Authored by: Manuel Bueno

It still baffles me that there are not more BoP businesses making use of women's skills to enhance their economic and social bottom lines. For example, looking at the details of the many fellowship opportunities or upcoming conferences (a list of which was recently provided by Francisco Noguera), the role of women is barely touched upon, if at all. Yet the earning power of women globally is expected to reach $18 trillion by 2014 - a $5 trillion rise for current income. That is more than twice the estimated 2014 GDP of China and India combined. This is a huge lost opportunity, which I already mentioned in one of my posts some time ago and which is creating important business opportunities.

To start with, women are productive economic agents that can contribute valuable assets to the commercial efforts in any company. As members of local communities they have valuable information about target customers such as their financial constraints or unmet needs. Therefore, they may be important in helping shape the final product, pricing or retailing decisions and/or targeting a more specific segment of the local community. Additionally, women can leverage liaisons between the local communities and private companies, hence spearheading commercial efforts by raising awareness about the benefits of the product or directly offering the product to the customer. As a result, women can often be included in significant ways in commercial and distribution networks.

Moreover, women are also important as consumers and heads of households. Women are often left in care of the family and are thus responsible for the welfare of their children. They normally purchase goods which are required in the household and they usually buy goods for other family members to use. According to our publication "The Next 4 Billion" women spend 51% of the household income in goods such as in food, housing improvements and health services. Therefore, they represent a very important "entry gate" for many routinely-used products. Furthermore, since they are often in charge of child care, women play a very significant role in improving the future opportunities of their offspring by improving household health and decreasing children mortality and morbidity rates. 

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Authored by: Manuel Bueno

According to our publication “The Next 4 Billion” yearly expenditures on housing in the BoP market is about $331.8 billion, yet a sizeable portion of the world still live in a housing deficit situation in which they either lack housing or they have housing of very poor quality. For example, in Latin America, the housing market is estimated to comprise $57 billion. Nonetheless, the Inter-American Development bank estimates that around 20% of these households have to live in houses with dirt floors (Paraguay stands out in these statistics with more than 80% of the population being forced to live in such conditions).

This lack of proper housing has strong economic repercussions. Access to housing with good quality characteristics and attributes has two important consequences on the poor: immediate positive impact on health and well being, and improved medium term asset accumulation and income generation potential.  According to a recent World Bank study (Cattaneo et al., 2007) housing quality is critical for people’s well-being, health and welfare. Replacing dirt floors significantly improves the health of young children by reducing parasitic infestations in young children (in around 78%) and reducing diarrhea in (-49%) and anemia (-81%). As a result of healthier environments, permanent flooring is associated with an increase in children’s cognitive standardized tests of between 36% and 96%. Moreover, families report fewer stress (-45%), depression (-52%) and increased satisfaction with their housing (+59%), Having proper flooring is also associated with higher housing values, asset accumulation and better future income generation possibilities, since housing is typically the main asset for lower income segments.

The problem is that the unmet need for housing is often equated with the need for new housing. However, the demand for new housing in the BoP is comparatively much smaller than the demand for home improvement, because moving to a new house not only requires incurring in a significant long term debt, a mortgage, but also often uproots many of the buyers who depend on their local social networks to sustain their incomes (especially considering that a sizeable portion of BoP markets are characterized by their informality and holding multiple simultaneous jobs). In fact, many BoP investments devoted to the creation of new housing projects for the BoP market (we have commented on a few of them here, for example: 1 and 2) are actually catering to a smaller market than they think.

Low-income households spend their incomes in housing different than middle and high-income population segments. These segments usually build their houses incrementally. This means that due to the income constraints mentioned above they build and improve the households in which they live a room at a time. Such improvements are typically informal and depend on the family’s accumulated resources. Moreover, as the housing quality of every family improves so does the neighborhood as well. The crucial material for incremental housing is cement which is required to improve floors, walls and roofs. This is the unmet need of most BoP customers in the housing sector and not brand new housing. However, serving profitable housing solutions to the BoP also poses important challenges.  First, product price points need to be affordable, commensurate with lower income levels and payment options adapted to low income consumer cash constraints.  Second, the product needs to be more accessible because the current distribution and logistical networks are often designed to serve middle and upper income consumers and do not reach low income consumers.  As a result, BoP consumers have to incur in significant costs to gain access to these networks. It should be noted that most of the cement purchased by BoP customers is lost in the “last mile”, that is, after the customer has bought it and before it is used, due to misuse or bad storage.

