LETS MAKE IT TO THE CORPORATE WORLD

The Fortune at the Bottom of the PyramidBy C.K. Prahalad and Stuart L. Hart

2008-08-16T06:53:00.000-07:00

Low-income markets present a prodigious opportunity for the world’s wealthiest companies — to seek their fortunes and bring prosperity to the aspiring poor.

Illustration by Marco VenturaWith the end of the Cold War, the former Soviet Union and its allies, as well as China, India, and Latin America, opened their closed markets to foreign investment in a cascading fashion. Although this significant economic and social transformation has offered vast new growth opportunities for multinational corporations (MNCs), its promise has yet to be realized.

First, the prospect of millions of “middle-class” consumers in developing countries, clamoring for products from MNCs, was wildly oversold. To make matters worse, the Asian and Latin American financial crises have greatly diminished the attractiveness of emerging markets. As a consequence, many MNCs worldwide slowed investments and began to rethink risk–reward structures for these markets. This retreat could become even more pronounced in the wake of the terrorist attacks in the United States last September.
The lackluster nature of most MNCs’ emerging-market strategies over the past decade does not change the magnitude of the opportunity, which is in reality much larger than previously thought. The real source of market promise is not the wealthy few in the developing world, or even the emerging middle-income consumers: It is the billions of aspiring poor who are joining the market economy for the first time.

This is a time for MNCs to look at globalization strategies through a new lens of inclusive capitalism. For companies with the resources and persistence to compete at the bottom of the world economic pyramid, the prospective rewards include growth, profits, and incalculable contributions to humankind. Countries that still don’t have the modern infrastructure or products to meet basic human needs are an ideal testing ground for developing environmentally sustainable technologies and products for the entire world.

Furthermore, MNC investment at “the bottom of the pyramid” means lifting billions of people out of poverty and desperation, averting the social decay, political chaos, terrorism, and environmental meltdown that is certain to continue if the gap between rich and poor countries continues to widen.

Doing business with the world’s 4 billion poorest people — two-thirds of the world’s population — will require radical innovations in technology and business models. It will require MNCs to reevaluate price–performance relationships for products and services. It will demand a new level of capital efficiency and new ways of measuring financial success. Companies will be forced to transform their understanding of scale, from a “bigger is better” ideal to an ideal of highly distributed small-scale operations married to world-scale capabilities.
In short, the poorest populations raise a prodigious new managerial challenge for the world’s wealthiest companies: selling to the poor and helping them improve their lives by producing and distributing products and services in culturally sensitive, environmentally sustainable, and economically profitable ways.

Four Consumer TiersAt the very top of the world economic pyramid are 75 to 100 million affluent Tier 1 consumers from around the world. (See Exhibit 1.) This is a cosmopolitan group composed of middle- and upper-income people in developed countries and the few rich elites from the developing world. In the middle of the pyramid, in Tiers 2 and 3, are poor customers in developed nations and the rising middle classes in developing countries, the targets of MNCs’ past emerging-market strategies.

Now consider the 4 billion people in Tier 4, at the bottom of the pyramid. Their annual per capita income — based on purchasing power parity in U.S. dollars — is less than $1,500, the minimum considered necessary to sustain a decent life. For well over a billion people — roughly one-sixth of humanity — per capita income is less than $1 per day.
Even more significant, the income gap between rich and poor is growing. According to the United Nations, the richest 20 percent in the world accounted for about 70 percent of total income in 1960. In 2000, that figure reached 85 percent. Over the same period, the fraction of income accruing to the poorest 20 percent in the world fell from 2.3 percent to 1.1 percent.

This extreme inequity of wealth distribution reinforces the view that the poor cannot participate in the global market economy, even though they constitute the majority of the population. In fact, given its vast size, Tier 4 represents a multitrillion-dollar market. According to World Bank projections, the population at the bottom of the pyramid could swell to more than 6 billion people over the next 40 years, because the bulk of the world’s population growth occurs there.

