generating financial instruments to cover different segments of the risk/return spectrum, providing management support, and storing and developing relevant knowledge and tools (Brest and Born 2013; Harji and Jackson 2012). An additional issue concerning the growth of impact investments is the lack of clear and shared legal frameworks for social enterprises (OECD 2015; Ormiston et al. 2015; Social Impact Investment Taskforce 2014b). Indeed, in several countries, there is a tendency to segment the marketplace by the legal status of ventures, neglecting the range of hybrid models that balance financial and social objectives coherently (Jackson 2013). The lack of legal resources (Bugg-Levine, Kogut, and Kulatilaka 2012; Gupta et al. 2020; Islam 2022) and outdated legal and regulatory frameworks constrain both social entrepreneurs’ growth and their businesses (Social Impact Investment Taskforce 2014a).

In this scenario, it is also important to highlight that, since the characteristics of impact investing vary considerably across legal and regulatory environments, investor geography, and time (Barber, Morse, and Yasuda 2021; Islam 2022; Wood, Thornley, and Grace 2013), the challenges to impact investing also vary in different contexts. However, only a few preliminary works have started to explore the peculiar impediments to impact investing in developing countries. For instance, the report carried out by Huppé and Silva (2013) for the International Institute for Sustainable Development (IISD) explored the critical problems facing institutional investors wishing to implement impact investments in developing countries. Specifically, by exploring distinct initiatives in India, they suggested that investment risk/return profiles, investment track records, and exit options are the primary problems for the growth of institutional impact investments in developing countries. Moreover, they suggest that impact measurement, blended capital curve, scalability, and sourcing deals/investment costs are critical problems faced by institutional investors operating in impact investing in developing countries. Focusing on the same country, Ravi et al. (2019) found that, in the Indian context, there was a lack of clarity and cohesion on the definition of impact and the measurement metric for impact investments. From another perspective, research conducted by the Brazilian Impact Investment Taskforce (2015) identified four areas of intervention to strengthen the local social finance ecosystem: increasing the supply of capital, increasing the number of investment-ready businesses with potential for growth, strengthening intermediary organisations, and creating a macro environment favourable to social finance. Moving on to the Nicaraguan context, Book (2011) suggested the necessity to develop clear and enduring metrics for impact investments. Finally, looking at the Chilean social impact landscape, in their working paper, Giovannini and Nachar (2017) found that the social economy in Chile still receives limited support from public policies and remains characterised by scarce integration of different players.

In conclusion, academic research on impact investing still needs new studies and theoretical frameworks to study the several open research questions in the field (Agrawal and Hockerts 2021; Glänzel and Scheuerle 2016; Islam 2022). One of those gaps relates to the study of the challenges to the growth of impact investing in developing countries (LaFrance et al. 2021). To the best of our knowledge, indeed, only some preliminary works have tried to understand the peculiar impediments and challenges to the growth of such investing in developing countries. Building on the mentioned literature, the present study aims to answer the following research question: what are the main challenges that hinder the growth of the local impact investing system in a developing country?

3. Methodology

To guide the research, the authors adopted a conceptual framework for impact investing to support the identification of the potential obstacles that may hamper its development. From the literature, we derived a simple research framework divided into 5 areas: investors and intermediaries, social enterprises, enablers, processes and methodologies, and beneficiaries (Figure 1).

Figure 1. The impact investing environment.

More precisely, we divided the local impact investment system into two internal elements of analysis (investors and intermediaries and social enterprises), one external element (the enabling environment), an extra element that encompasses processes and methodologies relevant in the field and, finally, an element that encompasses the beneficiaries of the impact investing activity. However, given the scope of this research, this last element has not been analysed. Indeed, this study aims to investigate the main challenges faced by the players contributing to the growth of impact investing in a developing country and not the players ultimately impacted by it. The beneficiaries are often focused on different issues, and the investments analysed here are specifically created to support them. In other words, the investments analysed are created for beneficiaries and not by them. Therefore, it is reasonable to conclude that they are rarely aware of the issues experienced by impact investors and hardly contribute directly to the growth and development of impact investing in a country. For these reasons, this study focused on the players and elements directly facing the challenges hindering the growth of impact investing in a given country. In accordance with previous literature exploring similar research questions (e.g., Glänzel and Scheuerle 2016; Ormiston et al. 2015; Phillips and Johnson 2021), this approach is suitable to investigate the challenges of impact investing in a given context. Additionally, it is also relevant to highlight that part of the developed research framework is dedicated to processes and methodologies relevant to impact investing. Building on the previous literature (e.g., Jackson 2013; Ormiston et al. 2015), this is an essential element to be investigated for a study aiming to investigate the challenges of impact investing. Moreover, as it is also emphasised in the described framework, this category is not ascribable to a specific player but involves every investigated player.

