Business Linkages: Lessons, Opportunities and Challenges
2007
For large firms, globalization has generated both new markets and new competitive forces. Constant pressure to reduce costs, shorten lead times, and focus on core competencies has driven firms to change their supply chain management strategies. Most large manufacturing companies now buy significant percentages of their inputs of both goods and services from other firms, with some spending as much as half of their revenues this way. Managing the supply chain for an optimal mix of cost, quality, flexibility, and strategic advantage (such as access to innovation) is becoming an increasingly important source of competitive advantage.
In addition, many firms have become highly transnational, with increasing presence in developing countries. The 77,000 transnational corporations identified by the United Nations Conference on Trade and Development now count more than 770,000 foreign affiliates which, in 2005, “generated an estimated $4.5 trillion in value-added, employed some 62 million workers, and exported goods and services valued at more than $4 trillion.” More and more of this activity is taking place in developing countries. Foreign direct investment (FDI) in these countries reached “the highest level ever recorded” in 2005 – $334 billion. In the 10th annual CEO survey conducted by PricewaterhouseCoopers (PwC) for the World Economic Forum, 35% of respondents indicated that more than 10% of their value chains were sourced from, or located in, low-cost countries.
Cost pressure and presence in developing countries combine to create an interesting set of opportunities and challenges for large firms. How to gain the local knowledge and contacts required to operate effectively? How to optimize cost, quality, flexibility, and other considerations in the value chain? How to manage any social or political controversy surrounding company activities? How to preserve “social license to operate”? H.R.H. The Prince of Wales has stated that “no business can survive for long as an island of wealth in a sea of poverty.” According to PwC, “the message is clear: companies need to be seen to be contributing, and not simply exploiting.” The CEOs responding to its survey recognized an “urgent need to forge stronger ties to the local communities in which they operate.” While these challenges are particularly pronounced for foreign firms with affiliates in developing countries, they are relevant to domestic developing country firms as well.
In developing countries, business linkages with local small-medium enterprises (SMEs) – including procurement, distribution, and sales – offer large firms an avenue through which to address some of these concerns. These relationships can allow large firms to reduce input costs while increasing specialization and flexibility. They can also increase local integration and “rooting,” providing access to local knowledge and, by spurring growth and development in the local SME sector, bringing about positive social and economic impacts in the wider community. There are thus both competitiveness and corporate social responsibility arguments in favor of business linkages...
The new publication, Business Linkages: Lessons, Opportunities, and Challenges, is an example of IFC's ongoing commitment to sharing knowledge and good practices, and to partnering with key global players to address challenges and identify opportunities for linkages in developing countries.
Linkages programs help local smaller businesses contract with IFC investment clients as suppliers of goods and services.
Jointly published by IFC, Harvard University's Corporate Social Responsibility Initiative, and the International Business Leaders Forum, the report explores the practice of business linkages between large firms and small and medium enterprises in developing countries. It provides 21 case studies from leading companies and highlights lessons from their experiences. Seven of these cases are IFC investment clients.
You can download a PDF version of the full report from the IFC website.