In this case, adapting to the customer requires finding ways to finance purchases and, more importantly, educate customers so they are able to make the best use of the product they have purchased. This, in turn, will increase loyalty and encourage repeated purchases. One of the most successful (and popular) success stories in the housing market is Patrimonio Hoy. Although it currently offers a vast array of different products to its customers, its original success is credited to finding a microfinance approach to stimulate consumption while having very low default rates. A more interesting recent case are the “Mi Casa” distribution centers, based in Mexico. Apart from microfinancing options, these centers offer the products and technical support required to incrementally build housing. Engemix is an example of a more radical business model, since it delivers ready-made concrete to the customer’s door.

Finally, one of the most interesting recent housing models is the one developed by Doutores da Construção in Brazil. Doutores does not target the final customer, but the myriad informal construction workers that often support local incremental housing works through their small hardware stores. The firm offers free classes to these informal construction workers and teaches them management and building skills that improve the quality of their work. This support is a means of capturing their fidelity as future customers and developing the firm’s capillarity in the target market (for more details of the work they do, there is an interesting promotional video online).

Authored by: Manuel Bueno

These series of posts have been co-authored by Francisco Mejía. Francisco is a Principal in the Opportunities for the Majority Office at the Inter-American Development Bank (IADB), based in Washington DC. He currently leads the preparation of various transactions involving the financing of BoP projects in leading and innovative companies in Latin America and the Caribbean. Prior to joining the Bank, Francisco was the Director of the Center for Economic Development at the Universidad de los Andes in Bogotá, the leading economic think tank and research institution in Colombia, and consulted for various international organizations. The views expressed in this blog contribution do not necessarily reflect those of the IADB.

In our previous two posts we introduced the two basic approaches that are currently being touted in helping incoming firms rapidly gain scale in BoP markets: the sectorial approach (see Al Hammond's post); and the platform approach, which is the one currently being developed by the Opportunities for the Majority Office in the Interamerican Development Bank and which was introduced by Francisco Mejia's guest post. Platforms may be useful to incoming firms to help to gain scale thanks to their accessibility and information. However, depending on the type of platform these characteristics and their contribution to incoming firms may change. Moreover, their products may have different degrees of complementarity and the balance of power between different platform stakeholders may also vary.

In our second post, we went into detail about 3 platform types: conditional cash transfer programs, utilities and mobile phones. In this third and final post we will explain the platforms from mass consumer goods, construction firms and microfinance organizations and conclude these series of posts.

4. Mass consumer goods:

Mass consumer good industries such as cosmetics, garments or perishables create platforms over which they tend to have limited control. This happens because these networks often outsource a big portion of the final distribution or marketing stages to local agents which are usually in charge of offering the product to the final customer and collecting payments. As a result their capillarity strongly increases at the cost of the compromising the full control over their product. In the scaling up and effectiveness of these platforms, women, both as customers and sellers, play an essential role. As customers they represent the entry gate to the household for many products. As sellers (or "consultants" or "promoters" as they are often called) they benefit from extensive informal knowledge about the purchasing power and reliability of the target market. The trust that the community has in "one of their own" also allows these saleswomen to educate potential customers on the appropriate use of the product as well as the benefits derived from its consumption. Furthermore, they may provide useful suggestions in the process of improving the product or offering additional products and services to existing customers. In addition, the women that participate as promoters and sales people, themselves provide a largely untapped market for added value and services.

In spite of their reach and capillarity, the information collected tends to be relatively weak, because of the difficulties involved in collecting and tabulating it. This is not to say that the existing platform does not receive information about the payment or of the product, but, since these transactions tend to be much less frequent than in utility firms, they provide a far less detailed picture of the customer. On the upside, despite being difficult to collect, the "soft" information owned by the saleswomen can be potentially very valuable since it may include fundamental insights about the needs, reliability and constraints of possible customers.

Some mass consumer firms have included in their offerings the option to buy in installments, thus effectively offering microloans to their customers. Such an option offers the chance for many platforms to develop a payment history for every household and thus develop a better idea of the reliability of the customer. In this second case, the quality and detail of the information is much better, although still patchy compared with that generated in the previous platforms. In general, the best fitting firms in these cases will be able to provide expert financial services to help to overcome the financial constraints of majority markets. Alternatively, incoming firms may offer products that are complementary to the ones that are already being sold or that are geared towards the same group of people. For example, if the platform already sells female beauty products an interesting addition may be products related with basic health care. This platform is also ideal for educational purposes since it is based on face-to-face contact and depends on the mutual trust between seller and buyer.

