How To Create An Enabling Environment For Inclusive Business?

in sectors that may allow only limited privatesector participation in the first place (e.g.energy or health). Work at sector-level orwith individual businesses will often berequired to identify such constraints. Anotherexample is the need for specific legislationthat allows inclusive business to access newforms of finance (e.g. impact investment) orto act as providers of finance to the poor(e.g. mobile and agent banking regulations).2. Common policy prescriptions include sectorwide de-regulation and removal of inhibitory laws,as well as new rules and regulations. How maythese be prioritised or sequenced for inclusivebusiness development? Experience suggests thatsuch priorities are highly specific to context, thestructure of target sectors and the nature orstage of the inclusive business model. At themacro level, an initial step is to improveoverarching institutional frameworks for privateinvestment and innovation with elements of bothliberalisation and new regulation (e.g. openingsectors to foreign investment and issuingsupporting legislation; developing competitionpolicy frameworks). Allowing pioneer businessesto enter specific sectors with inclusive growthpotential (e.g. agriculture, health, electricity) veryfrequently requires prioritising de-regulation ofgovernment-controlled systems or removal ofother overly stringent regulations stifling marketentry. The growth and sustainability of inclusivemarket entrants then often requires newregulatory initiatives – to protect consumers orto ensure fair prices, for instance. While enablinginclusive business in least developed countries islikely to require work at all levels at the sametime, programmes in other developingeconomies may be able to focus more on sectorand business-specific reforms for inclusivebusiness development and growth.Overall regulation is multi-dimensional andcomplex and will need to change over time. Assuch, there are few regulatory choices thatalways work. For example, governments mayneed to restrict competition temporarily andwhere necessary to help innovative businessesre-coup their upfront investment. Similarly,trademark protection can stifle or encourageinclusive business, depending on the context andlevel of development.3. In the context of new regulatory frameworks,several inclusive business advocates argue infavour of creating special legal forms incorporate law for business or voluntary‘accreditation’ systems. Are these measuresan effective way to promote inclusivebusiness? Evidence is still lacking on theeffectiveness of this policy tool and viewsvary on whether special statutory forms canmake it any easier to defend inclusivebusiness activities internally or toshareholders; or whether they make it easierto attract government, donor or investorsupport, compared to alternative policyoptions. A separate DCED briefing note oncorporate structures and governance andhow they affect social impact explores thisquestion in more detail.B. Wider government policies and strategiesWhile regulatory reform appears to have a centralrole for inclusive business development, variousexamplesdemonstratetheneedofcomplementary measures. More generally, manycommunities of practice in PSD would argue thatregulatory reform is necessary but not sufficientto achieve inclusive growth. The inclusivebusiness literature is rich in references toindustry- or firm-specific government measuressuch as subsidies, tax waivers or preferentialpublic procurement.4. The question of the appropriate level and typeof selective government interventions is howeverone of the most hotly debated ones in PSD. Inparticular, there is potential for tensions betweeninterventionist approaches and typical business

environment reforms, which are competitivelyneutral. Many consider targeted support tosectors and business as essential to development,but for others it is prone to government failureand mismanagement. In practice, experienceshows that badly targeted or managedgovernment subsidies can act as a barrier to longterm inclusive growth, while some well-designedand -monitored incentives to productive sectorsor business can be highly effective policy tools.A key implication is that inclusive businessprogrammes can learn from research on the risksand opportunities of industrial strategy, but so farinteraction between these communities has beenlimited. In particular, in line with DCED guidanceon this issue, strategic or ‘horizontal’ industrialstrategy and business environment reform can becompatible and mutually reinforcing. Lessonsfrom strategic industrial policy include theimportance of a clear economic rationale for anysubsidies, soliciting policy feedback throughpublic-private dialogue, making support timebound and dependent on results, and favouringsub-sectoral activities over individual firms. Adetailed list of suitable types of support isincluded in the main text.5. Among interventionist strategies, traditionalapproaches to industrial strategy have focused onallocating and managing incentives based on theeconomic performance of firms (e.g. productivityor export growth). In many emerging andindustrialised economies, these approaches havebeen an effective means to lift people out ofpoverty, in particular by creating directemployment opportunities for the poor. Some inthe inclusive business community now suggest adifferent approach to industrial strategy wherebygovernment incentives would be awarded andmanaged primarily based on social impact. Oneexample of an initiative to achieve this is theinclusive business accreditation system in thePhilippines.Based on experience, should inclusive growthprogrammes focus on the economic performanceor social impact of businesses as the maincriterion for support? While it is unclear whetherstrategies prioritising social impact would replaceor simply complement other industrial strategies,it is a legitimate question how governments candeploy resources in the most strategic way forpoverty reduction. Some researchers suggestthat using social impact as the main criterion fortargeted incentives could actually reduceaggregate productivity and thus undermineinclusive growth prospects. There are howeverprogramming options that could avoid suchtrades-off and meet both social and economicobjectives in a scalable way. These include: Supporting governments in nurturing sectorswith high productive growth potential whichare also labour-intensive, and managingsupport based on economic performance; Promoting decent working conditions andlabour standards in these sectors; supporting sectoral regulatory reform tomake it easier for businesses to invest ncingpracticesinagriculture; and complementing existing industrial strategieswith sectoral support programmes toincrease backward linkages between thebeneficiaries of state incentives and localsuppliers or intermediaries that involve thepoor in their work.6. Specific interventionist strategies which receivea fair amount of attention in the inclusive businessliterature are mandatory rules and preferentialcontracting criteria on inclusiveness. Can these beconsidered as an effective means to promote propoor growth? Evidence suggests that mandatoryinclusion rules, for example local sourcingrequirements for supermarkets, should beavoided as they tend to work against privateincentives, raise the cost of doing business anddon’t yield the desired effects. Alternativeapproaches, including market-based solutions

