Fostering innovation in low and middle-income countries through challenge funds and challenge prizes
3 September 2024
By Avilia Zavarella, Teodora Chis, Benjamin Kumpf, Head of Innovation for Development Facility, OECD, and Kathy Nothstine, Director of Cities and Societies, Challenge Works
A new report by the OECD Innovation for Development Facility and Challenge Works examines how challenge funds and prizes in low-income countries can positively impact local innovation ecosystems and government capabilities.
The best expertise to address a problem often lies outside one’s organisational boundary. This is true for governments and for most private sector companies across the world. In high-income countries, both corporations and government entities have long offered financial incentives to externals – individuals and organisations – to test and scale innovative solutions to complex problems. However, open innovation mechanisms like challenge funds and challenge prizes have been used less widely in low-income countries.
Now, more and more governments in low-income countries and international development organisations are using mechanisms such as these to foster innovation. Between 2012 and 2022, approximately USD 1.514 billion was invested in total by members of the OECD Development Assistance Committee (DAC) in or in relation to innovation challenge funds and prizes. Yet, there has been relatively little research into the method as a whole in this context. The evaluations that are available focus mostly on whether one specific solution scaled.
An increasing number of challenge funds and prizes are designed to enhance local innovation ecosystems, and the capabilities of governments in low-income countries. For example, the Africa Enterprise Challenge Fund (AECF) launched in 2008 with a focus on investing in innovative African small and medium-sized enterprises working in the agrifood sector. Since its inception, it has broadened its scope to other development challenges. It has now supported 425 businesses in 26 countries in sub-Saharan Africa, leveraging USD 808 million in matching funds, and is working distinctively as a market-builder. This means dedicated work not only to support a venture, but to address the enabling environment and potential hindering factors that might prevent a promising solution to scale.
Another example, the Mombasa Plastics Prize, was created to encourage innovation among aspiring entrepreneurs and leaders in Mombasa County to tackle the problem of marine plastic waste mismanagement within informal settlements. Of the 57 teams that entered, three were selected as winners and nine teams were chosen to be part of the MPP Incubator to progress their working prototypes into sustainable businesses, in close collaboration with Mombasa County.
While examples such as these are increasing, little systematic research has been undertaken to investigate how challenge funds and prizes affect ecosystems and government capabilities in these contexts.
“The research found that challenge funds and prizes have enabled positive effects on local innovation ecosystems”
Releasing a new report exploring the effects of challenge funds and challenge prizes on innovation ecosystems in low-income countries
To better understand the implications of initiatives such as these, the OECD Innovation for Development Facility (INDEF) and Challenge Works collaborated to investigate the effects of challenge funds and challenge prizes on innovation ecosystems in low-income countries, and how these instruments have contributed to building dynamic capabilities in public sector entities.
We are pleased to now release our findings in a new report, Fostering innovation in low and middle-income countries through challenge funds and challenge prizes – lessons for development cooperation.
This paper explores the effects of such mechanisms on innovation ecosystems and how challenge funds and prizes have contributed to building dynamic capabilities in public sector entities. Based on a literature review, a synthesis of ten evaluations and insights from four case studies in Rwanda, Sierra Leone, The Gambia, and an Africa-wide initiative, we have now developed a set of recommendations to support professionals working in international development organisations and public sector officials in low-income countries, especially those charged with designing and managing challenge funds and prizes and advancing new ways of working.
Research findings
The research found that:
- Challenge funds and prizes have enabled positive effects on local innovation ecosystems:
- They have enhanced social capital, particularly by creating collaboration and coordination opportunities between government representatives, development funders, and innovators and entrepreneurs.
- They have often resulted in formalising delivery functions. To coordinate the implementation of challenge funds and prizes, specific actors took on the role of ecosystem convenor following the implementation period, when no adequate mechanisms existed.
- Challenge funds and prizes have also had positive effects on government innovation capabilities:
- Time-bound initiatives that were designed with a strong focus on outcomes on the one hand, and on strengthening internal capabilities on the other hand, led to the creation of new rules, job functions and collaboration modes, enabling governments to continuously deploy open innovation mechanisms.
- Challenge fund and prize initiatives contributed to a mindset shift among public sector officials, including senior decision makers, by showcasing that regular citizens have the potential to contribute to innovation efforts for development outcomes.
The findings suggest that challenge funds and prizes should be part of the toolbox for public sector entities in low-income countries. They have the potential to contribute to productive innovation ecosystems and to better address persistent development challenges. They are mechanisms that – if well-designed and managed – can be a strategic part of a portfolio of interventions (policies, programmes, innovations) that advance progress and help build dynamic capabilities in the public sector.
Recommendations
These findings inform a set of six recommendations, based on the case studies and wider research of best practices. The recommendations are targeted at both professionals working in international development organisations, and officials working in public sector entities in low-income countries, especially those charged with designing and managing challenge funds and prizes. The six recommendations are:
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1. Align open innovation mechanisms with core government priorities
For development professionals, this means aligning open innovation mechanisms to core priorities of government partners in LMICs. Too often, innovation funds operate in a way that seeks “quick wins”, but in areas that are not regarded as key priorities by partners of government.
For government officials in low-income countries, this means ensuring that open innovation efforts target high priority areas and are given a high profile, to increase the likelihood of success.
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2. Strengthen government capabilities
For development professionals, this means assessing capabilities and levels of interest for challenge funds, prizes and similar mechanisms across government entities in partner countries; identifying local champions within the civil service and political leadership; and investing in upskilling government partners to execute.
For government officials in low-income countries, this means leveraging challenge funds and prizes to find, test and scale solutions to development challenges, investing time and energy in identifying which mechanisms add value to the mission and integrating these into the organisation’s toolbox.
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3. Anticipate and monitor spillover effects
For development professionals and government officials in low-income countries, this means assessing the data landscape and knowledge base regarding the local innovation ecosystem; working with partners to draft hypotheses, and developing baselines and actively monitoring key variables within the innovation ecosystem.
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4. Leverage existing co‑ordination mechanisms or create new ones
For development professionals, this means assessing opportunities to convene or support government partners and groups and individuals that have not yet been engaged.
For government officials in low-income countries, this means creating opportunities for intra-departmental collaboration on challenges and identifying ways to leverage existing co‑ordination platforms or set up new ones.
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5. Assess and adapt to the maturity of local innovation ecosystems
For development professionals and for government officials in low-income countries, this means developing a picture of the maturity of the innovation ecosystem and its players, to influence decisions on what players to target and how to prioritise ecosystem-building.
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6. Devote appropriate time, effort and funding to strengthening social capital
For development professionals, this means undertaking social network analysis and then assessing options to connect individuals with outsized positive influence with other players, to leverage the potential impact of experienced local entrepreneurs.
For government officials in low-income countries this means assessing the variety of ways to support innovators and entrepreneurs, creating an appropriate balance between increasing the number of startups, incubators, accelerators, and other elements in the innovation ecosystem, and amplifying the influence of teams that demonstrated impact at scale.
For both groups, this means assessing the social return on investment by considering the entire innovation portfolio rather than single investments.
This report was prepared by the OECD Development Co-operation Directorate (DCD) under the responsibility of Director María del Pilar Garrido. The lead authors are Avilia Zavarella, Teodora Chis, Benjamin Kumpf and Kathy Nothstine. The study is based on work undertaken collaboratively by the OECD Innovation for Development Facility and Challenge Works, a social enterprise set up by Nesta – an innovation agency for social good in the United Kingdom.
