The Internalization of Blended Finance in Danish Development Assistance: An Explorative Study of Danish Development Assistance's Change Towards Blended Finance

Abstract

Development cooperation has undergone dramatic changes in recent years. The international paradigm for development cooperation have moved from a conception of tied aid emphasizing close partnerships between donor - and recipient governments to a conception in which mobilization of private sector investments takes center stage. Danish development cooperation has adopted this new paradigm, encapsulated by the use of blended finance. As of now this change in the Danish development cooperation landscape and its implications have not been described in the literature. Neither has the international emergence of blended finance in any theoretical terms. This thesis explores some of these open questions by investigating the changes that has occurred in the two central organizations of Danish development assistance, Danida and IFU, towards the use of blended finance. As so little knowledge on this area currently exist, this thesis provides an exploratory study with the purpose of generating a better understanding of the change that has occurred, and how it can be understood, to strengthen the starting point of future research. Drawing on a theoretical backbone rooted in sociological institutionalism this thesis provides a qualitative account of these changes and how they can be explained by utilizing interview and document data. A broad analytical framework is extrapolated from sociological institutionalism yielding perspectives at the international level, the organizational field, and at the agent level respectively. The first perspective explains the increased use of blended finance as an outcome of the diffusion of international aid paradigms to the national context. The second perspective explains IFU’s increased use of blended finance as an outcome of IFU’s embeddedness in the Danish private sector field. Additionally, it explains that a legitimacy crisis in Danida coupled with an institutionalized practice of outsourcing made the transfer of programs to IFU a viable strategy. The third shows how the organizational partnerships between IFU and a group of pension funds have determined the model for Danish blended finance going forwards in a structure akin to private-equity funds. When considering the essence of the explanations as they are accounted for by the three analytical frameworks, we find that the core explanation for the changes towards blended finance in Danish development assistance is IFU and Danida’s quest to maintain and enhance their legitimacy as organizations engaged in development assistance.