Aid Effectiveness

Policy Brief
Development as a Strategy: A U.S.-European Business Dialogue
How can companies best contribute to tackling today’s challenges, including world poverty? How are companies effectively engaging poor people in the “bottom four billion” as consumers and producers? What are the mechanisms for deepening partnerships between the private and public sectors and mainstreaming development into business strategies? by Zahid Torres-Rahman, Director, Business Action for Africa and Jonathan White, Program Officer, The German Marshall Fund of the United States1
New challenges, new strategies The markets of the future are in the developing world. The smartest foreign investors have already recognized the huge investment and supply chain opportunities that these markets represent. They realize prospects for business growth rest upon their willingness to move beyond the mature markets to which they have become accustomed. Yet developing markets are often marked by weak governance, challenging investment climates, and impoverished populations. These present risks that must be managed by corporations if they are to successfully operate in markets with significant upside potential. The result is that issues—such as poverty and climate change—that have traditionally been the
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Summary: Economic growth, favorable demographic trends, and lower costs have driven companies to invest in the developing world. Although some firms have made advances in formulating core-business-aligned strategies for tackling the development challenges that these countries often face, there is a lack of widely agreed and disseminated best practices for business in support of development and efforts to date have mostly occurred in isolation. Based on a symposium convened in Chicago on May 15-16, 2008 and organized by GMF, the Chicago Council on Global Affairs, the Initiative for Global Development, and Business Action for Africa, this policy brief seeks to inform the wider business and development communities about the challenges and opportunities of pursuing long-term development objectives in business strategies. It aims to contribute to greater knowledge in this field through a robust transatlantic dialogue.

domain of governments, donor agencies, and civil society organizations, are now boardroom issues for business. Yet, there are currently few broadly accepted practices or systematic approaches for business on either side of the Atlantic in addressing these challenges. At the same time, there has been a surge in expectations—among current and prospective employees, investors, governments, and the general public— around what business can and should be doing to tackle today’s international development challenges. The evidence suggests that the international community is significantly off-track in meeting the internationally-agreed UN Millennium Development Goals (MDGs),2 which include halving world poverty by 2015. The current food crisis has likely further

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On May 15 and 16, 2008, the German Marshall Fund of the United States (GMF), the Chicago Council on Global Affairs, the Initiative for Global Development (IGD), and Business Action for Africa (BAA) hosted 30 U.S. and European senior business representatives and policymakers in Chicago, IL to share perspectives on the contribution of business to international development. GMF Senior Transatlantic Fellow and former U.S. Congressman, Jim Kolbe, chaired the event, alongside Sally Jewell, president and CEO of Recreational Equipment, Inc., and chair of IGD; and Andrew Bone, head of international relations for the De Beers Group and board member of BAA. This report summarizes the key themes that emerged from the discussion. 2 www.undp.org/mdg

Aid Effectiveness

Policy Brief
undermined progress on the MDGs, revealing policymakers’ long-standing neglect of productivity-enhancing investments in agriculture in the poorest countries. The private sector can play a positive role in helping reverse this trend. As a result there is renewed interest in the role that business can play, as part of a broader restatement of the importance of economic growth, trade, enterprise, and employment in lifting people out of poverty. The recent “Business Call to Action,”3 driven by the United Nations and the United Kingdom, seeks to galvanize the expertise and efforts of the business community in support of the MDGs, and reflects a growing recognition in the United States and Europe that business is part of the solution, not part of the problem. Encouraging greater levels of foreign and domestic investment and a vibrant private sector offers the most sustainable route out of poverty. No social program can rival the business sector when it comes to job creation and growth.4 Eight years ago, there was a move within the United States Agency for International Development (USAID) to find new ways to engage business. USAID recognized the dramatic shift in the composition of financial flows: while in the 1960s around 70 percent of U.S. resource flows to the developing world came from the government, now less than 20 percent do. Today, over 80 percent are private flows—including foreign direct investment (FDI) and remittances. U.S. business engagement is also seen by many as offering opportunities for leveraging soft power in support of national and international security objectives. What can business offer the poor? FDI to developing countries reached a record level $536 billion in 2007—a 20 percent increase from 2006. Driven by the global commodity boom, growth opportunities, privatization, and other market access reforms, these investments have led to increased trade, job creation, and industrial development. With the tapering-off of high debt relief, total foreign assistance declined by 8.4 percent hitting $103.7 billion in 2007 and remains well below the vast sums poured into developing markets by global companies. In addition to far outweighing aid flows, these corporate investments bring international business practices, technical expertise, and knowledge that can spillover into the local economy. Recognizing the important role they can play in development, companies are providing training, access to finance, and other capacity building programs that connect local enterprises with the global economy, supporting local health and education
www.business-call-to-action.com Michael Porter and Mark Kramer, “Strategy and Society: The Link between Competition Advantage and Corporate Social Responsibility,” Harvard Business Review, December 2006.
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systems and partnering with others in the process. Such efforts can be aligned with long-term business strategies, and also beneficial to the societies in which companies operate. Aid flows into health, education, and physical infrastructure can complement FDI and have a catalytic effect, enhancing the overall business climate.