5. Construction:

It is estimated that majority markets spend approximately US$ 330 billion per year on housing (Source: "The Next 4 Billion"). Such spending, however, is not done on new housing all at once. Instead, housing expenditures are done one a piece-meal basis with houses being in a state of permanent improvement. For example, once enough money has been collected a family may decide to use it in erecting a new bedroom or building permanent roofing. This investment behavior is a consequence of the absence of legal land ownership and the lack financing options available to low-income individuals. Therefore, what is usually called incremental housing is a pervasive phenomenon in majority markets. In this line, cement is the most important material for low-income customers thanks to it being easy to store and to buy in relatively small amounts.

In response to these unmet needs many construction firms have in the last decade developed platforms through which they may be able to access majority markets and finance construction for low-income families (Patrimonio Hoy being an oft-mentioned example). First, they have developed basic microfinance offerings thanks to which these firms attempt to smooth the cash flow of their clients. Second, these platforms try to empower women in their role of household heads. Furthermore, many construction firms have also developed their own educational programs to teach low-income customers how to make the best use of the products they purchase. Safety procedures and basic management and accounting are normally included in the syllabus. These programs may be offered for an additional surcharge or for free and it can be a very important channel to increase customer loyalty.

The economic agents belonging to these platforms are usually comprised of local hardware stores and a local sales network. Both of these agents are relatively free to offer the additional products they see fit in order to remain profitable. As a result, the construction company has less power over the platform to accept or reject certain products. Oftentimes hardware stores even offer an assortment of products from competing companies to the customer - each of which includes their own financing options and benefits.

Such a decentralized platform has its benefits since it enables the platform to have a very big reach and relatively high capillarity as well. On the other hand, the problem with decentralized platforms is that the information it may provide can be quite disorganized and hard to analyze. This weakness can be fixed if construction firms also offer financing options, because information derived from microfinance operations can be quite valuable in deciding whether the client is a good bet for future small loans, additional products or further housing improvement. Moreover, construction platforms may experience strong synergies with furniture offerings and smaller household goods, such as electrical appliances.

6. Microfinance:

The microfinance business model is sustained by three basic tenets: high volume operations, services adapted to the socioeconomic needs of majority markets, and risk management systems customized to the informal nature of the clients. As such, microfinance is often described as a hybrid between small business and retail banking, where loan appraisal techniques must be inferred from a variety of resources. Moreover, to maximize its social impact it mainly targets women as possible borrowers, since, apart from having lower default rates, their investments tend to have stronger impacts on their children. Operationally this requires efficient, decentralized and standardized operations for profitability and well-honed risk management. Microfinance institutions usually have loan officers responsible for the full loan cycle from new business promotion to analysis, monitoring and collection, since their performance bonus depends on a mix of portfolio growth and low default rates. This structure incentivizes loan officers to promote high-quality loans and enforce timely repayments. Loan officers are also normally in charge of conducting on-site visits to develop a strong relationship with the client and get a better understanding of the investment she wants to make.

Microfinance institutions have experienced a huge growth in the last years. It is estimated that they reach around 150 million clients, 100 million of which are considered to be poor. However, this growth has arrived more thanks to the number of institutions, rather than a growing reach. Microfinance as a platform is probably not as extensive as those belonging to utilities but it certainly has distinctive advantages. First, it typically reaches poorer areas where utility grids do not exist and so these and the platforms mentioned above may be complementary. Second, the platform is extremely flexible and evolves on the basis of the changing production and distribution of products. Third, it lends the support and legitimacy of a tried and tested business model that serves the poor while being financially sustainable.

The information generated in microfinance platforms is usually of good quality and includes at least payment histories, although it may also present other types of financial information depending on the financial services offered. However, these platforms tend to be quite zealous in their defense of the information they own, since it basically represents its source of competitive advantage. As a result, incoming firms who may want to associate with the platform often find it very difficult to have any control over the platform itself.

Microfinance organizations, due to the nature of their client base, are prone to developing agricultural and business services to help their borrowers invest and manage the assets they buy in the most efficient manner. Moreover, they are excellent partners to stimulate access to basic goods and services such as health and nutrition products that may benefit their customers, which are often women, or their families. Furthermore, some microfinance companies have already associated themselves with household retailers to try to offer also products at preferential prices. Those organizations that are more advanced in offering these additional services have been termed "second generation" microfinance institutions.

To conclude these series of posts, in the coming years we anticipate a growing number of incoming firms to associate themselves with existing platforms. As a result, as platforms allow more products and services to be sold through their networks and they become increasingly legitimate, we expect platforms to offer a growing share of products and services to majority markets. In effect, platforms may well end up being the key-holders for some products types in some specific regions. Finally, we would like to highlight that our platform list is not exhaustive. Although we believe we have chosen the most useful platforms for incoming businesses to gain scale, every firm has its own particular needs. Therefore, incoming firms should not restrict their choice of platforms to the ones we have taken here, but instead seek the platform that better fits their requirements. In conducting this search, management is advised to pay attention to the variables that have been examined here, namely, accessibility and type of information allowed by accessing the platform, the balance of power between platform stakeholders, and synergies between the products sharing the platform itself. By engaging in this exercise incoming firms will maximize their chances of successfully gaining scale, reaping profits and having a positive impact in as many low-income communities as possible.

