The conversation about global development partnerships tends to focus on the giants — the multinational corporations making big money announcements about multi-year collaborations. But local companies in many developing countries are also key partners in a wide range of development endeavors, from helping smallholder farmers link into value chains to improving access to finance.
Those local partnerships differ in some ways from those with multinational corporations, but they tend to start with the same basic premise: finding a common ground for collaboration. This may be easier with a local company deeply aware of the context and whose success is closely tied to the community, but partnering with them also comes with a different set of challenges and sensitivities.
The U.S. Agency for International Development has been partnering with local businesses for many years, but it did its first broad overview of activities only recently. The Local Private Sector Partnerships report, which was published in November, outlined some of the characteristics of USAID’s local partnerships and how they differ from those with multinational corporations.
The report estimated that of the active USAID private sector partnerships reported in the 2014 fiscal year, 44 percent included a local actor, about 65 percent of which were private businesses.
While engagement varies by region or country, the local private sector is an important actor in helping to build more sustainable systems and societies, said Elizabeth Warfield, coordinator of local solutions for USAID.
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“Sustainability is about the ability of the local system to sustain results,” she said, and that partly relies on being able to draw upon local networks, including the private sector.
Whether or not there is an uptick in engagement with local companies does depend largely on the local context. In some countries, like India, where there is a robust and increasingly sophisticated private sector, companies are more apt to be thinking about social issues and may be more inclined to partner with USAID.
In Colombia, about 11 out of the 14 partnerships the USAID mission put together in the 2015 fiscal year involved local companies.
The goal is to see how to engage them in a way that brings the technology, innovation, market linkages and market access they have to bear “so we can bend the development curve,” said Peter Natiello, the USAID mission director in Colombia.
The case for local partnerships
Local private sector partners bring a unique set of benefits, from local understanding to connections. It’s often easier than working with multinational corporations because local firms tend to have a higher risk tolerance, know the local terrain and possess assets like contacts in local governments or the private sector, Natiello said.
Local partnerships can also offer a more tailored approach than some corporations, which are guided by strategies created at their often distant headquarters.
Large multinational corporations generally have a CSR effort or sustainability strategy at a global level that they push to all the locations where they work, said Eric Naranjo, a USAID field investment officer in Peru. While sometimes it aligns with local priorities and needs, it doesn’t always.
“The multinationals are great, but having a one size fits all approach to different markets can be limiting,” Naranjo said.
Many of the benefits are amplified in conflict or post-conflict countries. The local private sector becomes an even more critical partner in conflict countries like Colombia, for example, because they understand how to do business in what can be a peculiar context for outside businesses, Natiello said.
This same heightened understanding has worked to benefit a partnership taking shape in Peru, which hinges on a law that allows companies to use tax liability to the national government to fund social infrastructure. Local companies are more aware of the mechanism and are willing to pursue it even though it’s complicated to use, according to Naranjo.
The Pan American Development Foundation has also benefitted from working with smaller, more flexible local companies in an effort to provide job opportunities for at risk youth who have received life skills and job training.
“I think it’s easier to engage with the local companies,” said Caterina Valero, senior programs director at PADF. “The decision-making process is faster, easier. They are the ones in the neighborhood, it’s easier for them to understand the shared goal.”
But it goes beyond that. Partnering with local businesses also increases the sustainability of a program or a project and can help those companies gain additional skills, further improving local capacity, Valero added.
Barriers to success
While the local firm might might be able to act more quickly, the due diligence process can be more complex, as USAID has to determine the company’s role in the local economy and how it might be connected to political figures, said Cecilia Brady, a partnerships adviser in U.S. Global Development Lab’s global partnerships team.
For example, in a place like Iraq, USAID had to take into account whether businesses were strongly or publicly affiliated with certain tribal groups because of their need to be viewed as neutral. Partnering with a company like Microsoft wouldn’t have the same implications, said Brady, who put together the recent report on local partnerships.
Local companies, especially smaller ones, may not have the same wherewithal as big players and may struggle more to navigate red tape, said Mary Porter Peschka, the director of the International Finance Corp.’s advisory solutions department.
A multinational corporation with a bigger budget may be able to better tackle some of those issues, especially if it comes to infrastructure; they’d have the option, for example, to build their own power plant.
The local private sector sometimes lacks internal experience, capacity, skills and resources, she said, adding that part of what IFC does is work to support companies. The result is that often partnering with, or working with, local companies has higher transaction costs and requires more handholding, Porter Peschka said.
“I think as we increasingly try to scale up our local partners, especially in challenging markets … we have to be more thoughtful about the upfront investment and think about how we organize and incentivize our staff,” she said.
Part of the bigger picture
Ultimately there aren’t that many differences in how local or MNC partnerships are structured. They often use the same mechanisms regardless of the size or hometown of a specific company. But for partnerships with local private sector, and the MNCs as well, there is room to grow.
While the USAID mission in India is a leader on private sector engagement, they learned quickly that engaging with companies requires a specific skill set and training to learn how to pitch to and translate development jargon for the private sector, said Anu Rajaraman, the deputy for field support in the U.S. Global Development Lab’s office of agency engagement and the for director of the office of partnerships for innovation at the USAID mission in India.
It also requires a different form of relationship building — and looking to co-design initiatives rather than a more traditional call for proposals. But one thing staff at the mission underestimated at first was the time and energy necessary to build those relationships, Rajaraman said. They’ve learned to nurture connections — and to arrive to meetings with concrete proposals and leave with next steps, she said.
Training is important, Natiello echoed, as is hiring employees who have a background in business. He used the example of a local staff member in the Colombian office, who used to work in finance, leveraged his knowledge and connections to put together a partnership where a $1.7 million loan guarantee from USAID has enabled a trio of local banks to lend $120 million to rural and conflict-affected municipalities.
During interviews she conducted for USAID’s Local Private Sector Partnerships Report, Brady said she often heard that understanding local culture was important in brokering partnerships — local staff, or those who had connections to a country sometimes found it easier, though Americans could also gain cultural fluency with time.
Local companies are likely to be the greatest drivers of economic growth in developing countries, so determining how to best harness their skills in the pursuit of development goals will continue to be important.
It’s not just a “counting exercise,” said USAID’s Warfield, it’s about looking at local resourcing and how private sector engagement and partnership tools, like a global development alliance, can be part of the bigger picture.
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