What does innovation actually look like in frontier markets?
It’s not always a breakthrough product or a shiny platform. It can be new machine on a dairy floor, a reworked supply chain, or a packaging change that quietly reduces losses and improves margins.
In this case study, drawing on lessons from Nepal’s Sahaj Challenge Fund, Andrew Seward looks at what it takes for innovation to take hold – and endure – in difficult market environments. Key takeaways:
Innovation is not a single, universal concept.
Incremental, modular, architectural and radical innovations behave very differently. What matters is not chasing novelty, but understanding what kind of change the market can realistically absorb – and what problem the innovation is meant to solve.
Context shapes outcomes.
Innovations succeed when they align with real incentives, behaviours and infrastructure. They stick when they work with how markets function in practice, rather than how programmes assume they should.
Finance is only part of the story.
Coaching, technical expertise, feasibility testing and market linkages often determine whether an idea survives beyond the pilot. These forms of support strengthen the market functions – skills, information and services – that allow innovations to spread.
Systemic thinking multiplies impact.
Pilots scale when they are embedded in policy, institutional and financing structures. Isolated interventions may test an idea, but lasting change happens only when multiple actors and incentives shift together.
The Sahaj Challenge Fund
A cornerstone of NAMDP II, the Sahaj Challenge Fund (SCF) was designed to catalyse private sector innovation by co- financing initiatives that address systemic market challenges. It was one of the key approaches used by NAMDP II to support innovation.
The fund supported a range of innovations, from incremental improvements to bold, radical solutions, across sectors such as logistics, post-harvest management, energy efficiency and audit practices, product diversification, product quality improvement, and product standardisation. By offering financial and technical assistance, the Challenge Fund sought to reduce risks for businesses, enabling them to experiment with new models and technologies. The Fund operated through multiple funding rounds, each tailored to address specific market gaps and challenges. Early rounds focused on foundational issues like improving value chains and developing market linkages, while later rounds aimed to support more ambitious innovations such as energy efficiency solutions and high-value product development as a service. This phased approach allowed the Fund to gradually build capacity within the private sector, aligning interventions with evolving market conditions and systemic reforms.
For decades, development agencies have used competitive funds to nudge firms toward new products, services and business models. Whether branded as challenge funds, outcome prizes or impact windows, the logic has been the same: put risk-sharing money on the table and let private actors innovate. The limitations of these approaches have been familiar too. In thin markets, an isolated cash injection rarely survives first contact with weak regulations, shaky support services or scarce follow-on capital. Finance could launch an innovation; it rarely carries it to scale. Nepal’s SCF offered a fresh look at what happens when that insight is taken seriously. Housed inside NAMDP II – a wider programme already working on quality standards, business-development services and credit links – SCF’s modest grants and coaching were reinforced by local delivery partners, pathways to commercial finance, and work to support an enabling business environment. Packaging tweaks, new product lines and cold chain solutions did not just pass a pilot test; they entered the market and kept going after donor cash stepped back.
Despite the complexity of fostering innovation in underdeveloped markets, the SCF provided a rich repository of lessons – both from its successes and challenges – on how we could design and implement challenge funds and similar market-driven initiatives. This paper takes a critical look at the Challenge Fund’s work, distilling lessons for anyone aiming to turn catalytic capital into lasting, market-wide change.
The core lesson is that innovation thrives not on finance alone but through alignment with context, technical assistance, continuous learning and systemic integration.