Authored by: Manuel Bueno

These series of posts have been co-authored by Francisco Mejía. Francisco is a Principal in the Opportunities for the Majority Office at the Inter-American Development Bank (IADB), based in Washington DC. He currently leads the preparation of various transactions involving the financing of BoP projects in leading and innovative companies in Latin America and the Caribbean. Prior to joining the Bank, Francisco was the Director of the Center for Economic Development at the Universidad de los Andes in Bogotá, the leading economic think tank and research institution in Colombia, and consulted for various international organizations. The views expressed in this blog contribution do not necessarily reflect those of the IADB.

In our previous post we introduced the two basic approaches that are currently being touted in helping incoming firms rapidly gain scale in BoP markets: the sectorial approach which was explained in detail by Al Hammond's post some time ago; and the platform approach, which is the one currently being developed by the Opportunities for the Majority Office in the Interamerican Development Bank and which was introduced some time ago in by Francisco Mejia's guest post. Platforms have two characteristics that can be very useful in stimulating scale in BoP businesses: accessibility and information. However, depending on the type of platform these characteristics and their contribution to incoming firms may change. Moreover, their products may have different degrees of complementarity and the balance of power between different platform stakeholders may also vary.

In this post we would like to talk in more detail about different platforms and explain in more detail how their distinctive characteristics can be leveraged. Based on the variables mentioned above and its usefulness in stimulating capillarity we classify the most important platforms in 6 groups, 3 of which will be explained in this post and 3 in the next one:

1. Conditional Cash Transfer (CCT) Programs:

CCT programs are a powerful public policy weapon against poverty. They transfer money (in cash or in kind) to families in exchange for them to comply with certain conditions. These conditions normally revolve around children's education and health, such as school attendance or regular vaccinations. In Latin America, the region where these programs are most popular, it is estimated that they have benefited more than 15 million poor families and over 60 million low-income people.

As a result of their activities, most of the information that these types of platforms generate are related with descriptive poverty statistics. They also have an extremely wide reach, particularly in countries like Brazil, Mexico or Colombia, where they are especially well developed. Their capillarity is also quite high, since by definition they try to be within reach of all those low-income people who may be eligible to receive aid. On the other hand the control over the platform that incoming firms may have is often low or very low, due to the public sector's dominance, so the margin for experimenting with different products may be restricted by the stance of existing stakeholders.

The best fitting industries are in this case providers of financial services that may help recipients to better manage their subsidies or smoothen their cash flows with microinsurance, small consumer loans and saving accounts. In order to lower the transaction costs for program beneficiaries, mobile phone offerings are also likely to provide excellent synergies. Furthermore, products or services related with education, health or nutrition could also be well accommodated in these platforms.

2. Utilities:

We consider utilities as those companies offering electricity, gas and water services to BoP markets. These services are quasi- ubiquitous in many urban areas in the developing world and their adjunct platforms have massive consumer bases.  On the other hand, their capillarity and reach is much more limited in rural areas, especially those with lower population densities or further away from the cities, because of higher servicing costs.

Traditionally, utility companies have perceived their core competencies to be strictly related with deploying their strategic assets in offering energy or water services at the lowest operational cost and reducing to a minimum technical and non-technical losses. However, some utility firms have discovered that the information about individual payment histories can be a very valuable asset. Subsequently many of these companies have chosen to leverage their information with their billing and collection capabilities to start offering financial services either directly or through external economic agents.

The most common financial product so far has been small consumer loans which are approved to purchase electric appliances, furniture or kitchenware, even though inroads have recently been done in microinsurance products as well. Codensa, for example, is a renowned case in this line (for more details, Manuel wrote some time ago a small case study about it).

In this case, as in the previous one, the platform falls squarely under the control of the utility company.  Hence, incoming firms have traditionally been strongly dependent on the support of the platform owner to be able to roll out new or modified versions of previous products. As a result much of the goodwill generated by these new services has been appropriated by the utility firm. This in turn has resulted in lower default rates both in bill payment and financial products and thus generating a significant source of consumer loyalty and income for the utilities and has dramatically improved the lives of the poor while offering an entry point to an otherwise inaccessible financial system.

As the volume of provided financial services has grown so has the appetite for an increasing range of goods. Therefore the outside firms who may benefit from allying with utility platforms is by no means constrained to finance providers and may include many mass consumer goods such as household products of all kinds, health, education, nutrition and /or IT products. It therefore represents potentially one of the most flexible platforms currently available in low-income markets.

