[Comment] Multinational Corporations: A Key to Global Poverty Reduction – Part II

From Yale Global

George C. Lodge
Craig Wilson

Business – the creation of profitable enterprise – is essential to global poverty reduction. Multinational corporations reduce poverty by connecting local business with world markets and bringing access to credit and technology. As efficient engines of change, MNCs also alter the conditions that create poverty. Yet MNCs are absent from some of the poorest regions in the world. The risks of investment are too high. So, the potential benefits of MNCs are not reaching the world’s neediest places. There is a gap between need and investment. The challenge is to close that gap: to facilitate investment by MNCs in poor regions by minimizing risk, and by making the investment profitable and thus sustainable. To address this challenge, we propose a new institution, the World Development Corporation (WDC).

Reducing global poverty has become a top priority for world leaders in recent years, and a plethora of international agencies aim to help the poor: civil society organizations or NGOs, the United Nations and its specialized agencies, the World Bank and others. Yet overall, the efforts to reduce poverty have been disappointing.

Leaders of NGOs and development institutions have begun to realize that there is no way that they can sustainably reduce global poverty without the active involvement of MNCs. In the past, attempts at collaboration encountered strong resistance. That resistance, while diminishing, lingers today and rests on two pillars, one ideological and one structural.

The ideological problem is exemplified by the efforts of the UN Development Programme (UNDP) to collaborate with big business. In July 1998, eleven MNCs had agreed to participate in planning for a Global Sustainable Development Facility. The fierce opposition of NGOs, however, forced the UNDP to abort the project later that same year. The NGOs feared that the companies would “contaminate” the UNDP.

Another disconnect between the business of development and the world’s MNCs is the absence of any meaningful participation by the MNCs in the preparation of World Bank/International Monetary Fund Poverty Reduction Strategy Papers. These papers, which have had a most positive effect on development work, are drafted with and by client governments. But curiously the major companies that will actually drive poverty reduction are not at the table. Presumably the supposition is that government and business are and should be entirely separate, and that business is not a central ingredient in the poverty-reducing recipe.

The structural problem is that there is no institution with the capability and responsibility to design a coherent business-led approach to poverty reduction in a particular country and to connect it to the essential players: required MNCs, interested NGOs, local business partners, the local government, and multinational development agencies such as the World Bank and the UN.

Some progress has been made to resolve these problems. The UNDP, acting under a new initiative called Growing Sustainable Business, works with Shell and other companies to establish solar-powered irrigation systems in Ethiopia, and with Ericsson, ABB and other companies to bring electrification and telecommunications to Tanzania. NGOs, together with local business and government, are partners in these projects.

A particularly promising venture is the Investment Climate Facility for Africa, launched in November 2005 by a group of companies and development partners including Royal Dutch Shell, Anglo American, and the UK’s Department for International Development. Working closely with a number of other local companies, NGOs and African governments, this facility, which is still under development, is to be owned and directed by the private sector. Its goal is to increase business investment in Africa through policy improvements in the investment climate.

While this work in the policy field is crucial, much more needs to be done to harness the capabilities of global corporations to reduce poverty. A WDC is necessary. The commercially-oriented investment-making corporation could be established under the auspices of the UN, owned and managed by a Board composed of 12 or so MNCs which have had long and respected experience in developing countries, companies like Nestlé, Unilever, Shell, BP, Ericsson, ABB, Tata Industries, and Cemex. These companies would be called the partners and become the WDC shareholders. They would provide the initial funding, although funds could also come from OECD governments and development agencies. Representatives of the UN Secretary-General and the NGO community would also be on the board. An advisory committee drawn from developing countries, civil society organizations, businesses, academe, and development agencies would complement the board. The board would appoint a small staff composed of experts in development representing a broad range of countries.

The WDC would proceed experimentally, focusing on those countries or regions that have received little or no investment, those that have been left behind by the processes of globalization. In consultation with local governmental, business and community leaders, the WDC would identify and design project possibilities for the consideration of the WDC partners and affiliates who may join with them. After project selection, WDC staff would assist in finding local partners, and coordinate relations among the participating companies as well as with development agencies. Projects must be commercially sustainable and eventually profitable for the participating companies. In this way the WDC could close the gap between the intentions of international development agencies and the impoverished who wait for help.

The WDC would encourage companies to work together and attack poverty on a broad front, bringing to bear their capabilities and resources. Nestlé, for example, might be accompanied in its dairy operations by companies providing electrification, telecommunications and micro-credit. Likewise, it would be rewarding for both the poor and the company if Globeleq, a subsidiary of the UK’s Commonwealth Development Corporation that builds electric generating plants in developing countries, were to partner with companies that handle the distribution and uses of electricity. The WDC would shape and manage these kinds of partnerships.

The WDC would also coordinate assistance from local and foreign development partners to assist with projects. Likewise it would call on the services of NGOs, who after all are becoming the conscience of the world, to ensure that the project was fulfilling its objective of poverty reduction. And the WDC would also make use of UN resources whose stamp of approval would provide legitimacy.

We believe that MNC executives will welcome the WDC. It would provide an efficient way for them to do what they say they want to do at countless meetings and conferences: serve community needs, not as philanthropy but as a central component of their corporate strategy. In doing so, they will invigorate corporate legitimacy.

The WDC would facilitate critical partnerships between and among corporations, NGOs, governments and international agencies in a way that enhances the effectiveness of all partners. It would help open new markets for corporate goods and services, and offer corporate employees a means to personal fulfillment by involving them in contributing to the welfare of millions. Finally, it would contribute to the social and political stability of developing countries, which is beneficial to investors. In short, WDC projects would serve the interests not only of the poor but also – in the long run – of corporate shareholders.

MNCs have been the lightning rod of anti-globalization critics –sometimes with justification. At the same time, they are the only institutions that have the resources and competence required to reduce poverty sustainably in those countries that globalization has left behind. But they cannot succeed alone. Not only must they cooperate with one another, but they also must collaborate with other development agencies and organizations so that their efforts can legitimately benefit from public and governmental support.

George C. Lodge is the Jaime and Josefina Chua Tiampo Professor of Business Administration Emeritus at Harvard Business School. In 1958, President Dwight D. Eisenhower named him Assistant Secretary of Labor for International Affairs, a position to which President John F. Kennedy reappointed him several years later. His books include “Managing Globalization in the Age of Interdependence, the New American Ideology” and “The American Disease.” Craig Wilson is an economist with the International Finance Corporation. He is currently based in Bangladesh where he manages a program aimed at improving the investment climates in South Asia. The authors develop these thoughts further in a book to be published in March 2006 by Princeton University Press entitled “A Corporate Solution to Global Poverty: How Multinationals Can Help the Poor and Invigorate Their Own Legitimacy.”