Global development is more collaborative and it is clear in this new era ushered in by the adoption of the Sustainable Development Goals that the private sector will play a key part in the implementation of this new agenda.
While the private sector has played an increasingly significant role in development in recent years — notably through cofinancing and philanthropic efforts — there is now an emerging belief that inclusive business practices will continue to rise to prominence as a vehicle to drive private sector engagement in development.
Indeed, discussions in donor circles around the promotion of inclusive businesses, defined by the International Finance Corp. as “commercially viable and replicable business models that include low-income consumers, retailers, suppliers, or distributors in core operations,” continue to gain traction.
One proponent, the Asian Development Bank’s Principal Economist Armin Bauer, told Devex in an exclusive interview that inclusive businesses are becoming a more viable and sustainable way to pursue development goals.
“Inclusive businesses look for scale, while seeing to it that the company’s core business model remains in providing sustainable solution to the relevant issues of poor people,” he said.
But the real objective is to provide more sustainable and inclusive development solutions that not only benefit the poor but turn them from passive recipients of aid to active contributors to their own development, Bauer added.
Despite the immense potential of an inclusive business model for development, so far only a limited number of private sector players are taking the leap. So what obstacles still need to be overcome?
The role of the private sector in global development efforts has never been more prominent, following the adoption of the Sustainable Development Goals. But how important are inclusive businesses to meeting funding needs? Devex talked to the Asian Development Bank's Armin Bauer to get the inside track on its huge potential and obstacles to success.
Two of the biggest stumbling blocks in spreading inclusive business models are scale and sustainability, Bauer told Devex in a previous interview. In a report co-authored with Chong Zheng Ying, senior project manager at Singapore-based CSR Asia, Bauer said that a key reason larger and medium-sized firms are reluctant to explore inclusive business ventures, particularly in Southeast Asia, is the lack of information on what kind of opportunities are available to them.
There is also a need for more companies to have a different perspective in looking at how private sector engagement is evolving — from charity to value-creation, said Robert de Jongh, specialist leader on social impact at Deloitte Consulting LLP’s impact investing arm Monitor Deloitte.
“This framing of how companies transition from charity to integrating the poor segment into their value chains should really be more about companies having a broader conversation about value and value-creation,” he said during the 2nd Inclusive Business Asia Forum at ADB’s Manila headquarters in February.
So what are these opportunities and what sectors hold the most potential for inclusive business models?
High-potential sectors include agribusiness, finance and telecoms, and health education. In their report, Bauer and Chong explained that these sectors will likely predominate in efforts to realize the investment opportunity for inclusive businesses, at least in the Asia-Pacific region.
“ADB estimates … the number of mature, ‘investment-ready’ inclusive businesses in the region is expected to triple in the next 10 years,” the report states. “This could mean a potential market opportunity … of about $6 billion to $7 billion, up from perhaps $1 billion in 2015.”
The value-added element in supply chain integration is important in sectors like agribusiness, where workers can be more involved at a higher level in the supply and value chain, Bauer said.
Those in the low-income sector of the economy can benefit from greater integration into supply chains through more advanced agribusinesses that process agricultural products and inputs, he said.
“What is needed are more innovative business models with high productivity, developed specifically for the [base of the pyramid’s] needs and allowing them to create income above the competing market rates of informal sector and middlemen,” Bauer and Chong said in the report.
Agribusiness is likely to comprise about 26 percent of the expected $6 billion to $7 billion of investments in the region in the next decade. Finance and telecom and health and education, meanwhile, are expected to notch up 31 percent and 28 percent, respectively.
But many sectors show potential: housing and urban utilities, tourism, trade and manufacturing, renewable energy and transport, water and sanitation, infrastructure development, as well as the traditionally profit-driven food and beverage sector, de Jongh said.
Companies and other development stakeholders may struggle to thrive without an enabling environment to support such endeavors — especially when it comes to tying the potential benefits of inclusive business models to the successful implementation of the SDGs.
De Jongh calls this enabling environment the “perfect storm” — and it consists of six elements: technology, financing, governance, regulations, partnerships, and changing consumer preferences.
Technology can lower transaction costs usually considered a typical barrier to entry for inclusive businesses and more companies and high-net worth individuals are now seeing more “value in investing in business models [like inclusive businesses] that do well by doing good,” he said.
Governments — many of which tightened their governance and regulatory frameworks following the onset of financial crisis eight years ago — have taken note and are increasingly interested.
As consumer behavior changes to place more value on companies that are inclusive or address social or environmental issues, businesses with a core business model that allows for collaboration and a wider social impact will maintain a reputational advantage, de Jongh said.
“If financing follows, business will also follow,” he concluded. “It is a very logical equation that the time is now — the perfect storm to rein in broader trends. The SDGs themselves create the perfect framework that we are better together if we work from private to public, public to private, and private to private.”
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