The perception that the bottom of the pyramid is not a viable market also fails to take into account the growing importance of the informal economy among the poorest of the poor, which by some estimates accounts for 40 to 60 percent of all economic activity in developing countries. Most Tier 4 people live in rural villages, or urban slums and shantytowns, and they usually do not hold legal title or deed to their assets (e.g., dwellings, farms, businesses). They have little or no formal education and are hard to reach via conventional distribution, credit, and communications. The quality and quantity of products and services available in Tier 4 is generally low. Therefore, much like an iceberg with only its tip in plain view, this massive segment of the global population — along with its massive market opportunities — has remained largely invisible to the corporate sector.

Fortunately, the Tier 4 market is wide open for technological innovation. Among the many possibilities for innovation, MNCs can be leaders in leapfrogging to products that don’t repeat the environmental mistakes of developed countries over the last 50 years. Today’s MNCs evolved in an era of abundant natural resources and thus tended to make products and services that were resource-intensive and excessively polluting. The United States’ 270 million people — only about 4 percent of the world’s population — consume more than 25 percent of the planet’s energy resources. To re-create those types of consumption patterns in developing countries would be disastrous.

We have seen how the disenfranchised in Tier 4 can disrupt the way of life and safety of the rich in Tier 1 — poverty breeds discontent and extremism. Although complete income equality is an ideological pipe dream, the use of commercial development to bring people out of poverty and give them the chance for a better life is critical to the stability and health of the global economy and the continued success of Western MNCs.
The Invisible OpportunityAmong the top 200 MNCs in the world, the overwhelming majority are based in developed countries. U.S. corporations dominate, with 82; Japanese firms, with 41, are second, according to a list compiled in December 2000 by the Washington, D.C.–based Institute for Policy Studies. So it is not surprising that MNCs’ views of business are conditioned by their knowledge of and familiarity with Tier 1 consumers. Perception of market opportunity is a function of the way many managers are socialized to think and the analytical tools they use. Most MNCs automatically dismiss the bottom of the pyramid because they judge the market based on income or selections of products and services appropriate for developed countries.

To appreciate the market potential of Tier 4, MNCs must come to terms with a set of core assumptions and practices that influence their view of developing countries. We have identified the following as widely shared orthodoxies that must be reexamined:

Assumption #1 The poor are not our target consumers because with our current cost structures, we cannot profitably compete for that market.
Assumption #2 The poor cannot afford and have no use for the products and services sold in developed markets.
Assumption #3 Only developed markets appreciate and will pay for new technology. The poor can use the previous generation of technology.
Assumption #4 The bottom of the pyramid is not important to the long-term viability of our business. We can leave Tier 4 to governments and nonprofits.
Assumption #5 Managers are not excited by business challenges that have a humanitarian dimension.
Assumption #6 Intellectual excitement is in developed markets. It is hard to find talented managers who want to work at the bottom of the pyramid.

Each of these key assumptions obscures the value at the bottom of the pyramid. It is like the story of the person who finds a $20 bill on the sidewalk. Conventional economic wisdom suggests if the bill really existed, someone would already have picked it up! Like the $20 bill, the bottom of the pyramid defies conventional managerial logic, but that doesn’t mean it isn’t a large and unexplored territory for profitable growth. Consider the drivers of innovation and opportunities for companies in Tier 4. (See Exhibit 2.) MNCs must recognize that this market poses a major new challenge: how to combine low cost, good quality, sustainability, and profitability.

