For the past two decades as growth has slowed in the developed world, investors have relied on the BRIC economies to deliver above average returns. With growth in BRICs slowing, investors and companies are looking increasingly at frontier markets in the less developed parts of Asia, Africa, and Latin America for new growth opportunities. Many of these economies have posted impressive GDP gains in recent years and appear ripe for investment. While frontier markets hold great potential, they present a series of challenges that differ radically from other emerging markets. Limited infrastructure, low incomes, food insecurity, and weak education and health systems means that these countries require a fundamentally different approach. Conditions in these countries do not allow for a ‘business as usual’ approach. Rather, companies and investors that understand how their business models can address the development needs of frontier markets are more likely to be successful in unlocking revenue growth in frontier markets.

Traditionally, many companies have approached development as a subset of CSR essentially a combination of compliance and philanthropy. While CSR is certainly important, it is not sufficient to assure success in frontier markets where the challenges to development are more fundamental and require a different approach that goes beyond CSR and charitable contributions.

Companies and investors are increasingly using Engagement as a key tool for growing in frontier markets, but also in actively contributing to a country’s development. What do we mean by ‘Engagement’? ‘Engagement’ is a very inclusive term to describe the broad range of interactions between companies and stakeholders – consumers, communities and others. Through Engagement, companies do not simply address CSR needs or requirements; they bring all aspects of their business – marketing, technology, distribution, purchasing to help grow local markets through co-creation, and investment. By leveraging these core competencies, smart companies not only assist in a country’s development, they create and expand business opportunities in the market.

What is the Value Proposition of Engagement in Frontier Markets?

Engagement is not a short-term process that will yield results in a single quarter or even a single year. Rather, it is a key element to a longer-term strategy in frontier markets, typically revolving around one or more of the following drivers:

• Base of the Pyramid (BoP) Market Opportunities . More than half the population of many frontier markets survives on less than $2/day. While historically this segment of society has been perceived as too impoverished to merit focus, the explosive growth of mobile telephones, microfinance, and other industries in frontier markets has largely been fueled by demand from this segment. However, many companies struggle to adapt their product offering and market strategies to meet the challenges at the BoP. Through engagement, companies have an opportunity to collaborate with BoP consumers and co-create products and strategies that deliver value and improve lives.

• Workforce/Human Capital Development. As China’s labor costs continue to rise, a growing number of companies are looking to frontier markets as a new source of low-cost labor for manufacturing and service sector jobs. In Africa alone, the workforce will expand by more than 120 million by 2020 – a truly staggering figure. While Africa’s growing workforce presents a tremendous opportunity, weak education and job training systems present major barriers to tapping into the workforce potential. Increasing numbers of companies are collaborating with governments and communities to strengthen education and workforce skills development.

• Local Supply Chain Development. As investors move into frontier markets, they often find they need to develop supply chains. While some companies will simply rely on international suppliers this is both costly and cumbersome. Increasingly, we see companies focusing on developing local supply chains in frontier markets, creating economic opportunity for suppliers and reducing long-term costs.

• Social License to Operate . Many companies face significant challenges when entering frontier markets in developing and then maintaining social license to operate – i.e. the consent of society and opinion makers –at all levels – to invest in and operate assets in a given market. Historically, social license to operate has been a significant issue in frontier markets for the extractives sector, but increasingly social license is emerging as a challenge in other industries including agri-business and even IT. Many companies are finding that they need to have a proactive Engagement strategy that enables them to map out the interests of stakeholders and collaborate with them.

Engagement Modalities How does Engagement work?

How a company chooses to go about Engagement will depend greatly on its industry sector, target market, and corporate culture. Here are three common forms of Engagement in frontier markets:

• Partnerships/Co-Creation . In West Africa, international seed companies, African inputs companies, NGOs, farmer cooperatives, and donors are forging a partnership to create a market for high-quality seed across West Africa. By working together, the partners can address regulatory barriers, foster research and development of hybrid seed, and exchange best practices. Together, they are both creating a growth market for a hybrid seed with millions of potential farmer-customers and improving food security through increased agricultural yields on key crops.

• Technology/Crowd-Sourcing . In East Africa, technology companies, telecommunications companies, tourism firms, governments and NGOs are working together to develop a powerful anti-poaching tool using crowd-sourcing that technologies that empower communities to preserve and protect natural capital. Crowd-sourced data will not only enable instant reporting of poaching incidents, advanced analytics will help park rangers to predict and anticipate where poaching is likely to occur. As East African governments begin to realize the power of ‘big data’ and analytics, it is opening up new business opportunities for technology providers.