(e.g. access to information about small suppliers),are likely to yield better results. While the role ofpreferential public procurement for inclusivebusiness is unclear, there is some evidence on apositive impact of government contracts on firmgrowth (including outside government) and newhires from the informal sector.C. Cross-cutting issues7. Based on the options for business environmentreform identified, what role can different types ofPSD programmes play in promoting favourableconditions for inclusive business? It seems thatdifferentprogrammeshavedifferentcomparative advantages in creating an enablingenvironment for inclusive business.Donor-funded advisory and advocacy programmesengaging directly with government are particularlysuitable to address cross-sectoral or otherfundamental constraints to private investment,including inclusive business. Within suchprogrammes, it is often possible to followestablished good practices and experienceselsewhere to help design new regulatory andpolicy frameworks for partner governments. Inaddition, successful examples industry-ledadvocacy alliances suggest that these are a usefuloption to address widely known inclusive growthconstraints at sectoral level.Approaches starting at the level of markets andsectors, such as market systems developmentprogrammes, are particularly suited to addresspolicy and regulatory constraints for inclusivebusiness models that are not usually covered innational reform packages, or that are outside theirscope due to the innovative approach of thebusiness. There are two important reasons forthis. First, the bottom-up approach of marketdevelopment programmes, which starts with athorough analysis of sectoral constraints toinclusive growth, allows such programmes tospot sector- and innovation-specific businessenvironmentbarriers.Second,theseprogrammes typically pursue a variety ofinterventions at the same time (e.g. supportingregulatory reform to enable direct sales fromfertiliser companies to farmers, but alsosupporting companies to train farmers in how tothe use of fertiliser); many examples illustratethat this multi-level approach is critical forinclusive business development.While business environment reform is nottypically within their mandate, some partnershipfunds and facilities have grasped opportunities tohelp individual partner businesses engage at thepolicy level in order to address binding constraintsto their business model. Partnership funds andfacilities are more likely to play such a role if theyhave a strong focus on innovation and if theyhave in-country staff to facilitate such efforts. Inthese cases, such programmes could play a moreprominent role in flagging issues and facilitatingreforms which ware not on the radar of otherdonor-funded initiatives. Where staff capacity istoo limited, partnership facilities could becomemore strategic about collaborations with otherPSD programmes to address businessenvironment reform needs.Regardless of the approach chosen, one usefultransferable lesson from business environmentprogrammes is the importance of analysing andnavigating political economy factors that influencereform; programmes that ignore such factorshave often failed. Yet, political economy issueshave not received much attention in the inclusivebusiness community so far. In practice, there canbe strong disincentives among both governmentand inclusive business to engage in certainreform efforts – for instance if they imply awithdrawal from subsidies from incumbententerprises (state-owned or private) orencourage market entry of competitors.Incorporating existing advice on politicaleconomy analysis and reform management, bythe DCED and others, into inclusive businessprogrammes could therefore be instrumental inanticipating such constraints, generating reform

buy-in or informing a change of partners in thereform process.Overall, this paper shows that the enablingenvironment for inclusive business is a complextopic that cannot easily be addressed based ongeneric guidance and checklists. While many regulatory reforms andgovernment policies to stimulate privateinvestment are likely to benefit inclusivebusiness as well, the market entry and scalingup of innovative inclusive business modelswill often require tailor-made governmentresponses, based on an assessment of thetarget sector and the needs of individualbusinesses. Improved exchange of lessons learntbetween the inclusive business communityand other groups such as businessenvironment reform, market systems orindustrial policy practitioners, could informthe choice of the most effective governmentresponses.The reform and policy options identified in thispaper, as well as suggestions of further researchare included in a summary table in Annex 1.Next stepsAs part of its mandate to learn about the mosteffective ways of promoting economicopportunities for the poor, the DCED is keen tofurther advance practical knowledge exchange onthe key questions identified in this paper. As apossible way forward, the DCED will exploremember interest in organising a debate event in2017 with donors, researchers and practitioners.