Furthermore, MNCs cannot exploit these new opportunities without radically rethinking how they go to market. Exhibit 3 suggests some (but by no means all) areas where an entirely new perspective is required to create profitable markets in Tier 4.
Tier 4 PioneersHindustan Lever Ltd. (HLL), a subsidiary of Great Britain’s Unilever PLC and widely considered the best-managed company in India, has been a pioneer among MNCs exploring markets at the bottom of the pyramid. For more than 50 years, HLL has served India’s small elite who could afford to buy MNC products. In the 1990s, a local firm, Nirma Ltd., began offering detergent products for poor consumers, mostly in rural areas. In fact, Nirma created a new business system that included a new product formulation, low-cost manufacturing process, wide distribution network, special packaging for daily purchasing, and value pricing.
HLL, in typical MNC fashion, initially dismissed Nirma’s strategy. However, as Nirma grew rapidly, HLL could see its local competitor was winning in a market it had disregarded. Ultimately, HLL saw its vulnerability and its opportunity: In 1995, the company responded with its own offering for this market, drastically altering its traditional business model.

HLL’s new detergent, called Wheel, was formulated to substantially reduce the ratio of oil to water in the product, responding to the fact that the poor often wash their clothes in rivers and other public water systems. HLL decentralized the production, marketing, and distribution of the product to leverage the abundant labor pool in rural India, quickly creating sales channels through the thousands of small outlets where people at the bottom of the pyramid shop. HLL also changed the cost structure of its detergent business so it could introduce Wheel at a low price point.

Today, Nirma and HLL are close competitors in the detergent market, with 38 percent market share each, according to IndiaInfoline.com, a business intelligence and market research service. Unilever’s own analysis of Nirma and HLL’s competition in the detergent business reveals even more about the profit potential of the marketplace at the bottom of the pyramid. (See Exhibit 4.)
Contrary to popular assumptions, the poor can be a very profitable market — especially if MNCs change their business models. Specifically, Tier 4 is not a market that allows for the traditional pursuit of high margins; instead, profits are driven by volume and capital efficiency. Margins are likely to be low (by current norms), but unit sales can be extremely high. Managers who focus on gross margins will miss the opportunity at the bottom of the pyramid; managers who innovate and focus on economic profit will be rewarded.

Nirma has become one of the largest branded detergent makers in the world. Meanwhile, HLL, stimulated by its emergent rival and its changed business model, registered a 20 percent growth in revenues per year and a 25 percent growth in profits per year between 1995 and 2000. Over the same period, HLL’s market capitalization grew to $12 billion — a growth rate of 40 percent per year. HLL’s parent company, Unilever, also has benefited from its subsidiary’s experience in India. Unilever transported HLL’s business principles (not the product or the brand) to create a new detergent market among the poor in Brazil, where the Ala brand has been a big success. More important, Unilever has adopted the bottom of the pyramid as a corporate strategic priority.

As the Unilever example makes clear, the starting assumption must be that serving Tier 4 involves bringing together the best of technology and a global resource base to address local market conditions. Cheap and low-quality products are not the goal. The potential of Tier 4 cannot be realized without an entrepreneurial orientation: The real strategic challenge for managers is to visualize an active market where only abject poverty exists today. It takes tremendous imagination and creativity to engineer a market infrastructure out of a completely unorganized sector.

Serving Tier 4 markets is not the same as serving existing markets better or more efficiently. Managers first must develop a commercial infrastructure tailored to the needs and challenges of Tier 4. Creating such an infrastructure must be seen as an investment, much like the more familiar investments in plants, processes, products, and R&D.
Further, contrary to more conventional investment strategies, no firm can do this alone. Multiple players must be involved, including local governmental authorities, nongovernmental organizations (NGOs), communities, financial institutions, and other companies. Four elements — creating buying power, shaping aspirations, improving access, and tailoring local solutions — are the keys to a thriving Tier 4 market. (See Exhibit 5.)

Each of these four elements demands innovation in technology, business models, and management processes. And business leaders must be willing to experiment, collaborate, empower locals, and create new sources of competitive advantage and wealth.
Creating Buying PowerAccording to the International Labor Organization’s World Employment Report 2001, nearly a billion people — roughly one-third of the world’s work force — are either underemployed or have such low-paying jobs that they cannot support themselves or their families. Helping the world’s poor elevate themselves above this desperation line is a business opportunity to do well and do good. To do so effectively, two interventions are crucial — providing access to credit, and increasing the earning potential of the poor. A few farsighted companies have already begun to blaze this trail with startlingly positive results.