Considering the focus of the present study and the shortage of available data, a qualitative approach was chosen. As stated by literature (e.g., Eisenhardt and Graebner 2007; Tracy 2010; Yin 2009), a qualitative approach is an appropriate and effective strategy for early-stage research on a specific topic to gain understanding in situations where there is limited knowledge. To identify the obstacles to the development of the local impact investing system, primary data were collected through semi-structured interviews and questionnaires. Semi-structured interviews were the core method for this research because, as stated by Barriball and While (1994), they are well suited to exploring the perceptions and opinions of respondents regarding complex issues, allowing interviewing a heterogeneous sample for which standardised interviews may neglect the differences and particularities of the respondents. Figure 2 depicts the structure of the interviews.

Figure 2. Interview structure.

The sampling strategy adopted to select the interviewees was purposive (or theoretical) sampling. Purposive sampling is a methodology based on grounded theory (Corbin and Strauss 1990; Mason 2017) that provides a consistency that makes it possible to build a robust theoretical explanation of the phenomena studied by specifying conditions, how they are expressed through actions/interactions, the consequences that result, and any variations of these qualifiers (Corbin and Strauss 1990). To build the sample, we follow different phases. The first phase involved the creation of an exhaustive list of organisations involved in social entrepreneurship and impact investing in Chile. Since the peculiarities of the Chilean social impact landscape (Del Giudice et al. 2019; Gatica 2015; Giovannini and Nachar 2017; Giovannini, Nachar-Calderón, and Gatica 2019; Muñoz et al. 2021) and the need for further exploration of the country (Bruton, Ahlstrom, and Obloj 2008; Espinoza et al. 2019; Leporati, Marin, and Roses 2021; Romaní, Atienza, and Amorós 2009), Chile represents one of the most suitable countries to explore the challenges to the growth of impact investing in a developing country. The list of identified organisations was built using public information obtained from B System, the report Structure and Dynamics of Social Entrepreneurship in Chile (Universidad del Desarrollo 2016), references from industry experts, and desk research. This research resulted in a list of 33 organisations. Specifically, this list of potential interviewees was chosen to ensure that the study represented a range of relevant players (investors, social enterprises, enablers, and experts), providing heterogeneity regarding a common theme (Patton 1990) and broadly explaining the Chilean ecosystem. The 33 potential interviewees were contacted, of whom 24 were interested in participating in the study and were interviewed. As illustrated in Table 1, the interviewees represented a diverse mix of organisations, and all of them played a relevant role in the social investment landscape of the country.

Table 1. Sample of interviewees.

