Poverty reduction for profit? A critical examination of business opportunities at the bottom of the

Wednesday, January 16, 2008

Authors: J. L. Warnholz
Publisher: Queen Elizabeth House Library, University of Oxford, 2007.

The author examines the idea that selling consumer goods to poor people at the bottom of the economic pyramid (BoP) generates profits for large businesses and eliminates poverty at the same time. He admits that big businesses have a central role in shaping future markets and generating employment. The entry of multinationals in the BoP sector would also reduce prices, raise real income and reduce the poverty penalty, i.e. higher prices paid by the poor due to their lack of choice.

However, the author points to some difficulties in the analysis of those effects:

* the poverty penalty is linked to the fact that poor people buy smaller quantities. This reduces the expected benefits from certain marketing techniques such as single sachets

* replacing long-established goods and practices by newly introduced consumer brands may be hazardous as the poor often lack proper information

* investment through multinationals might have a positive multiplier effect and increase demand for goods and services to the benefit of domestic firms. However, the author argues that markets are generally not undercover. Therefore, entry by multinationals will hurt small businesses and threaten local jobs

The effect of big businesses’ entry in BoP markets depends on the size of the market and the likelihood of profit. The author doubts that positive effects will prevail as:

* analysis using household surveys shows a BoP market size of less than 5% of previous estimates. In addition, big corporations will not find the basic needs market viable

* customers with incomes between $5-8 per day are already relatively well catered for by big businesses, while the poorest are likely to remain underserved

* reductions in firms’ cost structures are not likely to bridge the gap between the poor’s monthly income and the prices of typical consumer products

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Source: Eldis (link opens in a new window)