NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Editor’s note: The Erb Institute at the University of Michigan is a partnership between the School of Natural Resources and Environment and the Ross School of Business. The institute is committed to creating a socially and environmentally sustainable society through the power of business. In coordination with MANAUS Consulting, the institute is publishing a long-term series, which NextBillion is cross-posting with permission. Additional articles in the series are listed below.

In this article, we open a parenthesis in our seven-post series about the positive impacts of BoP strategies to take a look at cases where profits trump development goals.

So far we have argued that offering products and services in BoP markets not only provides profits for companies, but also benefits BoP consumers socially and economically. Here we take a closer look at why companies also have the obligation to promote social and economic development.

Ideally, profits and development intersect in a way that creates shared value. But this is not always the case. When profits remain the main driver for companies, the services and products provided may have limited or no economic and/or social benefit for the community.

This does not mean that a business strategy that is solely focused on profits is always unethical or bad. But it is also not the case that all BoP business strategies promote social and economic development. There are many examples of companies entering BoP markets that leave communities worse off or, at best, do not benefit consumers.

In countries where there are few or poorly enforced regulations against misleading advertising, businesses can exacerbate already prevalent social challenges within BoP communities, such as alcohol abuse. Companies often provide false information to increase sales.

Examples abound. In Malaysia, consumers have been told that Diageo-produced Guinness Stout can improve virility. Cheap, small bottles of alcohol called samsu are also marketed as being “good for health, helping to cure rheumatism, body aches, low blood pressure, and indigestion.” These samsu are packaged individually and offered for as little as $0.40, making them extremely appealing to low-income consumers. DOM Benedictine also promotes its liqueur as having health and medicinal benefits.

Nestle has faced backlash for offering sugary products to low-income consumers. Milo, a Nestle brand for chocolate milk energy drinks and chocolate cereals, has been criticized for its marketing techniques as well as for the lack of nutritional value of its products. The chocolate milk is targeted specifically at African primary schoolchildren and while children are eager consumers of these sugary products, these products contribute to a number of health issues including obesity and Type 2 diabetes. BoP consumers are often unaware of the direct connections between the products and these negative health outcomes. It’s worth mentioning that Nestle has also developed products that do offer health benefits, such as NIDO Essentia, a milk product developed to combat micronutrient deficiencies in Africa.

Many argue that despite the negative impacts some products and services may have, buyers have the right to choose freely and that organizations, governments and companies that decide on behalf of consumers are paternalistic. We see their point and it is true that consumers in developed countries also make choices that do not promote their well-being in the long run (when was the last time you went to the gym and when did you last eat french fries?).

Still, research from the University of Minnesota, Princeton and Harvard has shown that the poor may deplete their willpower more quickly than their richer counterparts, impacting their ability to make sound financial decisions. In 2013, Science published a study that claimed that poverty hinders an individual’s cognitive abilities and negatively impacts their decisions. The report noted that poverty and financial stress can be equivalent to losing 13 IQ points. Poverty’s impact on decisions points to a cyclical aspect of poverty that is often hard to escape.

Given the lack of consumer protection and poverty experienced in many countries, do companies have a moral responsibility to offer beneficial products and market them honestly?

It is my opinion that the private sector does have an obligation to contribute to economic and social development in poverty-ridden places. Consumers with higher income arguably have less to lose if they make bad spending decisions, but those living in or near poverty cannot afford to make bad choices.

This means corporations have the responsibility to publish the true rates on microfinance loans, list the potential health impacts of particular products, and develop nutritious, appealing, affordable foods. All this is not to say that promoting economic development is solely the responsibility of companies. But corporations do have a role to play in poverty alleviation and should contribute to broader government and civil society efforts. The private sector has always been a source of innovation and companies hold the solutions to many challenges experienced by BoP consumers. They should put those in place while earning a profit.

Do you agree? Do companies have a responsibility to positively impact development when engaging the BoP? Have you come across reports or studies that refute the findings of the Science publication? Or other research that supports it?

Santiago Bunce is an evaluation consultant at MANAUS Consulting, where he focuses on assessing impact and demonstrating the business case for social ventures.