N.	Experiences	Role
1.	Founder and CEO at AlGramo; member of Global Shapers Community, and Ashoka Fellow	Social Entrepreneur
2.	General Manager at Late!; member of the evaluation committee of SeleccionaChile (seed capital programme) at CORFO	Social Entrepreneur
3.	Director for Latin America at Emprediem and member of Global Shapers Community	Social Entrepreneur
4.	Founder and executive director at Late!; lecturer at Universidad Católica de Chile, and Social Entrepreneur of the year 2015	Social Entrepreneur
5.	Member at 2ble Impacto and Executive Director at Own Project Foundation	Investor
6.	Co-founder and COO at Broota; lecturer at Universidad del Desarrollo	Investor – Enabler
7.	Fund Manager at Fondo de Inversión Social (FIS)	Investor
8.	Administrator at El Sembrador	Investor
9.	Co-founder at Mountain Nazca Venture Capital, Board Member at Socialab and Board Member at Endeavor Chile; former Professor of entrepreneurship and innovation at Universidad Adolfo Ibañez	Investor
10.	Manager at General Partner at Chile Ventures	Investor
11.	Coordinator at Fundación Colunga and former team member at Socialab	Investor
12.	Manager at LarrainVial Foundation and former Commercial Director at Maria Ayuda Corporation	Investor
13.	Fund Specialist at Inter-American Development Bank	Investor
14.	COO and former Manager at Socialab and Co-Founder and CIO at Juusto	Enabler
15.	Co-founder and senior strategist at Sistema B Latin America; partner at TriCiclos and board member at Fundación BanColombia; former board president at Fundación Casa de la Paz	Enabler
16.	Executive director at Social Innovation Institute, Universidad del Desarrollo, and founder at Impacta CSR Strategic Consulting	Enabler
17.	Director at Center of Philanthropy and Impact Investing at Universidad Adolfo Ibañez	Enabler
18.	Director at InnovacionAl and former Manager of Alliances at J-PAL	Enabler
19.	Technical executive at CORFO, Department of Social Innovation	Enabler
20.	Executive director at Endeavor Chile; former investment manager at Southern Angels Investors, and Financial Manager at Octantis	Enabler
21.	Regional Manager LatAm at Instiglio and Senior Consultant on impact investing and social entrepreneurship; former director of NESsT Latin America	Enabler – Investor
22.	Professor of social entrepreneurship at Universidad Adolfo Ibañez, co-founder and president of Smart Citizen Foundation and independent consultant on social innovation and sustainability	Expert
23.	Emeritus Professor of strategic management and person-centred management; member of the investment committee at San Agustín Foundation and director of companies such as Fallabela, Copec, EuroAmerica and Codelco	Expert
24.	Executive director at Centro de Innovación Universidad Católica (UC), Professor of social innovation and entrepreneurship at UC and Universidad Adolfo Ibañez, former executive director at CORFO and former head of Innovation at Ministry of Economy	Expert

The interviews ranged from 40 to 60 minutes, and all of them were recorded. The method employed to categorise, code, and analyse the information obtained from the interviews was the “constant comparative method” (Glaser and Strauss 2017; Lincoln and Guba 1985), i.e., an iterative procedure designed for qualitative analysis that is also based on grounded theory (Hazenberg, Seddon, and Denny 2015; Strauss and Corbin 1994). The process consists of inductive reasoning that makes it possible to code the information. The processes of detecting, coding, and dividing themes were carried out using the Atlas.ti software for data analysis. Using Atlas.ti, the authors separated and coded the different sub-topics of analysis that emerged from theory and interviews. A total of 45 codes were created, one for each sub-topic. Once finished, the 45 codes were ranked according to the quantity of evidence found to justify them. Codes containing sub-topics with less evidence were filtered. After filtering, the remaining codes were clustered into five groups, one for each of the four areas of analysis in the framework and one additional “other issue” category. The resulting data were analysed by at least two authors independently, and all authors discussed their observations before being finalised.

4. Results: challenges to impact investing in a developing country

The following paragraphs discuss the challenges of impact investing in a developing country, i.e., Chile. The results are reported following the same structure as the research framework introduced, i.e., in the following sub-sections: investors and intermediaries, social enterprises, enablers, and processes and methodologies.

4.1. Investors and intermediaries

Although Chile is one of the best ecosystems in the region to invest (LAVCA 2017), one of the main limitations for social entrepreneurs in Chile is gaining access to private sources of finance. When discussing funding for ventures in the early stages, the interviewees agreed that the participation of the private sector is not suitable to respond to the request of the market. Moreover, they reported that the available capital mostly comes from the government, either through subsidies or seed capital. Regarding later stages of development, a considerable number of interviewees emphasises that there is a problem in the connection between a proven concept with regular operations and the investment funds to scale. While the government covers the first stages well, there is an open chasm to further expansion stages. As stated by one of the interviewees:

I think the funding is perceived as existing, as a super developed industry, but it is because the government is largely involved in these matters […]. Apparently, it seems to be that there is a lot of capital available, but when you research more on what is happening, I would say that my feeling is that it is an industry that has not developed at the speed that it should, given all the public support that exists. (Interviewee 12)

