Dr Maximilian Martin
Ethiopia is now the fastest growing economy in Africa with a GDP growth rate of over ten percent in the last decade. The logical next step is to ask how Ethiopia can become a middle income country. Most of the economic growth of the country in the past decade has been driven by public investment. This ‘big push’ has achieved considerable success—but it has also risked crowding out private investment.
As the country transitions to a next generation growth model, it needs to attract quality partners in order to succeed. Leaders in Ethiopia have begun to open up key sectors, such as services and agriculture, to inclusive investment so as to locate the capital needed. The textile and garment industry is also emerging as a new source of growth. Given the cyclical nature of global commodities markets, Ethiopia is looking to diversify and will need to raise the added value on its main exports, such as coffee, gold and chat (khat), and oil seeds. Other focus areas include improving the performance of Ethiopia’s transport and logistics system, as well as finding a way to modernize and expand the industrial sector.
At a time when upgrading and raising added value become ever more important to drive long-term and inclusive growth, companies everywhere are also rethinking their role as actors of development. Next to delivering profits to their shareholders, companies are increasingly expected to have a positive impact on their stakeholders, and pay taxes in the locations where they create added value. This changes the logic of value creation. The USD 5 trillion Base of the Pyramid market serving the poor with affordable products and services, the USD 546 billion global virtuous consumer segment, multi-trillion dollar market for green growth and a rising circular economy, combined with a modernizing public sector are each mega trends creating massive investment opportunities and the possibility to achieve sustainable growth, social impact and corporate profits. These structural changes in the operating environments of business also have the potential to unlock capital for investments in emerging markets that seek a positive impact on the country alongside a financial return.
Acting on the opportunity has nonetheless proven challenging for many. Anyone who wants to be successful needs to understand what matters to their customers, the business models that work in practice, how to make distribution happen, and how to become a trusted product and service provider—at the Base of the Pyramid and elsewhere. At a time when sustainability considerations loom ever larger for global CEOs, and in the minds of consumers and regulators, many executives report that they are stuck on their climb: the path to transformation is not yet readily discernable. To help address this issue, Impact Economy—the global impact investment and strategy firm—recently released “Driving Innovation through Corporate Impact Venturing: A Primer on Business Transformation.”
Next to traditional R&D activities, corporate venture capital has helped corporations over the past fifty years to capitalize on their profound industry expertise and move from early insights into emerging trends to actual investments that end up generating the new products and services that power core business. A fresh ingredient to this formula is the pursuit of impact: unlocking joint opportunities for financial and social returns is the new way forward. With Corporate Impact Venturing, emerging market and Western companies can build on the proven channel of venture capital in order to source the innovations needed, marrying corporate venture capital with positive social and environmental outcomes.
Take, for example, Corporate Impact Venturing in the field of nutrition, which is an important issue in Ethiopia and many other countries including Bangladesh. The country’s government aims for Bangladesh to become a middle-income country by 2021 via sustainable development. This requires overcoming significant social and environmental challenges including extreme poverty, food insecurity and one of the highest malnutrition rates in the world. Active in the field of nutrition is the French food multinational Groupe Danone, which also runs the venture-capital fund “danone.communities” in order to financially and operationally supports select projects. The fund uses a combined strategy that allows for the social benefits to be directly transferred to the core business by re-investing the profits in “expanding and running the business” with criteria aimed at improving livelihoods and the environment. In Bangladesh, Grameen Danone produces affordable and fortified yoghurts. This has the potential to create greater prosperity and serve poor consumers, helping Bangladesh achieve significant development; Grameen Danone Foods Ltd. was, as a result, developed with the purpose to tackle malnutrition and serve the rural poor. Produced in a local and environmentally friendly factory (where solar energy was used to heat cleaning water), Grameen Danone yoghurts were significantly cheaper than those of the competitors, and were sold by local women who were able to generate complementary income. As with any business model, there have been tweaks: after two years of operation at the BoP, the joint venture had not managed to achieve break even, whereas Danone made a profit of more than USD 1 billion in 2008.In response, the social business closed the direct distribution channel via local women and instead started marketing the yoghurt through established retail channels located in urbanized areas, with some success.
Another project closer to home, La Laiterie du Berger in Senegal (a manufacturer and distributor of dairy products), is yet another example where Danone and Grameen are currently investing. The fund’s investments enable affordable food production and create local jobs; at the same time, they can help Danone access the next key innovations in nutrition at the Base of the Pyramid. This is important given the firm’s objective of further building its global franchise, and to compete successfully against much larger players such as Kraft Foods or Nestlé. In other industries, there are many similar examples.
Corporate Impact Venturing offers a powerful pathway to systematically engage in corporate opportunity without neglecting corporate responsibility. For Ethiopia and other emerging markets, the prospect of finding new allies and sources of capital for inclusive development has never been better. Increased demand from the poor and a growing youth population in many emerging countries, a drive toward greater total resource productivity, a bifurcating consumer market driven only partially by price, and modernizing public sectors around the world are each calling for innovations to respond to structural changes in the operating environments of business. For Ethiopia, this means assessing how its priority economic sectors can now be linked to and benefit from the next wave of business innovation.
Editor’s Note: The 4th Impact Economy Symposium & Retreat kicked off today at the shores of Lake Constance in Switzerland, and will proceed until the 15th of June. This year Ethiopia is one of the focus countries. The event annually convenes key influencers, thought leaders, and practitioners from the worlds of investment, business, government, and philanthropy in order to surface the most effective solutions, innovations, and opportunities that have surfaced in the promotion of impact. In this exclusive Addis Standard series, Impact Economy’s Dr Maximilian Martin provides a preview of content covered at the conference. Addis Standard is one of the seven global official media partners of the ongoing symposium.
Maximilian Martin, Ph.D. is the founder and global managing director of Impact Economy, an impact investment and strategy firm based in Lausanne, Switzerland, and the author of the report “Driving Innovation through Corporate Impact Venturing.”