3. Mobile phones:

Currently, mobile networks cover more than 80% of the world's population and more than 4 billion people are estimated to have a mobile phone. In 2007 and 2008, it is estimated that around 1.15 to 1.2 billion mobile phones were sold worldwide, the brunt of which was eagerly taken in by developing countries and especially relatively young consumers. More importantly, thanks to the particularly flexible product architecture and the increasing computing power of the microprocessors attached, mobile phones are capable of bundling with many seemingly unrelated services related with the transmission of not only voice, but also data and services. As a result, different people have given different uses to mobile phones (for more details about mobile phone platforms we eagerly recommend David Lehr's study published in Acumen Fund's website). The bundled added service that has attracted most attention is, by far and away, mobile phone banking. In low-income communities mobile phones often offer major improvements in security, convenience and range of services to previously unbanked customers. In South Africa, for example, it is estimated that half of the bank accounts will be managed through mobile phones by 2010.

Mobile phone platforms exhibit very high degrees of capillarity. The geographical reach of these platforms depend very much on the operator, although the drive towards reaching economies of scale is spurring a move to consolidate between mobile phone companies in the search for ever-decreasing operational costs. Obviously the information generated by this growing network can be hugely valuable, especially as mobile phone standards converge and sharing of data is enabled between different serves. Depending on the variety of services offered through mobile phone networks, the accumulated information may be more or less detailed, but on the other hand the scope for a partnership may be wider. Finally, mobile phones platforms not only collect information about individual customers, but may also offer a detailed view into the social networks of their users thus giving the chance to incoming firms of catering to groups rather than to individuals.

Authored by: Manuel Bueno

These series of posts have been co-authored by Francisco Mejía. Francisco is a Principal in the Opportunities for the Majority Office at the Inter-American Development Bank (IADB), based in Washington DC. He currently leads the preparation of various transactions involving the financing of BoP projects in leading and innovative companies in Latin America and the Caribbean. Prior to joining the Bank, Francisco was the Director of the Center for Economic Development at the Universidad de los Andes in Bogotá, the leading economic think tank and research institution in Colombia, and consulted for various international organizations. The views expressed in this blog contribution do not necessarily reflect those of the IADB.

By now there is a reasonably strong consensus about the main ingredients of a successful business model in BoP markets, namely:

• Include low-income community members as productive agents in the firm and try to make use of their local knowledge, either by outsourcing part of the operations to local businesses or by hiring local population.
• Use flexible operational mechanisms to deal with patchy infrastructure.
• Decrease costs as much as possible to be able to offer lower prices, but without impairing quality (within reasonable boundaries).
• Offer products that meet the needs of the customer (versatility here tends to be quite important) and adapt to their payment constraints.
• Associate with local stakeholders such as civil organizations or NGOs to penetrate the target market and educate the population on the most efficient use of the product.

What is still in very much open to debate is how to scale up profitable business model so that their social impact is maximized. Broadly speaking there are two non-exclusive approaches:

Al Hammond in a series of posts proposes a sectorial approach. This in a nutshell involves identifying an outstanding business model for a particular sector and replicating it in different countries and businesses. However, as Al admits, finding such a business model capable of being applied everywhere is a tough nut to crack. In order for the business model to be replicated in different regions it needs to have a certain degree of ambiguity. The details would then have to be fixed depending on the local conditions, even though the success of business models in BoP markets can often depend on such minute details.

On the other hand, Francisco Mejía from the Opportunities for the Majority (OMJ) office in the Inter-American Development Bank suggested in one of our guest posts a platform approach as a means to rapidly gaining scale. In this post we would like to elaborate in more detail the basics of this approach while in the next two posts we will go into more detail about the advantages and disadvantages of specific platforms.

A platform is the public or private distribution and/or sales network that has been built to cater to low-income markets and, as a by-product of its operations, generates potentially useful information for additional market-based offerings. As such, it offers two very useful characteristics for incoming firms with a pre-defined business model wishing to gain scale rapidly: accessibility and information about BoP customers.

Accessibility is a variable that may be measured using two different parameters: capillarity and reach. Capillarity (from capillaries) refers to the density of the network in a particular area. For example, a mobile phone company may control either one or many points of contact in one neighborhood. Depending on the number of points of contact it owns, we may argue that it has more or less capillarity in that region. Reach, on the other hand, is related with the number of different regions the platform may have a presence in. As a result, a platform may have strong capillarity in one region but barely any reach beyond that particular area, or vice versa.