One of the reasons that may explain the slow flow of private capital for impact investing is the conservative approaches taken by investors. As stated by another interviewee, there are still profitable traditional businesses, and investors are regarded as conservative and risk-averse. Therefore, money is being allocated to those sectors, not to new ideas that can be considered riskier:

When we are talking about social entrepreneurship, we can say there is a lack of diversity in the private sector, but what is the private sector looking for? They are looking for known territories, i.e., opportunities where they believe they can manage the risk (from a bank to any other) and take that for the early stage. The private sector has little knowledge about what social entrepreneurship is. (Interviewee 22)

Indeed, despite the increasing number of social enterprises in the market and the growth of the financial industry, not enough capital has been destined for impact investing. The lack of public investments already mentioned in expansion stages and of private capital at every stage of development of social enterprises can be summarised as follows:

Proposition 1: there is a shortage of investment capital for social enterprises.

The reasons causing the reported shortage of investments are different. Specifically, it is possible to find opposing answers as to whether investors are interested in making a social or environmental impact or not. Some respondents have affirmed that investors are interested in making a social or environmental impact but only if enterprises are able to repay their investments. Other interviewees hold that investors are not interested in achieving social or environmental outcomes. Consequently, they prefer to invest in assets with projections of higher financial returns. On the other hand, social entrepreneurs are more interested in generating impact rather than in achieving financial revenues:

I think they speak a very different dialogue, even if there are certain special cases […]. However, the majority of entrepreneurs at the moment of presenting their projects want to show the social purpose and try to convince the investor that what they are doing is the most important […] you, as an investor, want to know why what the entrepreneur is doing is more important than other things and how she or he is skilled enough to achieve results. (Interviewee 13)

A further issue in this matter is the differences in understanding between social entrepreneurs and investors. The lack of clarity regarding the concepts and the differences between the social and financial worlds lead to a lack of understanding and generate information asymmetry problems between both counterparties. The reasons for this asymmetry and misleading can be linked to the investment costs faced by impact investors. Indeed, investors usually face high transaction costs in sourcing investing deals, conducting due diligence, and closing and syndicating investments (Bugg-Levine and Emerson 2011). Additionally, investors operating in impact investing address additional challenges and costs related to the intention to have also a social or environmental impact. However, these additional strains and costs are often not perceived and considered by potential investees. The differences in the objectives and perspectives of each party hinder the communication between them and stand in the way of reaching investment agreements. This hindrance can be summarised in the following proposition:

Proposition 2: the differences between impact investors and investees in language, priorities, and perceptions hamper reaching investment agreements.

The challenge described by proposition 2 can be corroborated by a lack of players able to understand the needs of both investors and social enterprises. In this context, intermediary organisations specialised in impact investing can play a crucial role in the growth of the industry (Brest and Born 2013; Ormiston et al. 2015; Phillips and Johnson 2021; Wilson 2014). Indeed, they contribute not only to reducing transaction costs but also to aligning the expectation of impact investors and social entrepreneurs on social and financial outcomes. It is also relevant to highlight that finding genuine and validated impact investment opportunities requires additional efforts and tailored resources. In this case as well, intermediaries can play a critical role by discovering impact investment opportunities and introducing them to impact investors (Brest and Born 2013; Phillips and Johnson 2021). However, the number of venture capital funds in the analysed ecosystem is limited,³ and they are mostly restricted to universities or the government, presenting significant unfamiliarity with tools able to promote late-stage investments (Sahli 2015). Furthermore, despite there being a few impact investing funds in Chile (e.g., FIS Ameris, which Ameris Capital manages), the Chilean ecosystem presents an expertise gap in investments in social enterprises. Indeed, our findings show that there is a lack of intermediation for social entrepreneurship:

When we talk about impact investment funds, we have in mind just one fund that is small […] there are some initiatives in development that may have much potential, but currently, they are in an embryonic state. (Interviewee 17)

Consequently, intermediation is widely acknowledged as one of the weakest points within the ecosystem, generating a gap in expertise and mediation in the impact investing landscape. This impediment can be summarised as follows:

Proposition 3: there is a lack of intermediary organisations to match investment capital with social enterprises.

