- The world needs better IDEs.
- This requires a profound transformation of investment promotion agencies (IPAs).
- FDI has yet to master how to bridge the global divide.
As the Foreign Direct Investment (FDI) industry gathered at WAIPA’s World Investment Conference in September, a clear message resonated: the world needs better FDI, a message that requires significant transformation. investment promotion agencies (IPAs).
Professionals around the world are wondering 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 to improve the lives of millions of people and the many initiatives on green investment, sustainable IPAs or diversity are just some of the tremendous effort by many people. However, the reality of things speaks of an outstanding task. In all geographic areas, homelessness, unemployment or deprived neighborhoods without access to basic services are commonplace. They remind us that FDI has yet to master how to bridge the global divide.
The bottom of the pyramid
The reality is telling: as many as 648 million people lived on less than $2.15 a day in 2019, according to World Bank data. This group is generally referred to as “low [or base] of the pyramid”, commonly referred to as the BOP. It is clear that global aid alone cannot meet the challenge they pose, and that even rapid economic growth often coexists with inequality. Quoting CK Prahalad and his seminal book “Wealth at the Bottom of the Pyramid: Eradicating Poverty Through Profits”, we believe that “typical images of poverty obscure the fact that the very poor represent resilient entrepreneurs and conscious consumers. values. What is needed is a better approach to helping the poor, one 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 businesses that provide them with products and services are profitable.”
What if we could make those words a leitmotif of what a better IDE might look like? What if we were to give a more strategic role to FDI so that it benefits sectors of society that it has not yet reached? For this to happen, there are at least three areas to focus on.
First, consider BOPs as a market. Economists and social entrepreneurs have recognized for years that the poorer sectors of society represent a market with distinct consumption patterns. GE, Unilever and Novartis are among many global companies that have expanded their markets and innovation capabilities by engaging in BOP markets. Additionally, a significantly improved digital and payment infrastructure has made engaging with the BOP more accessible for a wide variety of investors, as proven by many money transfer, payment and microfinance services. mobile phone based.
Retail and food industry investors have also begun to cater to the needs of BOPs. However, this segment presents specific challenges such as high price sensitivity, demand for maximum utility, brand awareness and affordability. As companies adapt to compete in these segments, they often gain a cost advantage and the ability to personalize and attract talent, which directly relates to the bottom line.
Serving BOPs generally forces companies to review and/or adapt their value creation methodologies. Information asymmetry is likely to prevent multinationals offering balance of payments-oriented products and services, or wishing to develop them, from taking full advantage of this opportunity. Why do we expect businesses to find their own way? The foundations are already tracking BOP-specific data that we could use to better understand the “story” of BOP, consumer aspirations, and other key insights. Fostering balance-of-payments-focused private-public collaboration would remove the current barriers that foreign (and often local) companies catering to this market often find.
Second, poverty must be understood 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, poverty and unsustainable production and consumption patterns are the main drivers of the environment. At the same time, environmental degradation and climate change can deepen poverty [and vice versa]. Although there is no easy solution, poverty and the environment must be tackled together.
APIs are already working with foreign investors to stimulate green investments. How can we leverage companies that are already committed to carbon neutrality, so that they also integrate the fight against poverty 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 helping them meet the performance imperatives of their boards? What data do we need to generate to help companies scale up their sustainability efforts to have a broader impact?
Third, it is about intentionally inducing FDI to promote social mobility. Governments – and therefore agencies that use public funds – are expected to play a greater role in poverty reduction and help households cope with a range of inequalities (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 have the most to gain from a better social mobility score”, adding that “an increase in social mobility of 10% would benefit social cohesion and boost global economies by nearly 5% by 2030.” This is in addition to other intangible benefits such as stability and improved opportunities for a more people to reach their potential. Many other countries could also benefit.
The task at hand is to redirect FDI from working with businesses to invest in a certain location, to working with businesses to invest in solving pressing problems through market-driven solutions who develop profitable products and services that provide BOP segments with better alternatives and more options for self-improvement.
This gives the possibility of co-created and innovative approaches that companies could develop internationally in the different markets they serve. Admittedly, many companies might not be interested in this segment. However, ROI is a topic discussed at 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 launch of new products and services that offer an attractive return on investment and at the same time respond to the call for a transformation of the FDI industry?
For this to happen, FDI professionals need to rethink how they market 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’ve topped, and more about helping companies engage with the realities on the ground and co-create solutions that matter. What if potential investors, motivated by new market opportunities with BOPs, based their decisions not only on the ease of doing business, but also on social mobility?
No time to waste
It’s urgent; the World Bank says climate change will push millions of people into poverty by 2030, especially in areas where the world’s poor are already concentrated today. Now is the perfect time for practitioners, policy makers and the business community to rethink how FDI can be structured for much wider impact. Linking FDI to balance-of-payments profit, as many social entrepreneurs and innovative firms have already done, will attract more 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 the FDI sector a pathway 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 change. Balance-of-payments initiatives, where the private and public sectors bring their best design resources and services that create a new kind of FDI value, offer a pathway to answer the call for better FDI. The FDI sandbox expansion provides an opportunity to create a powerful legacy that might actually leave no one behind. Who will be the first to enter this exciting new space?
Caroline Arriagada Peters is an international FDI consultant, author and trainer with clients around the world. She is a thought leader who is always looking to push the boundaries of the FDI industry. Twitter: @askcarolina
Deepa Prahalad is a design strategist, author and innovation expert in emerging markets. She works with corporations and startups, mentors leading social entrepreneurs, and sits on several nonprofit boards. Twitter: @deepaprahalad
This article first appeared in the October/November 2022 print edition of fDi Intelligence. See a digital edition of the magazine here.