Who profits from inclusive business models?

Inclusive Economy,Inclusive Politics13 Apr 2022Greetje Schouten, Marijn Faling

Inclusive business models are increasingly called upon as a solution to the multiplex challenges of poverty and inequality while at the same time providing companies opportunities for profitability. However, a review of the literature shows that the development impact of inclusive business models is often uncertain and that it is important both for inclusive business partners and donors to track this impact carefully to ensure the benefit of inclusive business for low-income communities.

Against a backdrop of challenges like poverty and inequality, the need for societal responsibility of businesses is repeatedly recognized and called upon. As a result, businesses engage in various collaborations with civil society, government, and knowledge institutes through inclusive business models. Key to this approach is the integration of low-income communities into value chains on a commercially viable basis as suppliers, retailers, distributors and/or customers. Inclusive business models thus combine development impact and business profitability by improving the wellbeing of low-income communities, while simultaneously providing businesses with access to diversified supply sources or new consumer markets. 

Yet, the popularity of this type of collaboration is based on its assumed impact rather than on evidence. Whether, how, and under what conditions inclusive business models contribute to development is still under-researched. Our review of the academic literature shows that in many cases it is not clear whether collaborative inclusive business models actually lead to development impact for low-income communities. In fact, models that are not carefully designed and implemented may even pose risks to those communities, including being locked-in or exploited by the very inclusive business models that are originally intended to support them.

Three reasons why the impact of inclusive business models is uncertain

A systematic review of the literature shows three key reasons why there is still little insight into the development impacts of partnerships for inclusive business models. 

First, development impact is often researched and understood in economic terms. This reduces the impact of development interventions on monetary indicators like increased income. However, making money is not enough to guarantee a satisfying life. As such, assessing income leads to an incomplete picture. Additional factors such as capabilities, social cohesion and self-respect may be equally relevant in determining well-being. 

Second, discussions around impact often conflate the reach of intervention with its developmental outcomes. For instance, one of the articles describes the impact of a partnership between Unilever, a multinational business in consumer goods and Bopinc, a non-profit organization that works on stimulating entrepreneurship in low- and middle-income countries. Their inclusive business model is aimed at enhancing the distribution of food and hygiene products to low-income consumers in Nigeria. In the article, the authors refer to impact as the number of households that bought Unilever’s products. However, the fact that someone buys a product does not automatically guarantee meaningful inclusion or well-being. A lot depends on factors like the type of products sold, whether they meet the households’ needs, which household members use the products, and whether the products substitute certain other products already available in the market. 

Third, development impact frequently remains undefined. Instead, there seems to be a commonly-held assumption that simply because inclusive business models include low-income communities in value chains, development impact is achieved. 

Three risks for low-income communities

When reviewing the few papers that do unpack the development impact of inclusive business models, it becomes clear that the inclusion of low-income communities does not always automatically lead to their development. It may even pose risks to these communities. 

First, inclusive business models may create ‘lock-ins’ for low-income communities. Powerful players such as multinationals prevent local entrepreneurs from getting better-paid positions with better working conditions. This means that although low-income communities are included in the value chain, they are stuck in low-paid jobs, without clear prospects of advancement. 

Second, low-income communities may be included in partnerships solely to provide businesses with information of and access to the local context. Putting the interests of businesses first can lead to a situation where the benefits of the inclusive business model accrue predominantly to the business instead of the community. As such, businesses may profit from communities’ knowledge of and network in low-income communities, whereas communities hardly benefit from the resources and expertise of the business partners. 

Third, preventing low-income communities from building their skill-set also means that they are easily replaceable. Businesses may go ‘shopping’ for other communities to include in their operations. Inclusion as such becomes temporary and insecure. A telling example is UNDP’s partnership in Kenya with local processing firms and small mango producers, with the aim to support sustainable wealth creation for mango producers in the poorest districts of Kenya. When the partnership realized that the geographical distance between small producers in the poorest districts and the processing factory led to higher (transportation) costs, they selected a different group of producers, while leaving the originally intended beneficiaries behind. New producers were predominantly selected on production volumes and transportation costs instead of their development needs. 

Tracking development impact

The literature review shows that there is no consensus on the development impact of inclusive business models. If not designed and implemented carefully, inclusive business models may actually pose risks to the very communities they are set out to support. This situation emphasizes the urgency to carefully monitor the development impact of inclusive business models.

The complexity of the markets in which inclusive business models usually operate, combined with the challenging dynamics involved in partnering processes means a careful and sensitive monitoring approach is needed. Evaluations that assess a theory of change (so-called theory-based evaluations) allow monitoring change at every stage of project implementation. This helps to understand whether, how and why inclusive business models realize or fail to realize development impact. This is not only relevant for inclusive businesses, but maybe even more so for the donors who are funding and supporting these initiatives to foster development impact. This helps to make sure that development funds do not only result in profit for business partners but first and foremost support the well-being and meaningful inclusion of low-income communities.