Commercial credit historically has been unavailable to the very poor. Even if those living in poverty had access to a bank, without collateral it is hard to get credit from the traditional banking system. As Peruvian economist Hernando de Soto demonstrates in his pathbreaking work, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, commercial credit is central to building a market economy. Access to credit in the U.S. has allowed people of modest means to systematically build their equity and make major purchases, such as houses, cars, and education. The vast majority of the poor in developing countries operate in the “informal” or extralegal economy, since the time and cost involved in securing legal title for their assets or incorporation of their microenterprises is prohibitive. Developing countries have tried governmental subsidies to free the poor from the cycle of poverty, with little success. Even if the poor were able to benefit from government support to start small businesses, their dependence on credit from local moneylenders charging usurious rates makes it impossible to succeed. Local moneylenders in Mumbai, India, charge interest rates of up to 20 percent per day. This means that a vegetable vendor who borrows Rs.100 ($2.08) in the morning must return Rs.120 ($2.50) in the evening.

Extending credit to the poor so they can elevate themselves economically is not a new idea. Consider how I.M. Singer & Company, founded in 1851, provided credit as a way for millions of women to purchase sewing machines. Very few of those women could have afforded the steep $100 price tag, but most could afford a payment of $5 per month.
The same logic applies on a much larger scale in Tier 4. Consider the experience of the Grameen Bank Ltd. in Bangladesh, one of the first in the world to apply a microlending model in commercial banking. Started just over 20 years ago by Muhammad Yunus, then a professor in the Economics Department at Chittagong University, Bangladesh, Grameen Bank pioneered a lending service for the poor that has inspired thousands of microlenders, serving 25 million clients worldwide, in developing countries and wealthy nations, including the United States and Great Britain.

Grameen Bank’s program is designed to addresses the problems of extending credit to lowest-income customers — lack of collateral, high credit risk, and contractual enforcement. Ninety-five percent of its 2.3 million customers are women, who, as the traditional breadwinners and entrepreneurs in rural communities, are better credit risks than men. Candidates for loans must have their proposals thoroughly evaluated and supported by five nonfamily members of the community. The bank’s sales and service people visit the villages frequently, getting to know the women who have loans and the projects in which they are supposed to invest. In this way, lending due diligence is accomplished without the mountain of paperwork and arcane language common in the West. With 1,170 branches, Grameen Bank today provides microcredit services in more than 40,000 villages, more than half the total number in Bangladesh. As of 1996, Grameen Bank had achieved a 95 percent repayment rate, higher than any other bank in the Indian subcontinent. However, the popularity of its services has also spawned more local competitors, which has cut into its portfolio and shrunk its profits over the past few years.
In addition, Grameen Bank’s rate of return is not easy to assess. Historically, the bank was an entirely manual, field-based operation, a structure that undercut its efficiency. Today, spin-offs such as Grameen Telecom (a provider of village phone service) and Grameen Shakti (a developer of renewable energy sources) are helping Grameen Bank build a technology infrastructure to automate its processes. As the bank develops its online business model, profitability should increase dramatically, highlighting the importance of information technology in the acceleration of the microcredit revolution.

Perhaps the most pertinent measure of Grameen Bank’s success is the global explosion of institutional interest in microlending it has stimulated around the world. In South Africa, where 73 percent of the population earns less than R5,000 ($460) per month, according to a 2001 World Bank study, retail banking services for low-income customers are becoming one of the most competitive and fast-growing mass markets. In 1994, Standard Bank of South Africa Ltd., Africa’s leading consumer bank, launched a low-cost, volume-driven e-banking business, called AutoBank E, to grow revenue by providing banking services to the poor. Through the use of 2,500 automated teller machines (ATMs) and 98 AutoBank E-centres, Standard now has the largest presence in South Africa’s townships and other under-serviced areas of any domestic bank. As of April 2001, Standard served nearly 3 million low-income customers and is adding roughly 60,000 customers per month, according to South Africa’s Sunday Times.

