How impact investors fight corruption

In many parts of the Global South, a vast portion of economic activity remains hidden from official records. In Africa, for instance, fewer than 40 percent of entrepreneurs formally register their businesses at the time of founding. In parts of Asia, informal employment – where workers lack contracts, legal protections, or steady benefits – can reach a staggering 80 percent of the workforce.

While these unregistered businesses provide vital livelihoods for millions of families, informal firms are often trapped in a cycle of subsistence growth. Because they do not officially exist, they struggle to access credit from commercial banks and find it difficult to hire highly skilled staff who require job security. They also hinder governments from funding public services because they do not pay taxes.

One solution to this is impact investment-investment that seeks both to create a profit and generate positive social returns. In a new study published in the Journal of International Business Studies, we investigate whether impact investing allows firms in the global south to formalize.

Impact capital creates a pathway to legitimacy

We find that impact investment works as a powerful external enabler that makes formal registration more attractive to entrepreneurs from the very start. This occurs through a direct boost to resources and market demand. In developing nations, small and medium scale businesses face a massive USD 5.2 trillion annual financing gap. Impact investors bridge this gap by channeling capital through local financial institutions that possess deep knowledge of the regional landscape.

For example, when the Norwegian development finance institution, Norfund, invested in Uganda’s DFCU Bank, the bank was able to expand its incubator and accelerator programs significantly. This intervention provided liquidity as well as the training, mentorship, and legitimacy needed for entrepreneurs to handle the complex bureaucracy of starting a formal company.

When impact investors fund large-scale infrastructure, such as green energy plants or logistics hubs, they create a demand pull. To win contracts as suppliers in these sophisticated global value chains, local firms must be formally registered to meet the legal and reputational standards of international partners. This shifts the economic calculus for a founder: the benefits of being "official" and joining a high-growth supply chain suddenly outweigh the high costs of registration.

The power of example

Impact investing also enables firms indirectly by improving the local business environment. Corruption, specifically the demand for bribes by government officials, is a massive barrier to formalization. When corruption is high, registering a business is not only expensive due to bribes but also inherently risky; being on the books makes a company a visible and easy target for future extortion.

Our study shows that impact investors help lower these institutional barriers through their financial muscle. Because these investors often engage in high-profile, long-term projects backed by international institutions, they have the leverage to demand transparency from local officials. They signal to the market that they will not participate in informal payments, often writing strict anti-corruption clauses into their investment contracts.

This creates a demonstration effect. When a few firms in a sector reject corrupt practices and still achieve commercial success, it inspires others to follow suit. As the perceived level of corruption drops, formal entry becomes less risky and more predictable for every founder in the region.

However, this effect has clear boundaries. Impact investment is most effective in "lower-middle-income" countries. In extremely poor nations with completely dysfunctional financial systems, investors struggle to find a foothold. Conversely, in more developed emerging markets, the impact of this specific type of investment is often crowded out by traditional commercial capital. For leaders and policymakers, the message is clear: impact capital can serve as a strategic tool for building the institutional foundations of a modern, formal economy.

About the study

• Data Sources: The study analyzed a comprehensive dataset of impact investments from 15 European Development Finance Institutions (EDFIs) across 86 countries.
• Sample Size: Researchers matched investment data with firm-level data from 33,468 small and medium-sized enterprises via the World Bank Enterprise Survey.
• Timeframe: The analysis covered transactions and firm founding decisions spanning from 1990 to 2023.
• Key Metrics: The study used multilevel logistic regression to isolate how investment influences a firm's decision to register formally at the moment of its founding.

Source

Adarkwah, Gilbert Kofi, and Peter Kalum Schou. "Impact investment as an enabler of firm formalization in the Global South." Journal of International Business Studies, 2026, https://doi.org/10.1057/s41267-026-00850-1.