Capital and Markets for the Missing Middle: Essays on Impact Investing and Agricultural Value Chains in Developing Economies

This thesis studies innovative solutions to improve market access in developing economies, with a specific focus on bridging the gap between global capital markets and product markets and the missing middle. The missing middle traditionally refers to small and medium-sized enterprises (SMEs) in low- and middle-income countries that are too large for microfinance but too small, informal, and risky for traditional financial institutions. However, smallholder farmers in cash-crop value chains face a similar challenge, having outgrown local demand but being too small to access global export markets. The research explores innovative intermediation channels designed to improve access to finance and markets for these firms and farmers. By analyzing the behavior of retail impact investors on a crowdfunding platform and the dynamics of smallholder farmers in an export-oriented value chain, the thesis identifies important challenges in these market linkages: in capital markets, direct connection to retail impact investors can mean a stronger emphasis on financial returns and increased credit supply volatility, while in product markets, the potential gains for smallholder farmers are, at least in the short term, offset by higher costs of production and weakened by low contract adherence and opportunistic side-selling. The setting for Chapters 2 and 3 is a Dutch peer-to-peer lending platform which connects retail investors from (mostly) the Netherlands with SMEs in low- and middle-income countries. Investors on the platform can lend as little as 50 Euro to fund loans for companies in sectors ranging from agriculture to renewable energy, typically intermediated by a local partner (a non-bank financial institutions) in the borrower’s country. The platform provides a double bottom line, offering investors financial returns in the form of interest rates between three and eight percent, while simultaneously advertising the social impact of the loans, such as job creation, female empowerment, and environmental benefits. Chapter 2 investigates how these retail impact investors trade off financial returns against social impact when choosing between different loan applications. Using a dataset of almost 70,000 transactions, the chapter employs a choice set analysis to estimate the influence of loan characteristics on funding success. On the platform, investment decisions are predominantly driven by financial returns rather than social impact. Conversely, characteristics of social impact, such as job creation, number of beneficiaries, or the gender of the borrower, do not significantly increase a loan’s likelihood of being chosen. Chapter 3 explores the stability of this funding source by analyzing how investors react to a credit supply shock. The chapter uses a difference-in-differences design around a natural experiment where a local partner in the Philippines caused repayment delays, affecting 43 percent of the investors simultaneously. The results show that investors are highly sensitive to risk, reacting to the negative news with a significant and persistent decrease in credit supply. Chapter 4 shifts the focus to product markets, examining a contract farming intervention designed to integrate smallholder avocado farmers in Kenya into export supply chains. The study evaluates the impact of linking farmer organizations with exporters through contracts that included procurement guarantees, training, and certification support. The findings indicate successful uptake of the components of the intervention. Farmers also planted more trees of the export-grade Hass variety, received 32 percent higher prices and produced higher quality fruit. However, the intervention also increased production costs significantly and the study consequently finds no short-term impact on total household income or food security. It is therefore important to support farmers during the transition. In this context, the high prevalence of side-selling is concerning and highlights the difficulty of introducing stable and sustainable contracting schemes in environments that are characterized by low levels of trust among market participants.