Where to Invest? The Influence of Local Communities on Capital Allocation in the Emerging Industry of Impact Investing

Abstract

How are exchange partners matched to each other in the market given a great amount of uncertainty facing these actors about the match quality? Different from prior studies that focus mostly on the actor and dyadic level factors, I argue that the process of matching is embedded in the concrete social and geographic settings, and the social contexts—especially the level of social capital—of local communities can mitigate the uncertainty facing exchange partners and therefore facilitate their resource exchanges. I test my theory in the fast-growing market of impact investments. In addition to financial returns, impact investors explicitly seek to create social and environmental impacts but often have to face great uncertainties in selecting investment targets due to the difficulty of measuring the social and environmental impacts of their investments. Empirical results support my argument showing that to mitigate uncertainty, “impact-first” investors that are nonprofits and less concerned about financial returns, in contrast to “financial-first” investors that are forprofits and more concerned about financial returns, select target companies located in geographic communities rich in social capital. The findings of this study contribute to the matching literature, social capital theory, and impact investment research, and have practical implications regarding the importance of the local community to the impact investors’ efforts to achieve their impact goals.