Can For-Profit Business Alleviate Extreme Poverty in Developing Countries?

Research Seminars
Academic Areas Economics and Public Policy
Professor Mukesh Eswaran, Professor, Economics, Vancouver School of Economics, The University of British Columbia, Canada
September 2, 2016 | 3:00 PM - 4:30 PM | Friday
AC 2 MLT, Level 2, Hyderabad, India
Contact: Neha Gupta,
For ISB Community
Abstract: In this project, we attempt to model the market confronting potential multinationals seeking to cater to those at the "base of the pyramid" of the income distribution. We investigate the circumstances under which for-profit firms may successfully alleviate extreme poverty in poor countries. Market penetration is enhanced when multinationals capable of performing R&D for appropriate technologies team up with local enterprises to provide specialized support for marketing and distribution. In particular, partnerships with non-governmental organizations (NGOs) dedicated to poverty alleviation rather than with local for-profit firms are shown to be most conducive to poverty alleviation. The greater the productivity increase the product or technology can bring about in buyers, the greater is the advantage of partnerships with NGOs—even when the willingness to pay is circumscribed. The mission-orientation of the NGOs provides multinationals the vehicle with which to achieve the scale required for a low margin-high volume strategy to be profitable. Furthermore, since positive pecuniary externalities increase the profitability of vastly different technologies, for-profit corporate partnerships with NGOs are seen to alleviate extreme poverty more rapidly than partnerships with local for-profit firms. The theory offers an explanation for the steep increase in corporate - NGO partnerships that is independent of corporate social responsibility arguments.