• Community Investment . In South America, one of the world’s leading technology companies is making a major infrastructure investment and recognizes that the local economy lacks the skilled technology workforce, which can actually use its products. Therefore, the company is collaborating with NGOs and the local government to invest in a locally developed Science Technology Engineering Math (STEM) job training programs to ensure that the community surrounding its investment has the skills to participate fully in the knowledge economy.

Successful Engagement in Frontier Markets

Companies and investors that want to win in frontier markets need to understand that they need to play a role in these countries’ development. That role will vary by industry, company size and market opportunity, but here are some key attributes of a successful engagement strategy:

• Effective Engagement is integral to a long-term strategy and should not be tied to short-term results . Engagement requires a sustained commitment to build the necessary relationships – not just with government, but also with civil society and communities. Building these relationships requires a significant investment of senior management time. This means that Engagement is only effective when the eventual return is sufficiently large to merit the investment of scarce management and financial resources.

• Engagement requires an open mind . Too often companies and investors come to the table with ‘the solution’ – most often their product or service. Engagement requires a fundamentally different mindset. It requires companies to listen, respond, and adapt their approaches based on feedback received, rather than simply prescribe solutions or approaches. Equally as important, it requires a willingness to collaborate across sectors –government, communities, civil society, donors and business.

• Lastly, effective Engagement requires commitment . Promises are easily made, but much harder to keep. While no strategy is ever 100% successful, failure to live up to commitments is fatal 100% of the time. When a company pulls out of a commitment due to poor quarterly earnings, it pays a steep price with stakeholders in terms of lost credibility and trust.

As economies in developed countries continue to stagnate and the established emerging markets slow, investors are rightly focusing on frontier markets as the next great growth opportunity. While frontier markets offer great promise, they require a fundamentally different approach if their potential for growth is to be realized. To capitalize on the frontier market opportunity, companies and investors need to do more than simply invest; they must have effective Engagement strategies that make them partners in unlocking a country’s potential for development.

We just returned from Chicago where we attended the Impact Capitalism Summit. a gathering of family offices, fund managers, asset managers, and foundations. It was an impressive event that highlighted just how far the notion of impact investing has come in the last several years. Here are some of our key takeaways from the event:

Impact investing is moving into the mainstream . Perhaps the most inspiring takeaway from the event is the degree to which impact investing has moved into the mainstream, with a high demand from investors across a range of asset classes generating impressive returns. Moreover, recent analysis highlights that impact investing strategies are yielding better average returns than many mainstream portfolio management approaches.

‘Impact’ is still a bit amorphous and subjective as a concept . Perhaps the most heated discussions at the event centered around what constitutes impact and how that impact is measured. For readers from the development field, it is somewhat gratifying to see Wall Street-types and others grapple with impact and how to measure it – challenges we have been facing for decades!

There is now a full range of asset classes in impact investing. The range of investment types – from grants to public equities to private debt – is truly impressive. Investment strategies vary from socially responsible investing in public companies to venture-type ‘solutions’ investing in areas such as clean technology and access to finance. Impact investing strategies should be considered along two axes: impact profile (aka theory of change) and asset class.

Climate, climate, climate . If there was one impact area in which there seemed to be universal interest, it was climate. Fund managers are increasingly screening companies not only for their negative impact on climate change, e.g. extractives and carbon footprint, but also for their resilience and adaptation strategies. At the same time, the ‘solutions’ investment community is growing beyond renewables and expanding into other critical elements such as water, agriculture, and efficiency.

There is growing interest in frontier markets, but a dearth of investment vehicles .    To date, most impact investing in frontier markets has focused on microfinance, where fund managers such as Microvest have built impressive track records. There was quite a bit of discussion about impact investing in frontier markets in other sectors, particularly in healthcare and education. However, unlike microfinance, there is a lack of vehicles for investors. Those platforms that do exist are often philanthropic and do not return capital (or generate return on capital). Demand appears strong for more investment-grade vehicles across asset classes: private equity, public equity, and debt. This is an area where donor agencies and DFIs can play a critical catalytic role, both in creating the vehicles and in buying down various forms of risk through guarantees, risk insurance, and project preparation facilities. USAID’s DCA. OPIC. MIGA. and others have a vital role to play in adjusting the risk profile of frontier impact investments, especially for first movers into the space.

In our work in frontier markets, SSG Advisors sees tremendous opportunity for impact investors in a range of sectors, impact profiles, and asset classes. We also see significant need to bridge the gap between the high demand for deals among the investor community, on one hand, and the limited supply of bankable deals on the other. By combining impact capital with donor and DFI capabilities, we are driving investment to address development challenges, ranging from food security to biodiversity to clean technology.