Inclusive Business in the Association of Southeast Asian Nations: ADB TA Consultant’s Report

ASEAN inclusive business agenda: Supporting MSME growth by building inclusive business value chains
Policy and Government
East Asia and Pacific
2. May 2018

Asia-Pacific: Inclusive business in the association of Southeast Asian Nations

Page count
91
Asian Development Bank (ADB)

In 2017, the Government of the Philippines chaired ASEAN, and made inclusive business (IB) one of its deliverables toward the ASEAN vision of a region that is “outward-looking, living in peace, stability, and prosperity, bonded in partnership in dynamic development, and in a community of caring societies.” This study, addressed to policymakers of ASEAN and the ASEAN Business Advisory Council, describes the markets for IB in ASEAN economies, and recommends further actions by ASEAN, the ASEAN Business Advisory Council, and ASEAN members to promote IB.

Recommendations

Inclusive business is now part of the 2016-2025 ASEAN Strategic Action Plan for Small and Medium-Sized Enterprise (SME) Development. MSME engagement in IB and linking MSMEs to established IB value chains are expected to accelerate achievement of the Plan’s five strategic goals:

  • Strategic Goal A: Promote Productivity, Technology, and Innovation. Productivity, technology, and innovation are at the heart of successful IB models, and MSMEs, with their boots on the ground, have an edge in following local trends, creating local employment, and spurring local economic activity. Government, investors, and non-government actors (i.e., incubators, universities, NGOs) should look into financing MSME and IB productivity, technology development, and innovation initiatives.
  • Strategic Goal B: Increase Access to Finance. Impact investing and blended finance are emerging private sector financing strategies in the region. Impact financing offers new and more flexible opportunities for IBs and their MSME partners to obtain funding outside of traditional sources (i.e., commercial banks). Blended finance is also helping lower IB investment risks, and crowd-in greater private investment into IB models and value chains.
  • Strategic Goal C: Enhance Market Access and Internationalization. IB prioritizes partnership-building and shared value creation across business value chains (made easier by e-commerce). IBs can be MSMEs’ gateway into national and international markets and consumers, and to producing products/services of higher value, as IBs follow international certification and sustainability systems.
  • Strategic Goal D: Enhance Policy and Regulatory Environment. Developing IB-supportive policy and regulatory environments is a major global initiative towards more inclusive economies. Greater participation of ASEAN member states in the global IB policy discussion, via the G20’s Global Platform for Inclusive Business, will open avenues for IB knowledge sharing, capacity building, and local/international cooperation.
  • Strategic Goal E: Promote Entrepreneurship and Human Capital Development. IB explores new modes of entrepreneurship and human capital development. Social enterprises, though smaller in scale and reach than IBs, are offering unique, community-based entrepreneurial and capacity building opportunities, which can be a staging point for eventual IB development.

To mainstream inclusive business in member states, the report also recommends that ASEAN should:

  • Further promote IB as part of its inclusive growth agenda.
  • Further develop and operationalize the ASEAN IB framework to provide adequate guidance on IB promotion, development, and implementation in member states.
  • Increase and improve intra and intergovernmental coordination and collaboration with development partners for IB support within ASEAN.
  • Encourage business associations to play a more active role in promoting IB.
  • To further enrich the global IB framework, also continue engaging in IB discussions with other regional cooperation bodies such as the G20 and the Asia-Pacific Economic Cooperation (APEC).

Sustainability in business has been long been measured vis-à-vis a company’s financial, operational, and commercial performance and growth. These traditional sustainability metrics have overtime been expanded and redefined to also take into account corporate impacts to other vital extrinsic capital—natural and social capital—other than economic capital. Recently, corporate sustainability strategies have further evolved to making business more inclusive, which involves venturing into un/underdeveloped markets and high risk environments, deploying more disruptive solutions to meet greater social needs, and integrating the entrepreneurial poor at the base of the pyramid (BOP) into core business value chains as producers, suppliers, distributors, retailers, and/or customers. Inclusive business (IB) builds on these new strategies.

IB models are increasingly getting attention in both the private and public sectors, and governments are seeking to adopt IB as a local and/or national development strategy and policy. In Southeast Asia, IB made a breakthrough at the ASEAN Leaders Summit in 2017, when the ASEAN economic ministers adopted an “ASEAN Inclusive Business Framework”. This effectively mainstreams IB as a socioeconomic development strategy across the 10 ASEAN member states, particularly for the development of micro, small, and medium enterprises (MSMEs). The report estimates that MSMEs make up more that 95% of all business enterprises, and generate up to 58% of local gross domestic products in the region. Linking MSMEs to larger inclusive businesses and IB value chains is foreseen as a win-win strategy for both enterprise; it will allow greater market access, open new trade and investment opportunities, and scale up social reach and impact for both MSMEs and IBs.

This report also presents an IB situationer for ASEAN:

  • ASEAN has a huge BOP population and market. Around 349 million people or 56% of the region’s total population are living on the poverty threshold, which forms a market of at least USD 220 billion. Indonesia has the largest BOP market, worth around USD 120 billion. This represents a sizeable new market opportunity for potential IBs.
  • BOP spending in ASEAN is centered on food. The report shows that food and beverages take up 58% of BOP consumption, followed by housing (8%), energy (6%), and transport (5%). Education and health care also critical needs but remain largely inaccessible due to lacking or poor public infrastructure, and lack of affordable private sector solutions.
  • IB is already practiced but still at the early stages of development. Currently, the report notes that IB models in agribusiness have the highest impact and scale, as demonstrated by new business models being rolled out by Covestro, Mars Incorporated, Nestlé, Syngenta, and Unilever, while IB models in education, housing, and health are the least developed. The report observes a general lack of IB awareness and understanding in the private sector, and companies who are already engaging in IB practice are not identifying themselves as such.
  • Impact investment in IB is increasing but currently focused on large deals, early stage capital provision, and incubation. Impact investment in IB is projected to reach USD 6.3 billion by 2025, and potentially large opportunities are expected in Indonesia, the Philippines, and Thailand. The report notes that most of the investments are coming from development finance institutions and banks, through large deals (thereby often excluding MSMEs), and incubation support with capital investments. Only a few impact investors finance established companies.
  • IB policymaking is gaining traction, as IB makes its way into public policy. Countries already have strong CSR (i.e., Indonesia, the Lao PDR, Malaysia, and Thailand) and social enterprise policies (i.e., Brunei, Thailand, and Singapore) in place, which can be further developed/ extended towards IB promotion. The measures taken by the Government of the Philippines is most advanced in the region—IB is part of 2017-2022 Philippine Development Plan, with IB tax incentives included in the 2017-2019 Investment Priorities Plan of Department of Trade and Industry. An IB accreditation scheme was also launched by the Board of Investments, and seeks eligible companies in two pilot sectors, agriculture and tourism.

ASEAN’s declaration of support for inclusive business is just the first step to stimulate private sector involvement in building a more “resilient, inclusive, people-oriented, and people-centered ASEAN”. ASEAN member states must now carry the momentum, and operationalize IB development and support in their respective countries. The report still points to a number of barriers to doing business at the BOP (i.e., high last-mile distribution costs, businesses’ unfamiliarity with BOP purchasing behaviors and living conditions, large informality and high perceived investment risk at the BOP, specific tax regulations affecting affordability and accessibility). More IB investments, complemented by long-term, strategic support in the form of technical assistance for IB value chain development, new financing schemes, and continuous IB dialogue and learning across sectors, is necessary for inclusive businesses to grow and flourish in ASEAN.