IntroductionThe potential role of inclusive business as a‘driving force for inclusion and sustainability andto contribute to the effective implementation ofthe Sustainable Development Goals’1 is now amajor focus of attention of donor anddevelopment agencies. As pointed out by the G20Development Working Group on InclusiveBusiness, donor governments can play a criticalcatalysing role by “enabling inclusive businessthrough [appropriate] policies, approaches andgood practices”2 – and there is a strong drive tofind out what these practices should and shouldnot consist of. Within the Donor Committee forEnterprise Development (DCED),3 the BusinessEnvironment Working Group is particularlyinterested in learning how a country’s businessenvironment can be improved in order to allowinclusive businesses to start up and grow.What is already known – based on feedback frominclusive businesses themselves – is that theenabling environment can critically influence theirengagement with low-income markets. In 2012,Accenture surveyed 56 Australian companiesworking to alleviate poverty overseas throughcommercial approaches; 43% named effectiveregulation as a crucial factor in their success.4 CitiFoundation (2014) surveyed 40 large companiesactive in 8 regions across the world and foundthat “a complicated regulatory or policyenvironment” is one of the most frequently citedbarriers to adopting inclusive business models.51G20 Inclusive Business Framework (2015), p.20.Ibid.3 The DCED is the forum for 22 bilateral donors, UN agenciesand one private foundation for learning from experienceabout what works and what doesn’t in creating sustainableeconomic opportunities at scale for the poor through theprivate sector. Its website at www.EnterpriseDevelopment.org is also a leading source of knowledge onprivate sector development and engagement.4 Accenture (2012): Business in Development Study.5 Citi Foundation et al. (2014): Growth for Good or Good forGrowth? How Sustainable and Inclusive Activities areChanging Business and Why Companies Aren’t ChangingEnough.2More specifically, Koh et al. (2014), who surveyed37 businesses serving the poor in Asia, Africa andLatin America, found that at least half of themfelt constrained by the following three businessenvironment issues: Inhibitory laws, regulations and procedures(65%); absent/ ineffective standards (63%); inhibitory taxes and subsidies (49 %).6What is less known is: In what way, if at all, dothese constraints differ from those faced by otherbusinesses in developing countries? Answeringthis question is a core interest of many agenciesworking in private sector development (PSD):While a growing amount of research is comingout on this issue7, there are still conceptual andpractical challenges in choosing policyinstruments that specifically help to create anenabling environment for inclusive business. Whyis this so?For a start, there seem to be a variety of viewswithin the inclusive business literature on whatcounts as an inclusive business or what exactly thebusiness environment consists of. This makes itdifficult to extract consistent and systematiclessons on effective approaches.Another limitation is that practical examples ofbusiness environment reform for inclusivebusiness are quite dispersed and often anecdotal.Part of the reason for is that many flagshipprogrammes on inclusive business typically don’thave an explicit or strong focus on businessenvironment reform. Instead, well knowninclusive business initiatives focus on ‘soft’ incentives for individual inclusivebusinesses such as peer learning, networkingand high-visibility recognition (e.g. G206Koh et al. (2014): Beyond the Pioneer. Getting InclusiveIndustries to Scale.7 Notably by BMZ/ GIZ, UNDP, the G20 DevelopmentWorking Group, IFC, Endeva, and The Practitioner Hub forInclusive Business, among other organisations.

Challenge on Inclusive Business Innovation,Business Call to Action);technical advice to inclusive business models,either as directly as part of application-basedfacilities or value chain developmentprogrammes, or through a service offeringlinkages with advisory service providers (e.g.Business Innovation Facility pilot and theBusiness Innovation Facility; UNDP InclusiveMarket Development initiatives; InclusiveBusiness Accelerator);access to finance for inclusive business,either through direct support or by linking upbusinesses with suitable investors (e.g. IFCInclusive Business Bonds, Inclusive BusinessAccelerator); and/orglobal or national-level advocacy, dialogue orknowledge sharing about the value ofinclusive business in general (e.g. UNDPGrowing Inclusive Markets Initiative andAfrican Facility for Inclusive Markets).As a result, it has been difficult so far to drawsystematic evidence-based lessons from theseprogrammes on how to promote businessenvironment reform for inclusive business.1. Framing the topic for PSD practitioners: Basedon a review of existing definitions, the firstsection will propose concepts of inclusivebusiness and the business environment thatare practical and relevant for programmespromoting economic opportunities for thepoor through the private sector.2. Providing an accessible synthesis ofexperiences,debatesandpracticalimplications for programming: In an effort tolink different strands of the inclusive businessliterature with different communities ofpractice in PSD, the main part of the paperwill then explore areas of consensus anddebates on what an appropriate businessenvironment for inclusive business is andhow it can be achieved in practice. In doingso, the section will summarise and signpostacademic evidence and actual experiences ofinclusive businesses and programmes thatsupport them (including those that are notexplicitly labelled as ‘Inclusi

Defining inclusive business and the business enabling environment for private sector development practitioners 1.1. Inclusive Business 1.2. Functional areas of business environment reform and wider government strategies 1.3. A practical framework of the enabling environment for inclusive business 2.