“We are very interdependent; the more we can understand these interdependencies, the more we can relate to what is happening in the world and learn how to cope with problems. All companies are affected by the cost of energy, rising commodity prices —what are the political consequences of these crises?” - Jim Kolbe, Senior Transatlantic Fellow, The
German Marshall Fund of the United States; former U.S. Congressman
Different corporations have varying perspectives on how to approach and prioritize development objectives. Views vary further when U.S. and European firms are compared, taking into consideration proximity, colonial history, and cultural differences. Yet, there is a new consensus emerging among forwardthinking companies on both sides of the Atlantic: businesses need to engage in thinking about development, for their own benefit, but also if today’s complex challenges are to be successfully tackled. Climate change, water scarcity, food insecurity, and environmental degradation are challenges that threaten our mutual prosperity and security and the developing world is acutely vulnerable to them. Business leaders increasingly recognize that their future success is indelibly linked to how they adapt and address the issues reshaping the global business landscape. Beyond philanthropy Philanthropy represents one significant way in which businesses

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can contribute. The top 50 corporate foundations are giving as much as the entire UN Development Programme (UNDP). Experience suggests that philanthropy can be particularly effective when competency-led—reflecting the donor company’s own specific skill set and business focus. Companies are aligning cash donations and capacity building more closely to their business focus, including through corporate volunteer and exchange programs and leadership training. At the same time, there is a growing recognition in Europe, and now increasingly in the United States, that the most powerful contribution that a business can make is through its core business: through its products and services, and the opportunities it creates for employees, suppliers, distributors, and the communities where it does business. Recent studies have demonstrated the strong, positive direct and indirect employment benefits that larger companies can have through their value chains. An INSEAD study of Unilever’s economic footprint in South Africa found that for every job at Unilever, another 22 workers depended upon the company for some part of their livelihood—equivalent to around 100,000 people.5 Moving beyond philanthropic, and often PR-driven, corporate social responsibility is seen as a more sustainable and effective strategy for tackling development challenges. Philanthropic donations can change unpredictably, making it hard for donors and civil society organizations to develop long-term programs. In some cases, hybrid funding models have proven effective, with up-front philanthropic support, in the form of cash, skills or access to intellectual property, kick-starting a business model. Business models for engaging with poor people as consumers and producers vary from industry to industry, but there are some emerging lessons: know and stick to core competencies; understand local needs and barriers and work to address these; engage with local stakeholders; and take a long-term view. There has been a recent wave of innovation—from harnessing micro-entrepreneurs in distribution chains to engaging local small and medium-sized enterprises (SMEs) through franchising arrangements, access to capital, and capacity-building. The power of partnership In the face of the complexity and scale of international develop5

ment challenges, governments and businesses are recognizing the importance of partnership. Governments are forming partnerships with businesses, and businesses are forming partnerships with each other to address issues as diverse as conflict diamonds (Kimberley Process6), water sustainability (Watershed Partners Program7 between USAID and The Coca-Cola Company), farmer productivity (Starbucks Alliance8 between USAID and Starbucks), access to medicines (Medicines Transparency Alliance9), and transparency in the construction sector (Construction Sector Transparency Alliance10). While businesses and governments work in different ways, they often are seeking the same outcomes with regards to development. Partnerships can be powerful in leveling the playing field and tackling industry-wide issues such as corruption, increasing the legitimacy of each individual actor in tackling the issue, and leveraging impact by taking initiatives to scale. Partnerships with local governments, nongovernmental organizations (NGOs), and civil society can help add credibility, accountability, and alignment with local needs to ensure the long-term sustainability of development efforts.

“Businesses can accomplish a lot by focusing on their supply chains.” - Richard Morgan, Communications Director for Africa,
Middle East, and Turkey, Unilever plc
Yet it is complicated to make partnerships work on the ground. There is caution about private sector innovation within some elements of the government and civil society, and a concern that governments should not subsidize the private sector to invest in areas that it would have invested in anyway. Competition between businesses can also be a real barrier to forming partnerships. Case in point, the cocoa industry, where there are clear industry-wide wins such as strengthening the capacity and productivity of poor farmers. Critical to the success of partnerships is a clear understanding of what each partner’s interests and core competencies are, along
www.kimberleyprocess.com www.usaid.gov/our_work/global_partnerships/gda/resources/coca-cola_watersheds.pdf 8 www.usaid.gov/our_work/global_partnerships/gda/resources/starbucks.pdf 9 www.medicinestransparency.org 10 www.constructiontransparency.org
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Ethan B. Kapstein, Measuring Unilever’s Economic Footprint: The Case of South Africa, 2008.

