Beyond Remittances: Diasporas as investors for growth
August 18, 2011 marked USAID’s third Diaspora Engagement Seminar, Fostering Diaspora Investment in Developing Countries, with Aaron Terrazas from the Migration Policy Institute, Richard Cambridge from the World Bank, and Eric Guichard, founder of GRAVITAS Capital Advisors and Homestrings. The speakers offered great insights on how, with the right tools, the Diaspora can now more than ever be instrumental in development through investment.
In his presentation, Terrazas highlighted three key factors that separate Diaspora investors from other foreign investors:
- Perception of Risk: Diaspora investors for instance are less averse to foreign exchange risk because they are more willing to accept returns in a country’s domestic currency.
- Home bias: Diaspora investors are more willing to invest in markets they are familiar with (countries of origin) even if it means below-market rates of return.
- Long-term investments: Diaspora investors are more willing to invest in long-term projects and are less prone to pursue only short term speculative returns.
Until recently, developing countries had difficulty attracting foreign investment. However, more than 16.4 million US immigrants come from countries that are expected to experience higher economic growth than the United States and there is great potential of returns for those willing to invest in their home countries. In his presentation, Cambridge emphasized the importance of mobilizing an instrument for potential Diaspora investors who generally have had little opportunity to invest on a large scale aside from remittances.
In 2010, there was an estimated capital flow of US$40 billion in remittances to African countries alone. However, remittances, which tend to encourage “subsistence consumption,” are not the only means of investment for the Diaspora. Other financial vehicles used by different Diaspora groups include mutual investment funds, sub-national bonds, and sovereign bonds. See slide #7 of the seminar presentation for the complete list.
"I had a frustration of reading about the great African growth story and not being able to participate like big financial institutions." - Eric Guichard
Diaspora investors experience a distinctive set of incentives that guide their investment decisions and give them a unique position to be catalysts for growth in emerging markets. According to Guichard, the next step would be to identify innovative financial tools that will connect Diaspora investors with various growth ventures. One such tool showcased in the seminar was Homestrings, an investment platform developed by GRAVITAS that offers potential investors a catalog of impact-driven projects in developing countries.
The seminar ended with a lively Q&A session with participation from both in-person and webinar attendees. Questions that were not answered during the session were forwarded to the speakers and will be posted here at a later date.