Faculty Opinion
Globalization's Unheralded Core: Corporate Investment
By Vijay Govindarajan and Chris Trimble T'96
Since September 11th, the elimination of poverty through economic development has increasingly been viewed not simply as humanitarian but also as a critical driver of our prospects for peace. That's because it is easiest for terrorists to recruit very poor, desperate people—those who have so little that they are willing to give up this life for the next. Ironically, while the perceived need for economic growth has increased, private investment in the developing world has fallen.
Through the 1990s, after the fall of the Berlin Wall and the implementation of market-oriented reforms in many corners of the world, investments in developing nations increased dramatically. But today the risks loom larger than the rewards. International banks have become much more cautious about emerging-market loans. Investment banks that once dedicated tremendous resources to researching small and midsize emerging market stocks now focus strictly on the largest companies in the safest countries. And institutional investors are dramatically curtailing their exposure to developing-world volatility.
 Perhaps this explains why the main focus of discussion for heads of state gathered in Monterrey, Mexico, for the United Nations International Conference on Financing for Development this spring was not private investment but official development aid—strategies for increasing it and its effectiveness. Although public aid is a critical part of the equation, it seems easily forgotten—perhaps simply because it is difficult for the press to cover—that direct investment by global corporations is by far the largest source of capital flows to emerging economies, five times larger than official flows.
Investment by global corporations is not only large, it is also extremely effective. It is very stable—corporations invest for the long term—and unlike portfolio investments and bank loans, it brings technology and management expertise with it, along with a desire and an ability to invest in the education of the local workforce.
Unfortunately, the risks of running a global operation have become more apparent since September 11th. But the risks of remaining a domestic-only company remain even greater. Advantages for global players are too substantial to ignore. First, with modern communications and information technologies, has become practical to coordinate globally dispersed production activities, each located wherever efficiency is greatest. Furthermore, competitors operating globally benefit from tremendous economies of scale.
In addition to the fear of falling behind the competition, corporations will continue to pursue global expansion because alternative strategies for achieving lofty growth targets are scarce.
The goals of policymakers and corporations are synergistic. There is still tremendous opportunity for corporations to create profitable growth in emerging economies while in parallel accelerating the development of those economies. Although corporate direct investment increased fivefold in the 1990s, it is still well below full potential, at least by historical standards. Today the developed world invests roughly 1 percent of income in developing economies, but that figure was as high as 5 percent during the 19th-century wave of globalization. Another indication that there is potential for greater corporate investment is the unevenness of those investments today. For example, investment in China is some 20 times larger than that in India, despite their roughly equal populations.
This points to a need for policymakers to spend more time working directly with the private sector to find ways to accelerate investment. But it also is a challenge to CEOs to independently find ways to play an even more meaningful role in the development process.
Global corporations have achieved a great deal of their global growth by simply replicating their existing businesses around the world. This is effective, but only to a point. Further growth necessitates some local adaptation. But even after that, only the small fraction of the population that can afford developed-world products is served.
This leaves the low end of the economic pyramid—the "aspiring poor"—woefully neglected. The most sophisticated global corporations have begun to recognize that the needs of this underserved market represent a tremendous opportunity. But solutions for this market require more than just adaptation: they require dramatic innovation—entirely new approaches to business. For example, Hindustan Lever, a subsidiary of Unilever, created entirely new approaches to product development, marketing, and sales to deliver a quality, branded soap to India's rural poor.
By addressing the needs of the poor, corporations like Hindustan Lever are not directly taking on the burden of "solving poverty." They are not becoming charitable organizations. Rather, they are identifying an underserved market and figuring out how best to serve it at affordable prices, by thinking creatively and investing in new technologies.
The challenge of development is multidimensional and extremely complex. Because no two countries are alike, no standard set of policies will suffice. But in every case, there is no getting around the need for tremendous capital investments. Of the many channels through which capital can flow, direct investments by global corporations—because they are long-term commitments that carry knowledge and technology with them—have the greatest positive impact on developing countries.
Vijay Govindarajan is Earl C. Daum 1924 Professor of International Business and director of the William F. Achtmeyer Center for Global Leadership. Chris Trimble is an adjunct associate professor of business administration and executive director of the center.
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