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GREAT insights Magazine

Promoting inclusive business models

March 2016

Farinelli, F. 2016. Promoting inclusive business models. GREAT Insights Magazine, Volume 5, Issue 2. March/April 2016.

In the face of rising inequalities within and among countries, partnering between businesses, CSOs and institutions as a way to tap into their complementary resources and expertise is critical, including in terms of pro-poor inclusiveness and sustainability.


The 2030 Agenda for Sustainable Development and the Sustainable Development Goals (SDGs) have set a new scene for the way in which economic actors shall produce, consume and operate. At the international level, there is a clear sense that business as usual is not an option anymore, and that in order to achieve the global goals for sustainable development, multi-stakeholder partnerships are needed in all areas and at all levels. In particular, the contribution of partnerships between civil society organisations (CSOs) and the private sector – ranging from cooperatives, to small and medium sized enterprises (SMEs) to large corporations – is key to achieve sustainable development in a balanced and integrated manner, and to generate urgent transformative changes and innovative business models.

Among the most urgent priorities to be addressed through partnerships between CSOs and businesses is the rising inequality that markets have generated in the aftermath of the recent economic and financial crisis, hitting particularly hard the most vulnerable economies and segments of the population. As a matter of fact, inequality was on the rise even prior to the crisis, when markets were stable and countries were going through a period of sustained economic and employment growth. In the three decades prior to the recent economic downturn, wage gaps widened and income inequality increased in a large majority of OECD countries. In developing countries, a significant majority of households (more than 75% of the population) is currently living in societies where income is more unequally distributed than it was in the 1990s – with the exception of China and India, where millions of people have been pulled out of poverty.


Promoting inclusive business models


President Obama called the structural widening of income inequality “the defining challenge of our time”. Expanding gaps in income and wealth around the world, however, are not an unavoidable by-product of globalisation and technological change. The experience of several countries – many of which are in Latin America – shows that it is possible to reduce income inequality while maintaining a high level of integration with the global economy. Partnerships between CSOs that, by definition, defend the interests and willingness of citizens and businesses have an important role to play to address inequality-reproducing cultural norms and to promote more inclusive growth patterns. In particular, they can contribute to provide more equal opportunities to disadvantaged groups of the population such as women, youth, or minority groups, by adopting more inclusive business models and promoting value chains that are especially relevant for the poor.

Figure 1: Promoting business linkages for pro-poor growth

CSOs are ideally placed to take care of the ‘public good’ component of business transactions that do not happen under pure market conditions, due to the high costs of skills upgrading and to the geographic fragmentation characterising small local suppliers in most developing countries. In value chains as varied as agriculture, manufacturing and retail, large corporations may create new pro-poor opportunities for local suppliers from which they source – be it small farmers who can learn farming as a business, small service providers or local vendors. In order for this to happen, however, there is a need for intermediary organisations, including CSOs that contribute to build and upgrade local supply capacities (see Figure 1). In global value chains, in fact, large buyers and lead firms have become increasingly demanding, without necessarily offering higher price margins to enhance economic and social upgrading.


Creating pro-poor business linkages opportunities


Creating sustainable business linkages between domestic firms and subsidiaries of large corporations represents a vital channel for expanding economic opportunity and poverty alleviation through a wider and more equitable distribution of the gains from integrating into the global economy. Incorporating the poor into global value chains may result in tangible benefits for large businesses as well, such as reduced operating costs, increased product quality or access to new local supply and distribution channels that help to strengthen their business in both home and host countries. In particular, it is possible to make use of the potential synergies between linkages creation and ‘pro-poor strategies’ by linking large corporations via the formal sector to the informal sector in urban and rural areas with the support of intermediary CSOs, which are key to make sure that the initiative taps into the full potential of local content creation.

Business linkages programmes may play a key role in supporting the formalisation and upgrading of small informal producers, as well as the efforts of formal producers/exporters to meet the international standards required by TNCs operating in global value chains. In Vietnam, for example, the Joint UN MDG Programme Green Production and Trade to Increase Income and Employment Opportunities for the Rural Poor brought together a coalition of national and international partner institutions to increase trade opportunities and investment linkages for local raw material and handicraft and furniture producers. The initiative used a value chain approach to identify business opportunities for integrating small local firms located in remote areas of the poor northern provinces of Vietnam into regional and international value chains. Support covered the entire value chain from raw material supply to exports rather than only parts of it.

A critical element for the success of the initiative has been the mobilisation of the right institutional partnerships, such as with local authorities, CSOs and business associations, to allow local firms access to linkage opportunities beyond traditional markets. Vietcraft – the local association of handicraft producers – played a key role in network building, product development, and trade fair organisation. UNCTAD, through its local Empretec (UNCTAD capacity-building programme) counterpart hosted by Vietrade – the country’s trade promotion agency – took care of assisting small producers in accessing the five different value chains by upgrading their entrepreneurial skills and meeting the quality standards of large international buyers (see Figure 2). Small producers were encouraged and assisted in their efforts to adopt health and safety standards and improved waste treatment, and to introduce new product lines with the help of experienced designers, taking inspiration from traditional ethnic styles but giving them a modern tweak to appeal to domestic and international buyers.

