Proceedings of the German Development Economics Conference, Berlin 2006 No. 19
From handicraft shops to cyber cafés, more and more NGOs in developing countries are moving toward investment in revenue-generating business ventures. This paper explores the motivations behind such investments and their impact the donor-NGO relationship. First, a case study of NGOs in Bangladesh provides evidence of NGOs' commercial earnings in the country. Then, a simple theoretical model underlines three determinants of an NGO's decision to invest in business: the uncertainty of future donor funding; the lack of funds available; and the need to finance expenditures that donors do not value. Furthermore, facing uncertainty regarding their ability to renew future commitment, donors might prefer NGOs with business ventures. Finally, the analysis shows that having an independent income does not necessarily make NGOs better off.