‘New values are generated between different systems, where inter-cultural friction arises’. These are the words of Professor Ueno during the commencement ceremony at the University of Tokyo, when explaining the importance of diversity. If this also applies to the generation of innovation, what elements (systems) should be blended with behavioural insight (BI) for further social innovation?
In this series of columns, I will present the potential elements that might cause a synergetic impact with BI, placing a particular focus on the development context.
2. Behavioural Insight and Resource Dependence Theory
Two important factors for effective development cooperation
What are some key factors in effective development cooperation? Responses to this question would vary between organizations, as well as between individuals of the same organization.
This is what I have been thinking about while studying and becoming involved in development cooperation. My response might change in the future, but for now, I consider the following two factors to be particularly important. One would be the implementation of a practical intervention according to the realities in the field. The other would be the securing of appropriate (financial) resources for the intervention.
The first factor is closely related to the idea of evidence-based policy-making (EBPM) and behavioural design. As I wrote in the previous article, the impact of development intervention is often inhibited by minor hurdles. In order to eliminate this small obstacle, knowing the causes of a problem and implementing small but empirically proven solutions, such as nudges, is highly important.
The other factor, securing appropriate (financial) resources for the intervention, is also key in determining the success of development strategies. Appropriate financial resources in this context do not refer to amount or loan conditions.
Here, it is about something like the ‘colour’ (or traits) of funding. This view assumes that all financial resources are somewhat ‘coloured’, and it entails people’s or organizations’ views, intentions and preferences, all of which affect how the recipient would act.
In order to intervene effectively and sustain the effectiveness, we need to take into account the ‘resource dependency’ of an organization or development project. Resource dependence theory, initially defined by Pfeffer & Salancik (1978), posits that a dependency on important resources influences the behaviour of organizations. Following this theory, Summerrock (2010) explains, as a result, that activities and decision-making within an organization are understood under the resource dependency mechanism.
Because city governments and municipal utilities such as waterworks in developing countries often receive and utilize donor funding from bilateral aid agencies and international banks, this perspective is highly significant. In addition, it is also true that Japanese local and municipal governments now use a variety of funding sources, including subsidies from the national government, donations and crowdfunding. Therefore, insight into resource dependency is required.
Why is the resource dependence perspective necessary for development?
The theory of resource dependency points to the possibility that the characteristics of resources allocated to an organization or development project might change the direction of the organization or how the project is evaluated. A prominent example can be found in the microfinance industry. In this case, the mission of an organization was forcibly altered when fundraising strategies changed. Consequently, a high interest rate was applied to the poor, leading to substantial controversy.
Mexico’s largest microfinance institution, Compartamos, was first established as an NGO in 1990. In 2007, Compartamos conducted an IPO (initial public offering) in the stock market in order to raise funds to expand their outreach to people who were not able to use financial services. Through this IPO, the ownership structure has changed, and consequently, Compartamos has become ‘commercialized’. As a result, although it achieved 53.6% ROE (return on equity) in 2007, it led to high interest rates of a gross 105% (APR) for borrowers. This attempt was severely criticized by those who saw microfinancing as a tool for poverty reduction.
This example well illustrates how resource dependency affects an organization’s direction and how it could change the outcome of development. In addition, this example shows why it is important to think about resource dependency in the context of development cooperation.
Why tie behavioural design and resource dependency theory together?
One of the core values of BI is experimentation and evaluation in the intervention stage. Although we may tend to think that this is only natural, what if donors or funders do not understand the importance of social experiments or evidence-based design? If that were the case, either knowing the cause of problem or promoting evidence-based policy-making could be difficult.
What is important here is that appropriate funding is key to make BI work well. By securing appropriate funding, organizations including city governments and municipal utilities can set experimentation and evaluation as a pre-requisite for policy intervention; therefore, this approach ensures evidence-based policy-making.
Implication for synergy between appropriate funding and BI
To promote the social and environmental impact of projects, the finance sector is increasingly incorporating social and environmental bottom lines. This trend is represented by innovative financial schemes such as ESG (environment, social and governance) investment, impact investment and responsible investment or indicators such as SROI (social return on investment).
To make BI work effectively, we might need to learn from such initiatives and incorporate BI aspects into financial systems. For instance, when financing a project, making experimentation mandatory or evaluating to what extent the intervention is ‘evidence based’ could be possible measures. It is also important to encourage donor agencies to incorporate the BI perspective when financing and evaluating a project.
Karlan and Appel (2012), interestingly, connected BI with funding culture. They argue that ‘donation is a vote’ and that therefore, donators’ decisions on which organization and project they give money to is key to increase truly effective intervention. In addition, according to them, the donation from individuals is 3 times more than that from corporations and foundations in the United States today. Hence, individuals can urge organizations to ensure that the intervention is sufficiently proved with robust experimentation. If the individuals understand the significance of the BI perspective, which places particular value on proof, their influence would be a powerful driving factor to ensure that BI is socially embedded.
taking into account resource dependency, we can ensure and leverage the BI
perspective in development intervention by reflecting it in the financial
systems and promoting the BI concept to individuals.
Yusuke Takagi (YBiT member)
Edited by Mika Kunieda, Lek Hong
 Ueno, C. (2019) ‘Congratulatory address at undergraduate entrance ceremony at Tokyo University 2019’. [Online] Available at https://www.u-tokyo.ac.jp/ja/about/president/b_message31_03.html [Accessed September 23rd, 2019].
 Pfeffer, J. and Salancik, G. R. (1978) ‘The external control of organizations: a Resource Dependence Perspective’. New York: Harper & Row.
 Sommerrock, K. (2010) ‘The resource dependency of organizations’ in Chapter 5 Sommerrock, K. Social entrepreneurship business models: incentive strategies to catalyze public goods provision. Basingstoke; New York: Palgrave Macmillan.
 The world’s average ROE of microfinance institutions was approximately 12.6% as of FY 2016, according to MIX market.*.
The world average interest rate on microloan was around 31% (Lewis 2008)**, and the Grameen Bank, led by the Novel Peace Prize Winner Mohammad Yunus, maintains it at approximately 16% on the general program.
*MIX market (2019) ‘Data and intelligence for socially responsible investors’. [Online] Available at https://www.themix.org/mixmarket [Accessed September 28th, 2019].
** Lewis, J. C. (2008) ‘Microloan Sharks’. Stanford Social Innovation Review: pp.54–59.
 Karlan, D. and Appel, J. (2012). ‘More Than Good Intentions: Improving the Ways the World’s Poor Borrow, Save, Farm, Learn, and Stay Healthy’, Boston: Dutton.