Evaluation findings reveal that the income increase from the surveyed products was nearly three times higher in the sample group than in the control group, and this was particularly the case in the sericulture/silk value chain, where the income from surveyed products contributed 26.5% to the overall household income in 2012 (compared to 16.7% in 2009), while the control group’s income contributed only 8.2% to the overall household income. This shows that CSOs may play a key role in providing information about market opportunities and promising business models, offering training and coaching, developing soft skills, or even providing virtual work spaces and access to ITs. CSOs can particularly focus on poor communities with high unemployment levels and help them to move out of the informal sector or of income generating activities with low value added gains.

Figure 2: Promoting inclusive linkages in Vietnam

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Promoting inclusive agricultural value chains


The impact of pro-poor value chain development is particularly striking when dealing with smallholder farmers. In a rural context, interventions aimed at making value chains more inclusive and at tackling higher value markets may increase productivity, income and food security dramatically. For example, the South African beverage manufacturer SABMiller has been sourcing local ingredients for beer production, such as sorghum, cassava and barley, from thousands of small farmers across the African continent, working with local cooperatives, international organisations such as UNCTAD’s Empretec and Business Linkages Programmes, and CSOs such as Technoserve to transfer agricultural knowledge and business skills. Among the most effective support measures that CSOs can provide to facilitate the development of pro-poor agricultural value chains are:

a. increasing access of small-holders to information needed to evaluate alternative market opportunities, as well as specialised technical information;

b. developing appropriate agricultural technologies and training smallholders for increasing productivity and increasing quality;

c. improving infrastructure (communication, transportation, irrigation, as well as cold chain storage systems).

UNCTAD’s Business Linkages programmes have increasingly incorporated inclusiveness and sustainability principles, leveraging the incentives and resources of the private sector to adopt environmental standards and to ensure the beneficial inclusion of the poorest segment of the population, especially in rural settings. For example, UNCTAD has recently launched a project in the United Republic of Tanzania aimed at promoting business linkages in sustainable tourism and organic production. Among its objectives, the project aims at supporting smallholder coffee farming communities in the Arusha area meeting the environmental standards of large buyers such as Lavazza, and at developing the right entrepreneurial mind-set of poor rural entrepreneurs. In order to carry out the field work, UNCTAD has partnered with the Hans R. Neumann Stiftung (HRNS), a German CSO that is currently assisting 25,000 coffee farming households, totalling up to 125,000 people in northern and southern Tanzania (Mbeya, Arusha and Kilimanjaro regions).

Figure 3: Promoting sustainable linkages in the United Republic of Tanzania

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The rationale of UNCTAD’s linkage-building intervention is that by instilling an entrepreneurial spirit in small coffee growers and their leaders through the Empretec training, a new approach to farming ‘as a business’ will be diffused, spurring farmers to strive for increased volumes and better quality, thus benefitting the large buyers such as Lavazza at the other end. Diversifying the income sources to better cope with fluctuating prices of coffee is also one of the most important objectives of the training activities. In this way, business linkages become a means to allow domestic SMEs, including small rural enterprises, to diversify and add value to their production, thereby participating more effectively in international production systems. As intermediary organisations, CSOs such as HRNS can play a key role in this context, by measuring impact, documenting and disseminating best practices, informing public opinion and public policy, and brokering partnerships. They can also play operational roles in business linkage efforts and in facilitating the success of innovative, inclusive business models.

References:

OECD. 2015. In it together: Why less inequality benefits all. Paris: OECD.

UNDP. 2014. Humanity divided: Confronting inequality in developing countries. New York: UNDP.

UNCTAD. 2012. Trade and Development Report. Geneva and New York: UNCTAD.

UNCTAD. 2013. World Investment Report, Global Value-Chains: Investment and trade for development. Geneva and New York: UNCTAD.

GTZ. 2006. Promoting business linkages. Bonn: GTZ.

USAID. 2014. Smallholders and inclusive growth in agricultural value chains. Washington DC: USAID.

About the author 

Great-March-2016-FulviaFarinelli-Photo

Fulvia Farinelli works at the United Nations Conference on Trade and Development (UNCTAD) in the Division on Investment and Enterprise Development. After joining UNCTAD, she became responsible for UNCTAD’s entrepreneurship development programme  Empretec in Latin America.


Photo: Le Thi Tao makes incense sticks at her family shop near Tu Duc tomb. Credit: Chau Doan/UNIDO, flickr.com.

This article was published in GREAT Insights Volume 5, Issue 2  (March/April 2016).

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