EL PASO, Texas — A new business model gaining traction within the developing world is that of the Inclusive Business (IB) model. Larger in scope than social enterprises, inclusive business opportunities exploded in 2013. Devex reports that, “…six of the 22 deals the Asian Development Bank private sector department approved qualified as inclusive business.” UN and European Union-backed initiatives for inclusive business have flourished across Africa, the Caribbean and the south Pacific. However, there is some hesitation and drawback from private industry concerning the viability and longevity of IB. What is this model composed of and why is it being timidly approached despite its massive potential?
The G20 defines IB as:
“…a private sector approach to providing goods, services and livelihoods on a commercially viable basis, either at scale or scalable, to people at the base of the pyramid by making them part of the value chain of companies’ core business as suppliers, distributors, retailers or customers.”
A company has to adjust and adapt its operations to address those living on just a few dollars a day, or those living at the base of the economic pyramid (BoP).
IB is different from social enterprises in that, according to a Devex report, “…social enterprises, which usually start small and are not always profitable, inclusive businesses are greater in scale and realize higher revenues.” The IB model is therefore not dependent upon idealistic startups but requires the capital and commitment from established private firms. Some firms are apprehensive about IB involvement because their current business mix only represents a certain income bracket; they’re only geared to reach a certain sect of the population and don’t know how to construct a working business plan for those in poverty. The tough criteria organizations like the Asian Development Bank (ADB) pose are contingent upon how many people the venture will create quality jobs for, how thoroughly a systemic problem will be addressed through the venture and if the business plan holds profit potential. One project the ADB is funding ensures college education for Philippine seamen. Shipping companies will pay most of the tuition upfront, then hire graduates and take staggered deductions from their paychecks.
The ADB is pushing IB as part of a wider approach for broad Asian fiscal policy reform to address rampant income inequality. A China Money Network report posits that over 80% of Asians are affected. Efforts from governments are fostering inclusive growth beyond mere tax increases.
The benefits of implementing an IB model may far outweigh the risks. In fact, the International Finance Corporation (IFC) thinks so and since 2005 has given, “…$7 billion in inclusive business to more than 300 clients in over 80 countries.” They recognize that those at the base of the pyramid account for $5 trillion in purchasing power. The G20 concurs, positing that private industry has a real opportunity to establish new markets, competitive advantages, consumer bases and skilled workers from IB.
The ADB has already drastically cut the number of those living in poverty with this approach that has seemingly been only halfheartedly embraced by the private sector at large. In 2010, it launched a ten-nation initiative aimed at attracting private sector growth through IB in Bangladesh, Cambodia, India, Indonesia, Lao PDR, Myanmar, Pakistan, the Philippines, Sri Lanka, Vietnam and Thailand.
Proof of the positive impact of IB can be seen in Kenyan cotton farming. Globalization and other factors including outdated farming equipment negatively impacted the capacity of small cotton farmers in the country. Ginneries were operating below capacity in part due to trust issues with small farmers. Forums were organized to increase communication between farmers and ginners, repairing trust gaps and educating ginners on best business practices. Ginneries are, after all, the link between growers and the marketplace. Farmer cooperatives were retooled to focus more on real-world business skills rather than advocacy, equipping co-op managers with ways to address key financing issues negatively affecting farmers and ginneries. Bad debts and risk-averse lenders were factors that had to be accounted for when composing new strategies to securing funds. The results of these collective efforts were apparent in improved communication within farming co-ops and between farmers and ginneries as well as the development of improved accounting practices that set lenders and investors at ease. The inclusive nature of those efforts has resurrected the potential of Kenyan cotton.
Inclusive business ventures have proven themselves to be a viable method of poverty alleviation in the developing world. What hampers their progress is a wary private sector that historically hasn’t recognized the possible economic contributions that those living in poverty can make to their portfolios. However, the entrepreneurial mindset sees opportunity everywhere; the poor are a consumer base all their own. The economic development and empowerment of underserved and new markets makes good business sense for major private entities looking to expand in the global marketplace.
– Dave Smith