Information is also a crucial variable in gaining scale, because, if properly utilized, it can be leveraged by incoming firms to differentiate those clients that are trustworthy from those that are not. By having information about customer quality, incoming firms can then choose to serve only the reliable customers and often even lower the final retail price, since they do not have to cover any losses arising from the unreliable ones (for our economics-minded readers, this is the adverse selection problem).

Furthermore, since BoP customers know that information is collected about them, their quality as a customer will tend to not deteriorate after the product is sold. For example, a reliable customer may (consciously or unconsciously) take less care of her house after buying insurance, because now the losses will be borne by the firm, rather than the customer (for our economics-minded readers this is the moral hazard problem). This is because it is in the best interest of buyers to be perceived as "safe bets" also after the purchase because their transaction history (payment timeliness, credit, insurance, etc.) is being built through this behavior and thus will have a decisive impact in future transactions they may want to conduct.

However, accessibility and information quality and type will vary depending on the platform itself. Some platforms may generate high quality information, but at the cost of lower accessibility. Additionally, incoming firms should also consider whether their products are complementary to those already being sold in the platform and whether they will have any power in deciding the spreading and growth of the platform activities. In the next post we will talk about different platform types and explain in more detail what are their respective characteristics and how they can be leveraged.

Authored by: Manuel Bueno

In 1980 the Latin American and the Caribbean (LAC) economy was twice as large as that in China and India. By 2004, LAC was 20% smaller than China and India. The fast economic growth of these two countries was accompanied by a speedier integration in world markets, while LAC stayed behind. Today, China’s and India’s combined share of world exports is 50% larger than LAC’s share, while in 1990 the opposite was true. How has the rise of China and India affected LAC countries?

On the one hand China’s and India’s growth may have been pushing LAC countries out of world markets. On the other, they may also be an opportunity for LAC due to their appetite, especially in China’s case, for natural resources, and their rise as a source of financing. A recent World Bank study, “China’s and India’s challenge to Latin America” explores this very question and, as is usually the case, the results are mixed.

At the national level, findings suggest that China's and India's growth have had an overall positive impact on LAC countries. Economic growth in LAC countries has been found to be tightly correlated with that of China and India. This has partly happened thanks to the increased commodities demand in which LAC has a comparative advantage, such as minerals and metals (copper, iron ore and zinc) and other commodities like coffee. The impact of this increased demand has been uneven, positively impinging countries in the Southern Cone and the Andean region. In contrast, Central America and Mexico have been barely affected by this trend.

With regards to foreign direct investment (FDI), China and India have a very small presence in LAC. The authors nonetheless state that they have still had a positive impact in the financing of LAC regions, because their rise as exporters of capital in world markets has lowered the cost of borrowing capital for LAC countries. Additionally, China has recently become active in some Central American and Caribbean countries, such as Bahamas, Dominica, Grenada, Haiti and Honduras, where it is now offering bilateral aid. At any rate, the scope for bilateral cooperation is large and yet to be realized. The ample possibilities are exemplified by recent Chinese-Brazilian agreements on satellite development or the Chilean-Chinese agreements in mining, geosciences or forestry.

Therefore, at the aggregate level the rapid growth of China and India seems to be helping LAC countries. However, if we focus at the industry level, Chinese and Indian growth may also negatively impact specific exports. In manufacturing industries, LAC’s exports and Chinese exports tend to be relatively similar, because they both have strong labor intensive industries. This is especially true in textiles, electronic and electrical appliances, and telecommunications equipments. Along these lines, Mexico has received most of the pain here while countries more dependent on natural resources and scientific-knowledge intensive industries have done relatively well.

In comparison, the LAC services sector, in which India is a strong world player, has been barely affected, because tourism plays such a huge role in this area. LAC’s exports of services to the US are still seven times larger than exports of services by China and India combined and this state of affairs is expected to remain in the next few years.

The authors note that LAC countries face several key challenges as a consequence from Chinese and Indian growth. First, they should try to avoid their dependence on natural resource exports hindering their long-term growth. Second, LAC countries should also try to accommodate the layoffs that may occur in labor intensive industries by emphasizing the role of education and re-skilling former employees. Third, LAC countries should resist the temptation of raising tariffs for cheaper Chinese and Indian imports. Unfortunately, in the last decade LAC governments have initiated more antidumping cases against Chinese goods than the European Union or the US. Fourth, and most important for BoP readers, LAC countries should improve their natural resource management and rural development policies.

As a result from these trends it is likely that new market opportunities for BoP businesses will arise, most especially those businesses working with agriculture (eg. Microdrip or Jassar Farms), forestry (eg. Ecolog), rural areas (eg. Drishtee) or tourism (eg. Rainforest Expeditions).