4.2. Social enterprises

Social entrepreneurship has grown in Chile in recent years. However, our interviews confirmed that this phenomenon is still in the early stage of development:

First of all, the movement is really incipient […]. The social enterprises are just emerging, and as with every enterprise, you first have to cross the Valley of Death to start to receive more capital, but that is a natural part of an industry that is growing. (Interviewee 21)

This lack of business development might be explained by the difficulties that social organisations have in structuring financial plans based on market logic. The logic of granting and financial survival is deeply ingrained in the social sector, and, consequently, most enterprises seem far more comfortable writing contract bids and applications for particular projects than business strategies (Sunley and Pinch 2012). In this line, a second issue recurrently mentioned by the interviewees is that, in several cases, social entrepreneurs remain focused on the impact and neglect the business development of their venture. Further evidence of this issue is the fact that, according to research carried out by the Universidad del Desarrollo (2016), 57% of Chilean social entrepreneurs surveyed are driven by the intention to solve social problems rather than the idea of creating a business with potential social impact. In this sense, the interviewees acknowledged that social entrepreneurs tend to prioritise social or environmental impact over financial development:

I think that most of the social entrepreneurs today are looking for how to create a social impact rather than a (financial) return. Therefore, you cannot offer financial results because it is something that is not your priority […] there is much interest in the purpose, much interest in changing the world. They think everyone has to fund them because they will change the world, but there are only a few who have seen beyond and have wondered about what the interests of investors are. (Interviewee 13)

At the same time, impact investors need to find investment opportunities able also to survive and potentially grow in the market. To achieve this goal, social entrepreneurs need to develop and present proper entrepreneurial skills and knowledge. Several interviewees stated that social entrepreneurs do not have a clear idea of their own business models and plans and, consequently, do not know what kind of capital and support they need. This result was also confirmed by the Universidad del Desarrollo (2016), which shows that just 40% of social entrepreneurs surveyed had some kind of training in the management of social enterprises. This issue could be related to the lack of training programmes for social entrepreneurs. The mentioned lack of knowledge also contributes to enhancing the difficulty of dialogue and understanding of the players operating in the analysed ecosystem, highlighted in proposition 2.

An additional issue mentioned by the interviewees when explaining the reasons for the lack of business development of social enterprises was the overdependence on public funding, free equity programmes, and awards. Several interviewees stated that this overdependence has negatively affected the natural development of ventures. Indeed, the provision of free capital has generated incentives to prolong the initial stages (proof of concept and incubation), thus delaying the testing and piloting of business models. Some interviewees also affirmed that providing free patient capital has also led to lower entry barriers for social enterprises. All these facts generate distortions in the impact investing market, making it harder for impact investors to find good investment opportunities.

In brief, the early stage of development, the lack of business development due to the prioritisation of social impact, the lack of entrepreneurial skills, and the excessive dependence on public funding are all factors that lead to a lack of good opportunities for impact investors, which can be summarised in the following statement:

Proposition 4: there is a lack of high-quality social business opportunities in which capital can be invested.

4.3. Enablers

4.3.1. Supportive players

Incubators and accelerators represent crucial players in promoting local economic growth (Hackett and Dilts 2004), enabling the avenue of novel enterprises both in developed (Aerts, Matthyssens, and Vandenbempt 2007) and developing economies (Haugh 2021; Scaramuzzi 2002). Regarding the Chilean ecosystem, the government and public institutions have been leading promoters of these enablers. For instance, Universities have developed incubation programmes to promote entrepreneurship, such as Chrysalis and UDD Ventures. Moving on to support for social entrepreneurship, the literature suggests that social enterprises require specific and specialised support to enable the dual aim of these entities (e.g., Emerson 2003; Haugh 2005). However, our interviewees agree that incubation programmes in the country do not provide the proper know-how to boost the development of social enterprises. Specifically, interviewees agree that existing incubation programmes are not sufficiently focused on enabling the achievement of both economic and social or environmental outcomes. In this case as well, the reasons for this gap are linked to the dependence of these programmes on public funding and grants. Indeed, public incentives for incubators and accelerators have been more oriented toward supporting the achievement of economic performance rather than providing advice for achieving social or environmental purposes:

The fact that the government gives you money and then asks you to show your results in terms of traditional entrepreneurial economic performances forces you as an incubator to help the projects involved in the programme to have an acceptable economic performance but not necessarily to have a social impact. Therefore, I think that all that part of capacity building in the social field is still lacking. (Interviewee 13)

In this scenario, promoting the creation and development of incubation programmes specialised in supporting social enterprises could be a solution to fill this gap. Indeed, as shown by the literature (e.g., Sansone et al. 2020), social incubators enable social enterprises to achieve both economic and social or environmental outcomes. However, there are only a few incubators and accelerators specialised in this area in Chile, and their number is not suitable to enable the growth of impact investing in the country.

