- The world needs better FDI.
- That requires a deep transformation of investment promotion agencies (IPAs).
- FDI has yet to master how to address the global divide.
As the foreign direct investment (FDI) industry gathered at the World Investment Conference organised by WAIPA in September, one message resonated clearly: the world needs better FDI, one which requires a significant transformation of investment promotion agencies (IPAs).
Professionals across the world are asking themselves how to address challenges such as climate change, disruption of value chains or food insecurity. FDI practitioners, policy-makers and economic developers have come a long way in improving the lives of millions and the many initiatives about green investment, sustainable IPAs or diversity are only a few of the sterling efforts from many. However, the reality of things speaks of a pending task. Across geographies, homelessness, unemployment or deprived neighbourhoods lacking access to basic services are a common sight. They remind us that FDI has yet to master how to address the global divide.
FDI has yet to master how to address the global divide.
The bottom of the pyramid
The reality is telling: as many as 648 million people lived on less than $2.15 per day in 2019, according to World Bank data. This group is usually referred to as “bottom [or base] of the pyramid”, commonly referred to as the BOP. It is obvious that global aid alone cannot address the challenge they pose, and that even rapid economic growth often co-exists with inequality. Quoting C.K. Prahalad and his seminal book ‘The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits’, we believe that “the typical pictures of poverty mask the fact that the very poor represent resilient entrepreneurs and value-conscious consumers. What is needed is a better approach to help the poor, an approach that involves partnering with them to innovate and achieve sustainable win–win scenarios where the poor are actively engaged and, at the same time, the companies providing products and services to them are profitable.”
What if we could make those words a leitmotif for what better FDI could look like? What if we were to carve a more strategic role for FDI so that it benefits sectors of society it has not reached before? For this to happen there are at least three areas to focus on.
First, is to see BOPs as a market. Economists and social entrepreneurs have for years recognised that poorer sectors of society represent a market with distinctive consumer patterns. GE, Unilever, and Novartis are among the many global companies that expanded their markets and innovation capabilities as a result of engaging with BOP markets. In addition, vastly improved digital and payments infrastructure has made engagement with the BOP more attainable for a wide variety of investors, as many mobile phone-based money transfer services, payments and micro-financing services have proven.
Investors in the retail and food industry have also begun to cater to BOPs. However, this segment has specific challenges such as high price sensitivity, demand for maximum utility, brand consciousness and reachability. As companies adapt to compete in these segments, they often gain a cost advantage, and the ability to customise and attract talent which has a direct link to the bottom line.
Serving BOPs usually requires companies to revisit and or adapt their value-creation methodologies. Asymmetry of information likely prevents multinationals with BOP-focused products and services, or interest in developing them, from taking full advantage of the opportunity. Why do we expect companies to find their way alone? Foundations already track BOP-specific data we could use to better understand the BOP ‘story’, consumer aspirations and other key insights. Fostering BOP-focused private-public collaboration would remove current blockers that foreign (and often local) firms addressing this market often find.
Second, is to understand poverty as a component of sustainability. According to the International Institute for Sustainable Development (IISD), an international think-tank based in Canada: “From an environmental perspective, both poverty and unsustainable patterns of production and consumption are key drivers of environmental degradation. At the same time, environmental degradation and climate change can drive poverty [and vice versa]. While there is no easy solution, poverty and the environment must be addressed together.”
IPAs are already working with foreign investors to drive green investment. How can we leverage those companies that have already committed to carbon neutrality, so that they also incorporate poverty alleviation into their work, not only from a CSR point of view, but through the design of their services and the value chains that support them? How can we help investors understand the links between sustainability and poverty, while at the same time helping them respond to the return imperatives from their boards? What data do we need to generate to help companies expand their efforts when it comes to sustainability for it to have a wider impact?
Third, is to intentionally drive FDI to foster social mobility. Governments – and therefore agencies that use public funds – are expected to play a greater role in poverty alleviation and helping households in coping with a whole set of inequities (from access to water to health, life expectancy, or income). According to the WEF, Brazil, South Africa, Hungary, China and India are the five countries “that stand to gain the most from a better social mobility score”, adding that “increasing social mobility by 10% would benefit social cohesion and boost the world’s economies by nearly 5% by 2030”. This is in addition to other intangible returns such as stability and enhanced opportunity for more people to fulfil their potential. Many more countries could benefit as well.
The task ahead is to redirect FDI from working with companies so that they invest in a certain location, to working with companies so that they invest in addressing pressing challenges through market-driven solutions that develop profitable products and services that offer BOP segments better alternatives and more options for self-improvement.
This births the possibility for co-created and innovative approaches that companies could scale internationally across the various markets they serve. Admittedly, many companies might not be interested in this segment. However, return on investment is a topic addressed in every board meeting. What if the FDI industry could better articulate the business opportunity when working with BOPs? How could we open new conversations and foster the release of new products and services that offer an attractive return on investment and at the same time respond to the call of a transformation of the FDI industry?
For this to happen FDI professionals need to rethink the way they sell their host economy as an investment destination, the type of incentives it offers and the services it provides. The work ahead is less about shouting about a ranking they topped, but about helping companies engage with the realities on the ground and co-creating solutions that matter. What if prospective investors driven by new market opportunities with BOPs, not only base their decisions on ease of doing business rankings, but also based on social mobility?
No time to waste
There is urgency; the World Bank states that climate change will drive millions into poverty by 2030, particularly in regions where the global poor are already concentrated today. This is an ideal time for practitioners, policy-makers, and the business community to reimagine how FDI can be structured for a far wider impact. Linking FDI to benefit the BOP, as many social entrepreneurs and innovative companies have already done, will attract a larger pool of foreign investors, skills and approaches, including those overlooked by current industry practices.
At a time when the FDI industry needs to reinvent itself, engaging with BOPs offers a path for the FDI sector to increase its impact. We believe that the best “direct investment” should include “direct engagement” with those who need FDI the most. There is no time to wait for this shift. BOP-focused initiatives where the private and public sectors bring their best resources and design services that create a new type of FDI value, offer a pathway to respond to the call for better FDI. Expanding the FDI sandbox offers an opportunity to bring about a powerful legacy that could actually leave no one behind. Who will be the first mover in this exciting new space?
Carolina Arriagada Peters is an international FDI consultant, author and trainer with clients across the world. She is a thought leader always looking to push the frontiers of the FDI industry. Twitter: @askcarolina
Deepa Prahalad is design strategist, author and expert on emerging markets innovation. She works with corporates and startups, mentors leading social entrepreneurs, and serves on several non-profit boards. Twitter: @deepaprahalad
This article first appeared in the October/November 2022 print edition of fDi Intelligence. View a digital edition of the magazine here.