Standard does not require a minimum income of customers opening an AutoBank E account, although they must have some regular income. People who have never used a bank can open an account with a deposit of as little as $8. Customers are issued an ATM card and shown how to use it by staff who speak a variety of African dialects. A small flat fee is charged for each ATM transaction. An interest-bearing “savings purse” is attached to every account to encourage poor customers to save. Interest rates on deposits are low, but superior to keeping cash in a jar. Sunday Times also reported that Standard Bank is considering a loan program for low-income clients. Computerization of microlending services not only makes the overall operation more efficient, but also makes it possible to reach many more people — lending money to individuals with no collateral and no formal address. Since there is lower overhead and little paperwork, AutoBank’s costs are 30 to 40 percent lower than those at traditional branches.
At the 1999 Microcredit Summit, the United Nations, in conjunction with several major MNCs, such as Citigroup Inc. and Monsanto Company, set a goal of making basic credit available to the 100 million poorest families in the world by the year 2005. Unfortunately, the success of this undertaking has been slowed by high transaction costs, a lack of automation, and poor information and communications infrastructures in rural areas.

To address these issues and accelerate the development of microlending, French banker Jacques Attali, the founding president of the European Bank for Reconstruction and Development and a former chief aide of French President François Mitterand during the 1980s, has created PlaNet Finance. Its Web site, www.planetfinance.org, links thousands of microcredit groups worldwide into a network to help microbanks share solutions and lower costs.
Ultimately, the development of an automated solution for tracking and processing the millions of small loans associated with microlending should be possible. If processing and transaction costs can be reduced enough, they can then be bundled together and sold in the secondary market to multinational financial institutions like Citigroup. This would greatly expand the capital available for microlending beyond the current pool from donors and governments.
In the United States, microlending has also taken root over the past decade in poor urban neighborhoods. For example, the ShoreBank Corporation, formerly South Shore Bank, has demonstrated the profitability of banking for the poor in Chicago’s troubled South Side. Project Enterprise, a Grameen-like program based in New York City, is aimed at minority entrepreneurs. Several multinational banks are beginning to offer microbanking services in developing countries. Citigroup, for instance, is experimenting in Bangalore, India, with 24/7 services for customers with as little as a $25 on deposit. Initial results are very positive.
Shaping AspirationsSustainable product innovations initiated in Tier 4, and promoted through consumer education, will not only positively influence the choices of people at the bottom of the pyramid, but may ultimately reshape the way Americans and others in Tier 1 live. Indeed, in 20 years, we may look back to see that Tier 4 provided the early market pull for disruptive technologies that replaced unsustainable technologies in developed countries and advanced the fortunes of MNCs with foresight.

For example, Unilever’s HLL subsidiary has tackled the lack of practical, inexpensive, low-energy-consuming refrigeration in India. HLL’s laboratories developed a radically different approach to refrigeration that allows ice cream to be transported across the country in standard nonrefrigerated trucks. The system allows quantum reductions in electricity use and makes dangerous and polluting refrigerants unnecessary. As a bonus, the new system is cheaper to build and use. Electricity, water, refrigeration, and many other essential services are all opportunities in developing countries. A U.S.-based NGO, the Solar Electric Light Fund (SELF), has creatively adapted technology and applied microcredit financing to bring electrical service to people in remote villages in Africa and Asia who otherwise would spend money to burn hazardous kerosene, candles, wood, or dung for their light and cooking. SELF’s rural electrification system is based on small-scale on-site power generation using renewable resources. A revolving loan fund gives villagers the financial means to operate these electrical systems themselves, also creating jobs. Since its founding in 1990, SELF has launched projects in China, India, Sri Lanka, Nepal, Vietnam, Indonesia, Brazil, Uganda, Tanzania, South Africa, and the Solomon Islands.