These problems can be summarised in the following statement:

Proposition 5: specialised business incubation programmes for social enterprises have not developed enough to foster the growth of social entrepreneurship and impact investing.

4.3.2. Regulatory framework and governmental support

On the demand side, in Chile, there is no adequate or cohesive legal framework that meets the needs of organisations aiming to achieve both social or environmental and financial returns (Gatica 2015). Consequently, it is possible to find social enterprises with different legal forms and, therefore, regulated by very divergent laws. This issue generates uncertainty in the ecosystem, especially for investors that need as much clarity as possible regarding their investments. Furthermore, from the perspective of policy makers, potential supports for impact investments are more difficult to establish since they have to consider and deal with organisations with very different characteristics and needs. For instance, some of them are within the so-called “third sector”, therefore benefiting from tax exemptions, donations, and other advantages. However, they are subject to several limitations on using the capital earned. On the other hand, there are social enterprises that are traditional enterprises and, therefore, without any kind of special treatment beyond social recognition. Unlike many developed countries (e.g., Florek 2013), the absence of legal frameworks for social enterprises is a common problem in many developing countries. For instance, most Latin American countries have no precise legal frameworks for blending social or environmental impact and for-profit organisations. The respondents agree that creating a special legal status for social enterprises would represent an important milestone for both the sector and the social investment market:

It would be incredibly good for investors because a regulatory framework provides them clarity. So, I think a regulatory framework is fundamental not only to increase the number of enterprises but also to give security to investors. […] There are many risks, and there are many grey areas, so that a regulatory framework would also provide legal certainty. (Interviewee 5)

In addition, the complexity of taxing structures, among other issues, represents a significant disincentive for investment activity and its growth (LAVCA 2017). In this sense, governmental policies and private initiatives may be a high-yield pipeline between social entrepreneurship and funding by attracting the latter or motivating resources already in the country.

According to the respondents, the lack of a legal framework for social enterprises may not represent an impediment to impact investing, but generating it could unlock new sources of capital. On the supply side, the interviewees confirm that the legal framework for impact investments leaves little motivation for private investors to invest in social enterprises.

These issues can be summarised as follows:

Proposition 6: the lack of clear and tailored legal frameworks regulating social enterprises and impact investors contributes to inhibiting the growth of impact investing.

4.4. Processes and methodologies

Methodologies for appraising potential investees in terms of social impact, financial sustainability, and organisational resilience have to be created to develop due diligence suitable for social entrepreneurship (Glänzel and Scheuerle 2016; Ormiston et al. 2015). Overall, the interviewees detect a lack of professionalization and knowledge of impact investing in the country. The traditional approach to investment evaluation is simply a jumping-off point for creating new financial tools and instruments capable of achieving the twofold mission of impact investing. Therefore, as one of the interviewees stated, investing endeavours to fully mature practices and generate new tools must be a priority for such investing:

It is hard for investors to differentiate what social impact is and what is the border for being a social enterprise or not. There is a lack of agreements, consensus, methodologies, and practice. (Interviewee 21)

This lack also affects social enterprises. Indeed, according to the Universidad del Desarrollo (2016), just 14.7% of Chilean social entrepreneurs use robust systems to measure social impact. Additionally, 38.2% use standard metrics from traditional businesses and do not have any additional instrument for impact measurement (Universidad del Desarrollo 2016). Building on this, it was no surprise that our respondents agree that impact measurement in the country is a practice that is underdeveloped:

Today, we are very weak in terms of content for impact measurement. So, how will you ask for impact investing if you do not have the methodologies to assess it? It is clear that there is a lack of knowledge about it. (Interviewee 9)