Authored by: Manuel Bueno

Some months ago, I commented in one of my posts on the winning photos of CGAP’s Microfinance Photography Contest 2008. In my opinion, this contest was useful because it served as a reminder of who the final microfinance customers are: a woman drying corn, a camel owner, a farmer tending her strawberries or a young girl preparing radishes to take to market.

CGAP is now accepting entries to their 2009 contest. For those with an artistic flair their deadline is on August 14th. Good luck!

Authored by: Manuel Bueno

Microfinance in its simplest form involves extending loans to a group of borrowers (usually called self help groups) who agree to help each other by means of group savings and informal support. The typical self help group consists of 10 to 20 people who meet regularly to discuss social issues and activities and deposit their savings in a joint bank account. Once enough savings have been accumulated, group members can apply to internal loans within the group or apply for loans through a commercial bank.

Even though microfinance is estimated to have directly reached 100 million customers in 2008 (for more details see my previous post) there is still plenty of debate about whether it has a significant impact on the lives of the poor or not. There are many good reasons why it may benefit or harm the people it tries to help. In theory, microfinance self help groups are better at allocating resources because it takes advantage of  more comprehensive local information regarding local needs and lower monitoring costs, thus mitigating challenges like moral hazard and adverse selection. Therefore transferring resources to self help groups should result in local empowerment and efficiency. On the other hand, those resources devoted to the self help group may be appropriated by local elites. Additionally, if these resources are channeled through institutions parallel to local governments they may undermine rather than strengthen local capacity.

Continue reading this story...

Authored by: Manuel Bueno

Last October 2008 Stuart Hart visited Erasmus University in Rotterdam as a committee member of the PhD defense of Martin Klein from the Erasmus School of Economics at Erasmus University.

Martin has now founded ‘Business for Development’, a BoP business development company focused on stimulating founding new BoP businesses in partnership with other organizations. Unfortunately his webpage does not have much information yet, but parts of his doctoral thesis can be freely downloaded. It is indeed an important document to take into account; while summarizing what we know about starting and developing businesses at the BoP, it also develops this body of knowledge from the perspective of both BoP practitioners and academics.

Martin's thesis examines the most common postulates of what it means to work at the BoP level thanks to an extensive survey of 143 BoP firms working in 105 countries, and prods into what exactly are the challenges and opportunities that these firms encounter. In this line and among other findings, he shows that there are several issues which are constant along the lifetime of a BoP business, such as external corporate governance and challenges related to developing a strong market position. Other issues were perceived to be relevant at some points in the growth cycle of the business, but not in others. For example, the struggle to remain profitable or finding ways to keep on growing only became important concerns after some other operational milestones had been passed.

Martin also develops a management support model for developing profitable pro-poor business models by incorporating additional variables to the business model. These variables provide criteria for the development of profitable pro-poor business models and may be a factor in explaining why some firms succeed at the BoP while others fail.

Furthermore and not surprisingly, many of the challenges and opportunities found by these firms are very much context-specific. Thus a firm has to be willing to adapt as much as possible to the local conditions in order to thrive. Here, Martin makes clear that often BoP businesses are often asked to be contrasting things. For example, on the one hand, BoP businesses have to become highly specialized and embedded within the local markets, while also having to remain flexible to gain scale and exploit other local markets.

Martin here finds that robustness has a larger effect on financial performance than does flexibility. He also finds that social value creation improves financial performance whereas adopting environmentally friendly practices does not seem to have such a positive effect. As a result, he suggests that maybe additional incentives and monitoring mechanisms are needed at for BoP ventures until it pays off financially to be environmentally friendly.

In my opinion, Martin also sheds light into some interesting tensions that underlie surviving in these markets. For example, if a firm is highly specialized to the local market, then what learning is most relevant and applicable to other BoP businesses? Martin argues that this is a false dychotomy. BoP businesses have indeed much to learn from each other, not less thanks to the soft skills acquired in their management. He vouches in favor of finding ways to stimulate more connections among businesses to avoid “reinventing the wheel” and to share insights and lessons learned.

Another important tension is the clash between formal and informal economies. BoP businesses belong to the formal economy, but the local markets in which they are embedded are most often highly informal. To build the reciprocity and trust required to succeed in these markets, BoP businesses should tap into the entrepreneurship and customer knowledge that underlies informal economies. At the same time, working in the formal market facilitates cooperation and enables growth by reducing market imperfection and transaction costs. Still, finding the ideal middle ground is not an easy task.

Martin finishes off by pointing out areas of future analysis. Previous research has shown that NGOs may be particularly valuable partners for BoP businesses, but it remains unclear how exactly or in which cases they may be particularly relevant. Moreover, a full assessment on the long-term contribution of BoP initiatives to poverty alleviation is yet to be done.