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Policy Brief
with an open, trust-based relationship. The private sector can provide much expertise in areas such as supply chain management, business planning, marketing, exporting, and other business practices. Measuring impact for greater effectiveness There is a strong view that businesses need to move beyond anecdotes and case studies and do a better job of measuring the development impact of their core business operations. By doing so companies get credit for the development impact of their operations and can share this information with employees, shareholders, and other stakeholders. Businesses need to develop a few vital measurements—as many as are needed, but as few as possible. The World Business Council for Sustainable Development has recently led the creation of a framework for facilitating impact measurement.11 As important as conducting these impact assessments is the commitment of companies to learn from them, with the leadership required for taking the company in a new direction if necessary. Continued evaluation and verification reinforces the culture of change and helps move a company in the direction of effective promotion of sustainable development. Measurement is not just about numbers, but effective decisionmaking too. Central to the learning process is the development of repositories of experience and information—including examples of what works, but also of what does not. Businesses should also share “worst practices” so that they do not duplicate others’ mistakes. Challenges remain though. There is a lot of passive resistance to measurement among corporations and reluctance to expose their blind spots to public scrutiny and peer review. There is already so much mandatory oversight and compliance that companies are adverse to engage in additional voluntary evaluations. There are different types of quantifiable data, but some impacts are qualitative and more difficult to measure. There is also tension over how much to disclose. Keeping information out of the public domain could play into the hands of activists: a bold, transparent and honest approach is needed. There is also debate over who should define what the common measures are. Different companies have different measurement tools, and NGOs might have entirely different standards. There will be different measurements in different sectors and industries, but
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to the extent that it is possible, it would be beneficial to have common standards for measuring similar impacts. Engaging in policy dialogue There is an emerging recognition within both the business and the development communities of the important and positive role that business can play in the policy space: engaging in national strategies for generating economic growth; helping foster an enabling environment for business and trade at the local, regional, and national levels; and acting collectively to promote good governance and tackle corruption.

“Business cannot thrive alone—business, government, and civil society all have to work together. Governments cannot create wealth. But they can work with business to create a place for wealth creation to thrive.” - Andrew Bone, Head of International Relations,
De Beers Group
Given its understanding of Africa’s diversity, business offers a valuable perspective on how countries in that region can unlock their potential for growth and unlock the entrepreneurial energy of the continent—as measured by indicators such as the World Bank’s Doing Business Report, which measures the ease of doing business on an annual basis.12 Getting behind strong reformers can send important signals to other investors and to other countries. Donors often have influence over developing country policy, more so than any individual company, yet companies have in-depth knowledge of the barriers to growth and can contribute to a policy dialogue as well. Business can also play an important role in promoting international trade—often more important than aid in generating growth and development. This should include advocating for a better alignment of OECD trade and development policies, and a dismantling of trade barriers and distortive agriculture subsidies adversely impacting the poorest countries. The United States has the highest effective trade barriers against the lowest income countries,
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www.wbcsd.org/web/measuringimpact.htm

www.doingbusiness.org

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“Business has a responsibility to contribute to social and government policy to support growth and equality. Every low-income country should have a growth strategy, and it should be informed by business. How do you put that in place? Most countries have business councils, but they are not always and everywhere injected with the dynamism that they need.” - William Kingsmill, Director (Acting), Policy and Research
Division, Department for International Development, U.K.
such as Bangladesh and Cambodia. It collects more in tariffs than it gives in aid to a whole range of countries; it collects more in tariffs from Vietnam and Bangladesh than from the United Kingdom and France. U.S. and European policies have made agriculture one of the world’s most distorted sectors in the international trading system, despite the fact that incomes of most poor people in developing countries are linked to farming. The current food crisis further reveals the critical need for long-term agriculture investments in these countries and a serious rethinking of the negative impact of U.S. and European trade and agriculture policies on the developing world through the prism of our national security. Despite the recent collapse of the WTO Doha Development Round negotiations, both companies and the poor would benefit from new disciplines and the strengthening of a rules-based, open trading system. There are also numerous barriers to trade within developing countries—from weak infrastructure to inefficient customs administration—which can be at least as damaging as international trade restrictions. Businesses can play an important role in advocating for the appropriate policies at the national and regional levels that foster conditions that enable entrepreneurs to invest and take risks, and help the private sector thrive by linking them to the global economy. Corruption is another international issue inhibiting economic growth, but it is particularly problematic in low income countries where the institutions responsible for fighting corruption are weak. It takes two to be corrupt, and there is clearly an obligation on the corporation to avoid corruption. Initiatives that enhance transparency on both sides offer promising ways to address the issue. For instance, the Extractive Industries Transparency Initiative (EITI)13 sets a global standard for companies in the extractives sector to publish what they pay and for governments to disclose what they receive. Getting civil society organizations involved is a good way to hold both sides accountable. Donor agencies also need to engage as they are likely to have significantly more leverage than an individual company in preventing corruption. Deepening partnerships across business, donors, and NGOs, as mentioned above, in support of policy engagement can help to overcome this collective action problem. As U.S. and European firms engage in development policy discussions, there are a number of emerging lessons. First, by working collectively, they can be more effective in tackling complex issues. Second, business can play an important role in building the understanding of development issues, and the rationale for business engagement, among the general public. Corporations need to get better at highlighting domestically their contribution to international development, as well as the success of programs such as the U.S. Millennium Challenge Corporation,14 which focuses on private sector development and infrastructure. Developing effective messages among employees, investors, and the broader business community is an important starting point. Getting a broader consensus on the importance of trade is particularly important: when people hear “development” they are supportive, but in the context of “globalization” they are fearful of the economic implications. Business can make a powerful contribution to building a constituency for the policy changes needed to advance poverty reduction in the world’s poorest countries. Lastly, there is a need for establishing more formal and strategic approaches to development by business. Many businesses on both sides of the Atlantic are keen on more fully understanding their impact on societies—not just recording anecdotes—and embedding development perspectives into their operations as well as long-term strategic planning. The isolated nature of most current development efforts undertaken by multinational
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www.eitransparency.org www.mcc.gov