In accordance with the literature (e.g., Arena, Azzone, and Bengo 2015; Reeder et al. 2015), the development of dedicated and standardised methodologies for impact investing and impact measurement represents a critical factor for the development of the social impact market. Indeed, as also emerged from our interviews, traditional investment methodologies and metrics are unable to properly support and consider the needs and goals of social enterprises. Moreover, elaborating dedicated measurement metrics would support the creation of historical data for impact investing in the country. This data could be a crucial element in improving the understanding of the phenomenon in the ecosystem and facilitate not only the avenue of effective and tailored tools for impact investing in the country but also the creation of suitable expectations for impact investors and social entrepreneurs.

Building on these reported points, it is possible to summarise a final challenge for the growth of impact investing:

Proposition 7: there is a lack of impact investing methodologies, impact measurement metrics, and historical information for impact investing.

5. Discussion and conclusion

The present study contributes to identifying and confirming a set of obstacles to the growth of impact investing in a developing country. Specifically, this study identifies 7 propositions, extending our understanding of the main challenges faced by such investing in a developing country by analysing the interviews of 24 relevant players in the Chilean social impact landscape. Our study also contributes to providing insights about the link among the different challenges faced by players operating in impact investing in the context of a developing country.

As mentioned, some of our findings confirm and expand our understanding of what has been reported in previous preliminary works analysing impact investing in other developing countries. Therefore, it is reasonable to conclude that the challenges identified by this study are also present in other developing countries. For instance, the Brazilian Impact Investment Taskforce (2015) underlined the existence of a lack of alternatives for financing social enterprises at an early stage in their life cycle. This result is in line with our proportion 1, which highlighted a lack of public investments in the expansion stages and private capital at every stage of the development of social enterprises. The reasons for this lack of investments can be related to differences between investors and investees in terms of language, priorities, and perceptions. Indeed, as recognised by our proposition 2, these differences result in hampering the reaching of investment agreements and, consequently, in a shortage of capital for social enterprises. These difficulties could be partially overcome by filling the gap of more intermediaries, highlighted by our proposition 3. As suggested also by previous works (e.g., Brest and Born 2013; Ormiston et al. 2015; Phillips and Johnson 2021; Wilson 2014), intermediaries can play a critical role in discovering impact investment opportunities and bringing them to the attention of impact investors, facilitating the dialogue between such investors and social entrepreneurs by aligning their expectations for social and financial outcomes and reducing transaction costs. Building on this reasoning, it is reasonable to expect that creating incentives and policies facilitating the progress of these players could strongly benefit the social impact landscape in a developing country. Another challenge also identified in other developing countries (Brazilian Impact Investment Taskforce 2015; Huppé and Silva 2013) is the lack of high-quality social business opportunities in which capital can be invested (i.e., proposition 4). This lack can be correlated to our proposition 1. Indeed, the presence of more consolidated business models within emerging markets could facilitate the avenue for a bigger number of investments. A possible way to face this challenge is suggested by our proposition 5. According to what was shown in developed countries (Glänzel and Scheuerle 2016), specialised business support for social enterprises (such as that carried out by social incubators, see Nicolopoulou et al. 2017; Sansone et al. 2020) could foster the growth of social entrepreneurship, compensating for the lack of experience and resources of social entrepreneurs. Future research could follow this line of research to investigate the role and effectiveness of organisations supporting social entrepreneurship in developing countries. An additional challenge characterising developing countries is the absence of a tailored and common regulation of social entrepreneurship (proposition 6). This lack contributes to generating an ecosystem where social entrepreneurs adopt different legal forms, being therefore regulated by divergent laws. Consequently, uncertainty is created regarding the relevant rights and obligations in the ecosystem, making investments and policy interventions more difficult. Further evidence supporting our proposition 6 can be found in the fact that, for instance, the legal form of “benefit corporation” (Clark et al. 2013) is currently even more widespread among developed countries. Building on our findings, it is possible to suggest to policy makers in developing countries should engage in creating policies that clarify and make more transparent the rules governing social enterprises. Suggested policy intervention could also facilitate the adoption of clear and standard impact investing methodologies, comparable impact measurement metrics, and historical information for impact investing, thus addressing the challenge represented in our proposition 7. This challenge, also experienced in other developing countries (Book 2011; Brazilian Impact Investment Taskforce 2015; Huppé and Silva 2013; Ravi et al. 2019), not only hinders impact investments but also contributes to making more complex the dialogue between impact investors and social entrepreneurs, so that their expectations fail to align.