Authored by: Manuel Bueno

The BoP community has come a long way since the initial publication of “Strategies for the Bottom of the Pyramid: Creating Sustainable Development” by Prahalad and Hart in 1999 which jumpstarted the BoP idea. Since then, many people have joined the movement, new businesses have been started and increasing resources have been devoted to this approach. Along the way, many of these startups have failed and an increasing amount of research has accumulated, much of it citing the lessons learned both from successes and failures and pointing out ways to fix problems that had before been deemed unsolvable.

The blossoming of this community has financially and morally empowered many entrepreneurs to take into account developing countries as a business opportunity and to discover radical innovations which are cumulatively leaving a mark in the development arena. It is very important to remark that the BoP community as a social movement has offered the chance for such radical innovations to happen and be acknowledged by both development and business experts. The BoP community has literally fertilized the ground allowing these discoveries to happen. However, to better understand the BoP community as a social movement as well as to pinpoint the tasks still pending, it may be worthy to put it in perspective with other social movements which have also created or destroyed markets.

The impact of social movements has been studied for several years by organizational theorists as a way of understanding how they may create opportunities for businesses. One of the most important scholars in this field is Hayagreeva Rao, a professor at Stanford University who some months ago published “Market Rebels”. Written in an easy style, he summarizes around a decade of work about how social movements are more often than not decisive factors in the success of particular innovations.

For instance, Rao explains how cars became part of American culture in spite of claims that “you can’t get people to sit on an explosion” mostly thanks to a powered-up social movement willing to prepare the ground for automobiles. He also takes into account other examples such as the rise of microbrewing (the US jumped from having 43 breweries in 1983 to more than 1400 in 2000), the surge of different forms of shareholder activism against big corporations or how the anti-biotechnology movement prevented German pharmaceutical companies from commercializing biotechnology products.

The findings explained in Rao’s book are relevant for us, because as a social movement, we also have our agenda: advancing and refining business-based approaches to tackling poverty problems. Rao argues that for a social movement to be successful in shaping market behavior it firstly needs to articulate a hot cause that will arouse emotion and then rely on cool mobilization that will signal the identity of the community members and sustain their commitment.

A hot cause is the starting point for a social movement. It is often, but not always, initiated by a “lightning rod” issue that mobilizes people’s passions and engenders new beliefs. Such hot causes promote change through the feelings they stir in us. These may be positive or negative and reciprocal or not. For example, we may feel proud in belonging to a social community (positive and reciprocal) and feel angry at someone else’s behavior (negative and non reciprocal). Within the BoP community such hot causes are often expressed through case studies that show that change is possible and allow people to introduce themselves to the social group. Some of these case studies have become classics such as those related with Cemex, Hindustan Lever, Casa Bahia, ITC Choupal or Aravind Eye Care Hospitals.

Cool mobilization directs the heat generated by hot causes into promoting new behaviors, creating social experiences and affirming new concepts, identities and/or commitments. The new experiences are improvisational and created by the community itself. These communities help sustain the commitment of the group and allow every individual to realize their collective identities. In this line, our website, NextBillion, is a phenomenal tool for such cool mobilization. University courses and business plan contests represent other important means for cool mobilizations in the BoP community, because they allow the participation of the audience in creating such a community of feeling.

Together, hot causes and cool mobilizations power the collective actions in social movements. In my opinion, the BoP social movement has already moved past generating hot causes and is now going through a cool mobilization to better direct all the heat generated. Such heat is now enormous and unless we all involved figure out ways of directing it, we risk losing this fabulous chance and instead seeing the enthusiasm fizzle out. Witness for instance, the enormous appetite for job openings (even for unpaid internships) within this sector. Late sociologist Charles Tilly outlines four main organizing principles to sustain social movements at the cool mobilization stage:

• Improving the sense of collective identity and the self-worth of participants.

• Creating a feeling of group unity by fostering feelings of solidarity and community.

• Involving large numbers of people to display the potency of the social movement.

• Eliciting commitment from the participants by making them actors in the movement.

These principles should guide the future activities of the BoP community in order to consolidate what has been won and to amplify the legitimacy of business approaches in solving poverty. In my previous post I proposed randomized experiments as a necessary method more akin to an increasingly mature and sophisticated community which requires better quantification of the social profits generated by BoP businesses. In addition to a renewal in our research methodology it is pivotal that all of us involved in this community find a way to direct this flame, so that the change we have started is sustained and amplified in the next years. It is now our responsibility to engage in cool mobilization techniques to keep the flame burning and get as many people as possible actively involved in the BoP social movement.