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Policy Brief
corporations and the lack of widely agreed and disseminated best practices makes a dialogue among American and European business leaders particularly relevant. An on-going transatlantic discussion among companies, donors, and NGOs will help to foster better practices, forge innovative collaborations, and help generate private sector opportunities for all. Summary Based on a series of breakout sessions and panel discussions in Chicago, a number of policy recommendations were developed to support better practice in development for business:  Embed development practices across the entire organization, through strong corporate leadership engagement.  Align development-focused activities with core business strategy to ensure long-term sustainability and maximum impact.  Proactively engage and partner with local stakeholders including government, business, NGOs, and civil society to support legitimacy and leverage efforts.  Make an investment in and adopt practices for measuring results and foster learning from failures and a culture of change.  Invest in the “policy space” necessary to hold governments— at home and abroad—accountable for trade, development, and other policies impacting the poor.
Organized by the German Marshall Fund of the United States, the Chicago Council on Global Affairs, the Initiative for Global Development, and Business Action for Africa, the symposium convened American and European companies along with donors and development experts in Chicago on May 15-16, 2008. Participating organizations and businesses included: Baxter International, Cummins Inc., Caterpillar, Inc., De Beers Group, CSR Initiative at Harvard University’s Kennedy School of Government, Hills & Company, International Business Leaders Forum, Miller Brewing Company, Monsanto, Pfizer, Recreational Equipment Inc. (REI), SABMiller, Symetra Financial, TechnoServe, Underwriters Laboratories, Inc., Unilever, U.K. Department for International Development, the Office of the U.S. Trade Representative, the U.S. Department of State, and the World Business Council for Sustainable Development.

About the Organizers

The German Marshall Fund of the United States (GMF) is a nonpartisan American public policy and grantmaking institution dedicated to promoting greater cooperation and understanding between North America and Europe. GMF does this by supporting individuals and institutions working on transatlantic issues, by convening leaders to discuss the most pressing transatlantic themes, and by examining ways in which transatlantic cooperation can address a variety of global policy challenges. In addition to its headquarters in Washington, DC, GMF has seven offices in Europe: Berlin, Bratislava, Paris, Brussels, Belgrade, Ankara, and Bucharest. www.gmfus.org

The Chicago Council on Global Affairs is a leading independent, nonpartisan organization committed to influencing the discourse on global issues through contributions to opinion and policy formation, leadership dialogue, and public learning. The Chicago Council brings the world to Chicago by hosting public programs and private events featuring world leaders and experts with diverse views on a wide range of global topics. www.thechicagocouncil.org

The Initiative for Global Development (IGD) is a national alliance of business leaders across the United States that champions effective solutions to global poverty. It has grown to a national network of more than 300 partners in 11 cities. IGD works to promote poverty reduction by advocating for effective U.S. policies and advancing innovative private sector solutions that expand opportunities for people living in poor countries. www.igdleaders.org

Business Action for Africa (BAA) is an international network of over 200 businesses, business organizations and development partners, working collectively to accelerate growth and poverty reduction in Africa. BAA catalyses business-led collective action in three areas: Advocacy on the international and national policies needed to drive development in Africa; joint projects on the ground across the region; and sharing and showcasing good business practice. www.businessactionforafrica.org

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