The Growing Role of Community Development Finance in Economic Development

There is a breadth of research on the association between economic development (EcD) investments and economic growth, but less studied is how community development (CD) investments can contribute to neighborhood and regional prosperity. This paper explores how the growing pool of CD resources, namely Community Development Financial Institution (CDFI) investments and New Market Tax Credit (NMTC) allocations, target low-to-moderate income neighborhoods and contribute to broader economic development efforts. Using census tract-level data collected by the CDFI Fund from 2012 to 2021, the authors investigate the scope of CDFI investments and NMTC allocations on business and employment growth in those tracts. The authors find that these CD investments are strongly focused in the intended geographic areas of distressed and underserved census tracts and are associated with business growth in tracts that receive funding. These patterns are strong for CDFI support, but more uncertain for NMTCs.