Epsilon Archive for Student Projects

Abstract

This thesis examines how governance quality influences the ability of Development Finance Institutions (DFIs) to mobilize private investment in developing countries. In this study, mobilized private investment (MPI) refers to the portion of private investment that can be attributed to the presence of DFIs through guarantees, concessional loans, or equity participation. Using panel data from 104 developing countries between 2012 and 2023, the study investigates how three aspects of governance, namely Rule of Law, Regulatory Quality, and Government Effectiveness, influence the volume of MPI. A random effects panel regression approach is used, along with Principal Component Analysis (PCA) to construct a composite governance index. The analysis also includes an interaction term for the post-COVID period and a comparative model using foreign direct investment (FDI) as a benchmark.

The findings show that stronger governance is significantly associated with higher levels of mobilized private investment. Among the three dimensions, regulatory quality has the largest and most consistent effect. Results also indicate that governance may have become more influential in the post-COVID period. These patterns hold across robustness checks, including alternative specifications and comparisons with FDI trends.

The thesis contributes to development finance research by providing empirical evidence that institutional quality is a key enabler of blended finance. However, it also highlights a distributional challenge: DFIs appear more effective in countries already on a development trajectory, while those with weaker institutions risk being left behind. The study underscores the importance of integrating governance diagnostics, risk-sharing tools, and institutional support into future blended finance strategies.