This study has some intrinsic limitations. Firstly, it analyses only one country. For this reason, regarding complementary issues discovered when analysing the interviews, a few impediments strictly associated with the particularities of the country were detected and so not generalisable. The dimension of the market is an example of these limits. Compared to other countries in the region, such as Colombia and Brazil, the Chilean market is smaller. Consequently, despite its stability and growth (LAVCA 2017), the country could face further difficulties in attracting external impact investors and social entrepreneurs. Secondly, the present study focused on exploring the challenges faced by impact investing in a developing country, not considering the perception of beneficiaries. Despite this methodological approach being suitable for our aim (Glänzel and Scheuerle 2016; Ormiston et al. 2015; Phillips and Johnson 2021), future research could explore other countries and test the effectiveness of frameworks developed for this study considering the beneficiaries’ point of view. Finally, future studies could also explore the challenges we identified through a quantitative approach in order to extend the results of this study with new insights.

As an exploratory study on a relevant and current phenomenon in a developing country, our study contributes to the literature on the field by shedding light on the most critical challenges faced by key players. Additionally, building on the explanations of existing relations among the impediments identified, our study also contributes to providing suggestions for possible interventions able to address the challenges faced by impact investing in a developing country. Understanding these impediments and their related relations is an important gap in the impact investing literature; it can make a key contribution to the development of policies to mobilise private capital to address and mitigate the effects of social and environmental crises in developing countries. Indeed, since public policy plays a crucial role in enabling impact investing (Burand and Tucker 2019; Donald, Ormiston, and Charlton 2014; Wood, Thornley, and Grace 2013), policy makers in developing countries can consider the barriers identified in this study to develop policies and instruments able to balance the needs of impact investors and social entrepreneurs, and therefore better support the growth of impact investing in their own countries. In addition to the actions suggested before, policy makers in developing countries could promote the development of business incubation programmes for social enterprises to foster the growth of the social impact ecosystem. As mentioned before, in line with our proposition 5 and according to previous literature (Nicolopoulou et al. 2017; Sansone et al. 2020), these specialised incubation programmes can represent pivotal tools in the support and creation of well-established social enterprises. Therefore, by promoting the development of these programmes, policy makers could contribute to bridging the lack of high-quality social business opportunities in which impact investors can invest (i.e., proposition 4). Additionally, as a consequence of the inflow of more robust investment opportunities, more private investors could engage in the country, contributing to filling the shortage of investment capital for social enterprises (i.e., proposition 1).

Acknowledgments

Our gratitude to Soledad Ferrer, Gonzalo San Martín, Gabriela Carrasco, and Waldo Soto, who provided us advisory and guidance in exploring the impact investing ecosystem in Chile. Furthermore, we would like to thank each one of the 24 interviewees who, despite their tight schedules, gave their time to discuss and explore the Chilean social entrepreneurial ecosystem. We are grateful to them for their availability and for sharing their knowledge and experience with us. Finally, the authors acknowledge the support of Irene Bengo for her helpful feedback on a preliminary version of this manuscript.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. In accordance with previous works (e.g., Bornstein 2007; Del Giudice et al. 2019; Martin and Osberg 2007; Seelos and Mair 2005), the present study considers social enterprises as organisations that combine the achievement of social or environmental goals with an entrepreneurial spirit. Specifically, social enterprises refer to organisations creating new market-driven products or services that not only generate revenues that makes them economically sustainable and potentially scalable, but also generate social or environmental impact (Sansone et al. 2023).

2. For an overview of the Chilean ecosystem, see: https://www.oecd.org/chile/and. https://www.startupblink.com/startup-ecosystem/chile. For a focus on social economy in the country, see Giovannini and Nachar (2017) and Giovannini, Nachar-Calderón, and Gatica (2019).

3. Some examples of venture capital funds in the country are Nazca Ventures, Magma Partners, Chile Ventures, and UDD Ventures.