Business For Development

A look at the role of business in development economics

Article
Economics
20 Minutes

The Path Not Taken

It has become commonplace in development circles to speak of developing countries as suffering from a wide array of pathologies, each requiring either urgent funds or a blueprint for reform. Much of it is may be judged as true, as is each individual pressing need, but the seemingly dichotomy between the developed and developing often overshadows a simpler difference : the centrality of economic growth which fuelled The Great Escape from a world we may barely recognise today.

That leaves the business development which actually brought that about acutely missing from much development theory. In turn, it removes business leaders – and business leaders’ decisions - from the development process almost entirely. But just like business leaders were at the forefront of development in the West, so are they now at the forefront of development in emerging markets.

In other words, business development – and management decisions – are not only active participants in but may in fact steer the course for the wider economy in the country they operate in – hardly surprising since 69 of the world’s largest 100 economic entities are businesses, not countries. As Michael Porter points out, the weight of business is foremost a recognition of reality. Yet, in a survey carried out by The Economist Intelligence Unit, only 22% of such businesses actually address child labour, only 23% address climate change, and only 28% address gender equality. That cloak of value neutrality may be seen as ultimately misplaced : business can achieve significant progress without actually adopting any grand goal, but by optimising minor decisions which nevertheless have significant impacts on developing countries.

In a world where, as Adam Smith famously said in The Wealth of Nations, the making of a pin requires 18 different operations, one may very well not be particularity sanguine about such matters. But in a world where a Boeing 747 requires 6,000,000 parts from across the world, global business leaders’ impact needs to be recognised as such – and, sometimes, optimised.

In Praise of Large Multinational Corporations

Now, the promised benefits of free trade and internationalizing corporations in the Third Age of Globalization may have been overstated, while initial hopes didn’t fully materialise, but there is little indication they overstated or misrepresented the benefits to the developing world from the multinationals which oversee about two thirds to four fifths of internal trade.

Businesses, in other words, are most consequential in bringing about convergence in developing countries. By extension, the decisions entrepreneurs and corporate leaders make in their approach to emerging markets should be seen not not as peripheral but a pivotal role in the path those emerging market countries take. This isn’t a matter of public relations or Sustainable Development Goals few take seriously but acknowledging unadulterated reality : business leaders have a tremedous impact on these countries.

Global Development Chains

With that comes the weight of management decisions which ripple well beyond the balance sheet. Now, one’s responsibility remains to shareholders : the business of business is profit, as Milton Friedman phrased things. Few would take a business which advocated lower profits seriously nor are rose tinted glasses necessary. But cognition of wider impacts means business leaders may sometimes optimise their activity to greater benefit for developing countries they work in.

In other words, instead of flying geese, let’s speak about global development chains.

Businesses supply chains are often as much drivers of development as is government policy, often questionable aid or UN policy. Whether those supply chains are conducive to development thus needs to be at the very least acknowledged. Sometimes, small changes can turn business into engines of progress as well as growth – just as they did in the West.

Part of that is passive and part active, being the result of management decisions. Those management decisions can sometimes be optimised without negatively affecting the bottom line.

Passively, we may speak in terms of global supply chains, primarily a function of trade itself. Multinationals’ global supply chains alone account for about one in five jobs globally. In developing countries those are often the slightly better paid jobs which do most to ripple across the economy and set the tone for economic activity elsewhere. Empirically, while the effect is heterogenous, evidence suggests business development and trade decreases overall inequality as well as some of the worst aspects of rapid development, such as child labour.

Actively, the situation becomes the remit of management. Quite simply, global supply chains do not equal global value chains. The main benefit to developing countries seems to come, conceptually, from global value chains - indeed, as the paper’s model as well as augmented models predict, supply chains may exarcebate heterogenity in worker outcomes.

In contrast, the value-add activities that the latter are associated with often mean not just jobs but highly-skilled careers that draw back former brain drain and act as spearheads of technological development. Indeed, Supply Chain 4.0 frameworks may often mean that the automation of the Fourth Industrial Revolution means these will have the highest impact long term . The allocation of these value-add activities is, in turn, a matter of management decisions - if business leaders don’t expand value-add activities, global development chains remain global supply chains.

The same framework may be applied more widely.

Passively, business leaders operating in developing countries are often faced with the need to interface with a vast informal sector. For the bottom quartile of countries by GDP, informal employment can account for as much as 40% of economic activiy. Often, as much as half of all workers are self-employed and in 9 out of 10 cases this is a micro-enterprise composing of just one person. The situation is something businesspeople may take for a fact, passively. But business leaders’ decisions in the situation aren’t passive, but active. The business informality often translates directly into corruption, small and large. It is an active decision to accept that, and often only multinationals have the financial weight to say no : if business leaders don’t, global development chains remain global supply chains.

It also translates into labour practices with suppliers which my not correspond to international norms. It would be highly unfair to always hold a multinational responsible for its suppliers’ business practices in business environments where the government itself looks the other way. Nevertheless, it is in fact an active decision to accept suppliers on their word that they meet a minimum threshold of international labour regulations - if business leaders do, global development chains remain global supply chains.

Overall, multinational corporations which may very well advocate for gender equality in home countries tend to skew the issue somewhat in developing countries. Reasons may be complex and, econometrically speaking, the variable with the greatest explanatory power seems to be property rights in the host country. Nevertheless, polices which aim to align wages, all other factors considered, would advance gender equality to a greater extent than any socially-aimed policies without the necessity of extra costs - if business leaders choose to, global supply chains become global development chains.

Conclusions

Business and the growth it brings is not an aspect of reaching development goals but very much its central driving force.

Business leaders who oversee almost four fifths of international trade by some estimates have at their disposal difficult but simple choices to turn their companies’ global supply chains into avenues not just of growth but of development. Turning global supply chains into global development chains allows host developing countries to converge with the West very much in the same manner developed countries themselves reached the same position, with business leaders as active participants at the forefront of change.