a higher share of investment through internal funds as they have less access to credit, and face a higher cost for capital. This suggests a clear role for DFIs in supporting their growth by financing them directly, and by supporting their access to finance from private equity and from local financial markets.

The challenge of supporting pioneering firms in fragile states cannot be seen in isolation—it is part of a wider coordination problem, whereby it is difficult for any one firm to prosper in a context where other firms are absent. Pioneer firms will only succeed in an economic environment where multiple firms are succeeding, so creating value chains and markets is essential for their growth. But individual firms in fragile contexts face great risk and uncertainty in knowing what other firms will do, in fragile contexts. This suggests that an additional role for DFIs is addressing the lack of coordination, and the underlying risk and uncertainty that it creates.

The rest of the paper is structured as follows: section 2 describes pioneer firms and the ways they benefit fragile states. Section 3 looks more closely into the barriers and costs pioneer firms face in fragile situations. Section 4 proposes what DFIs could do to help pioneer firms overcome the barriers they face and grow. Section 5 discusses how DFIs can achieve more through greater collaboration. Section 6 provides concluding remarks.

# **2. Pioneering firms: Who are they and why do they matter?**

The most useful firms for a fragile state are those that pioneer an activity that is new to the economy: this is what is meant by _creating new markets_ . The herd is large—‘pioneers’, ‘first movers’ and ‘first entrants’ refer to the first firms to produce a new product, introduce a new process, or enter a new market.<sup>6</sup> They can be in any sector of economic activity, and of any size, age, or origin; yet often they tend to be large and active in multiple markets. Multinational firms, by definition, push the boundaries of markets through exports or foreign direct investment.<sup>7</sup> There are benefits to being a first mover in a fragile state. Pioneer firms can tap into unexploited natural resources, use low-cost labor, and provide missing basic services. Many markets may be open for entry with little existing competition. Initially markets in fragile countries are small and grow slowly, but during periods of conflict reduction and stabilization, when foreign aid pours in, fragile states often experience spurts in government spending, which can support enterprise growth if the pioneering firms come in to take advantage of it.<sup>8</sup> If not, most of the spending leaks out into imports or inflation. Under pressure from their shareholders, DFIs are eager to finance pioneer

> 6 Some distinguish between inventor, product pioneer, and market pioneer. An inventor “develops patents or important technologies in a new product category”. A product pioneer is “the first firm to develop a working model or sample in a new product category” while a market pioneer is “the first firm to sell in a new product category” (Golder and Tellis, 1993). Studies on market entry usually focus on a market pioneer and define it as the first firm to enter a new market (Kabuth, 2003).

> 7 Nakata and Sivakumar, 1997; Zashev and Ehrstedt, 2010.

> 8 International Finance Corporation, 2019.

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