Exploring the Links Between International Business and Poverty Reduction: a case study of Unilever in Indonesia

An Oxfam GB, Novib, Unilever and Unilever Indonesia joint research project

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Background
Why this research project? • Shared interest in increasing contribution of international business to poverty reduction • UN Global Compact/MDGs What is this report about? • a ‘learning’ project; not an audit of Unilever or UI. • The goal: to understand how wealth generated by a multinational company’s local operating company can have positive or negative impacts on people living in poverty • To do this, we looked at UI’s entire value chain from small-scale producer to low-income consumer to understand the points of entry and leverage to reduce poverty.

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Four areas of research
• • • • UI’s ‘macro-economic’ level impacts UI’s employment impacts The value chain from supply to distribution Low-income consumers in the marketplace

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The UI business

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Foreign exchange, trade & human resource flows

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UI’s distribution of profits

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Value Chain
Estimated employment linked to UI value chain (2003)

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Value Chain
Estimated distribution of value generated along UI’s value chain (2003)

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The supply chain
Direct suppliers • UI had 334 suppliers, spending approx Rp 3,591 billion (US$ 419m) • 80% of suppliers are domestic, 20% are international • Top 10 suppliers by value are all Indonesian and account for 34% of purchases • Domestic suppliers provided 84% of goods and services • All UI suppliers required to observe Unilever’s Code of Business Principles • UI maintains basic standards through negotiations, on-going dialogue, and a rolling three-year audit programme • UI supplier companies exceed legal regulations governing wages and benefits in Indonesia but pay and employment conditions’ for suppliers’ employees and contract workers were lower than those for UI’s direct workforce

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The supply chain (cont.)
Producers of raw materials • UI products are made from raw materials sourced mainly from Indonesian producers, traders and processors • Producers growing agricultural products are among the poorest people in UI’s value chain • Five agricultural raw materials entering UI’s local supply chain stand out in this regard—tea, palm oil, cassava, coconut sugar, and black soybean • The market for coconut sugar – a key ingredient for Kecap Bango—is characterised by oversupply, with farmers selling through middlemen and experiencing high levels of debt which keep them in debt peonage • Where there is a business case for alternative supply chains, these can have positive impacts for poor producers
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The distribution chain
• UI’s distribution side of the value chain creates more employment and value than the supply side • The distribution chain creates twice as many jobs (62.5%) as the supply chain side (27.1%) • This includes thousands of jobs among an estimated 1.8 million small stores and vendors • This employment is often overlooked as a contributor to economic development and poverty reduction • The closer to UI that distributors and retailers are in the chain, the more likely they are to gain skills and knowledge, negotiate better prices and conditions, experience higher employment standards and incomes, and be able to build up business capital
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Value chain insights
Employment • More than 300,000 people (FTEs) make their livelihoods in UI’s value chain • More than half this employment is found in the distribution and retail chain Value • Total value generated along the chain was estimated at US$633m: 1/3 UI 2/3 in the chain; the government receives (from UI alone) 26% of the total value generated • The value captured by poorer people working at either end of the value chain is much lower than the value captured by those who are in direct interaction with UI
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Lessons learned from project

• Understand the ‘job’ multiplier in UI’s total value chain, and potential use of value chain policies as tool in sustainable poverty reduction • Value-adding activity creates a broad tax base - essential for development of formal economy and funding of government programmes • FMCG value chains can offer poor people an opportunity to gain basic skills and earn incremental, regular income • Although imperfect, may be useful first steps towards increasing skills, accumulating assets, and improving quality of life • The scrutiny of UI’s relationship with low-income consumers and its contractor review processes suggested ways in which the company could improve its interactions with people living in poverty
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Lessons learned from project
• Highly embedded MNCs and large domestic companies might in future provide a focus for useful work on private sector poverty impacts and poverty reduction strategies. • This project has increased our understanding of UI’s impacts and interactions with people living in poverty in Indonesia. • Gained a better understanding of the potential of distribution chains to generate employment and income • But participation in value chains does not guarantee improvements for poor people • Often difficult to define what constitutes ‘fair practice’ by companies.

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Follow up actions

Unilever Oxfam GB / Novib

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Exploring the Links Between International Business and Poverty Reduction: a case study of Unilever in Indonesia Questions & Discussion

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