Clarity matters in inclusive business

Published on Wednesday, 17 February 2016

Published by Armin Bauer on Wednesday, 17 February 2016

Simpa Networks affordable solar energy solutions for poor consumers in India.
Simpa Networks affordable solar energy solutions for poor consumers in India.

Inclusive businesses are commercially viable core-business models that provide at scale innovative and systemic solutions to the relevant problems of the poor and low-income people. While inclusive business is becoming increasingly popular, there is still a lot of confusion about what it is, how it addresses the poor, and how it works.

Inclusive business models create relevant goods and services or decent and well paid work opportunities for the low-income segment of society, which directly contribute to improve their living standards and reduce poverty in a systemic way through business solutions. Social enterprises are the smaller version of inclusive business; they are smaller in investment, social impact, and often—but not always—also financial return.

The concept of inclusive business goes back to what leading economist and strategist C.K. Prahalad referred to as “fortune that companies can make at the base of the income pyramid” or BoP. The first broader BoP market assessment was done by the International Finance Corporation (IFC) in 2006, and recently updated after evaluating more than 100 household surveys worldwide and establishing a global consumption database. Different brackets of the low-income populations exist within the overarching BoP, typically the bottom 40-60% of the income brackets of a developing society.

The IFC uses the $8 poverty line globally, but their inclusive business investments also target the bottom 40-60%. The $8 range cannot be used for the inclusive business discussion in Asia, as 90% of Asians live on less than $8 a day. In fact, 4.5 billion people worldwide live on less than $8 a day. The table below lists these brackets and compares the population percentages in Asia.

In recent years most governments in Asia and the Pacific have started to develop strategies that make their growth process more inclusive. Programs include expanding infrastructure access to unserved areas; building up social safety nets; and addressing inequalities in access to services, income opportunities by geographic location or gender. Inclusive business is the direct contribution of the private sector to make growth more inclusive. It is not just business as usual. Companies consciously design and then implement inclusive business models that either generate decent income opportunities with higher returns for the poor than the market rate, or provide relevant and affordable services and products that address their social needs of the low-income population.

For society, more inclusive business solutions mean less poverty and better living standards for the poor. Identifying and branding inclusive business investments and their social impact can help governments set up and monitor targets for poverty reduction.

As the BoP is large, providing solutions to the problems of the poor requires business models that can be scaled up. While such models can work for smaller companies and social enterprises, larger inclusive business investments are needed to create more systemic impact in a given region. The challenges, though, are different for large and small firms.

While large companies can deliver more scale, they traditionally serve mostly the upper consumer markets. Their prime challenge is to modify existing core operations to integrate the low-income population given the perceived risks and little knowledge about the markets of the poor, as well as taking into account the facts that their current investments create already established financial returns, and the competitiveness of inclusive business investments may not yet be tested.

Nevertheless, large firms are increasingly interested in investing in the BoP and developing new inclusive business models. While large companies can deliver more scale, they traditionally serve mostly the upper consumer markets. Their prime challenge is to modify existing core operations to integrate the low-income population given the perceived risks and little knowledge about the markets of the poor, as well as taking into account the facts that their current investments create already established financial returns, and the competitiveness of inclusive business investments may not yet be tested.

There are a host of international finance organizations now supporting inclusive business, among them multilateral institutions like ADB, the Inter-American Development Bank and the IFC, as well as bilateral development partners such as Australia, Germany, the Netherlands, Switzerland, the UK, and the US. J.P. Morgan and Credit Suisse, two of the world’s largest commercial banks, recently established their own programs to finance inclusive business, and local banks have begun to include inclusive business in their portfolios.

Finally, let’s mention impact investors, which differ from philanthropists by their objectives to achieve financial returns, and from traditional investors because they seek to create social (or environmental) impact. While traditional investors—especially banks and development banks—prefer backing the inclusive business models of large companies, impact investors remain active in the smaller ticket market, with average investments between $100,000 and $3 million. Globally, most inclusive investments are $3-30 million in mid-sized companies. The global impact investment industry has put up more than $60 billion, making inclusive business an investment class of its own.

This blog is part of a series of blogs about inclusive business in Asia written by a wide range of experts in the run-up to ADB’s 2nd Inclusive Business Forum for Asia in Manila. Visit the new Inclusive Business in Asia site here.