The success of SELF and other NGOs focused on small-scale distributed energy solutions has begun to attract the attention of Western companies such as the U.S.’s Plug Power Inc. (fuel cells) and Honeywell Inc. (microturbines). They see the logic in moving into a wide-open market in Tier 4 rather than trying to force their technology prematurely into applications for the developed markets, where incumbents and institutions stand in their way. With several billion potential customers around the world, investments in such innovations should be well worth it.
Improving AccessBecause Tier 4 communities are often physically and economically isolated, better distribution systems and communication links are essential to development of the bottom of the pyramid. Few of the large emerging-market countries have distribution systems that reach more than half of the population. (Hence the continued dependence of the poorest consumers on local products and services and moneylenders.) As a consequence, few MNCs have designed their distribution systems to cater to the needs of poor rural customers.
Creative local companies, however, lead the way in effective rural distribution. In India, for instance, Arvind Mills has introduced an entirely new delivery system for blue jeans. Arvind, the world’s fifth-largest denim manufacturer, found Indian domestic denim sales limited. At $40 to $60 a pair, the jeans were not affordable to the masses, and the existing distribution system reached only a few towns and villages. So Arvind introduced “Ruf & Tuf” jeans — a ready-to-make kit of jeans components (denim, zipper, rivets, and a patch) priced at about $6. Kits were distributed through a network of thousands of local tailors, many in small rural towns and villages, whose self-interest motivated them to market the kits extensively. Ruf & Tuf jeans are now the largest-selling jeans in India, easily surpassing Levi’s and other brands from the U.S. and Europe.

MNCs can also play a role in distributing the products of Tier 4 enterprises in Tier 1 markets, giving bottom-of-the-pyramid enterprises their first links to international markets. Indeed, it is possible through partnerships to leverage traditional knowledge bases to produce more sustainable, and in some cases superior, products for consumption by Tier 1 customers.
Anita Roddick, CEO of The Body Shop International PLC, demonstrated the power of this strategy in the early 1990s through her company’s “trade not aid” program of sourcing local raw material and products from indigenous people. More recently, the Starbucks Corporation, in cooperation with Conservation International, has pioneered a program to source coffee directly from farmers in the Chiapas region of Mexico. These farms grow coffee beans organically, using shade, which preserves songbird habitat. Starbucks markets the product to U.S. consumers as a high-quality, premium coffee; the Mexican farmers benefit economically from the sourcing arrangement, which eliminates intermediaries from the business model. This direct relationship also improves the local farmers’ understanding and knowledge of the Tier 1 market and its customer expectations.

Information poverty may be the single biggest roadblock to sustainable development. More than half of humanity has yet to make a single phone call. However, where telephones and Internet connections do exist, for the first time in history, it is possible to imagine a single, interconnected market uniting the world’s rich and poor in the quest for truly sustainable economic development. The process could transform the “digital divide” into a “digital dividend.”
Ten years ago, Sam Pitroda, currently chairman and CEO of London-based Worldtel Ltd., a company created by a telecommunications union to fund telecom development in emerging markets, came to India with the idea of “rural telephones.” His original concept was to have a community telephone, operated by an entrepreneur (usually a woman) who charged a fee for the use of the telephone and kept a percentage as wages for maintaining the telephone. Today, from most parts of India, it is possible to call anyone in the world.

Other entrepreneurs have introduced fax services, and some are experimenting with low-cost e-mail and Internet access. These communication links have dramatically altered the way villages function and how they are connected to the rest of the country and the world. With the emergence of global broadband connections, opportunities for information-based business in Tier 4 will expand significantly.
New ventures such as CorDECT in India and Celnicos Communications in Latin America are developing information technology and business models suited to the particular requirements of the bottom of the pyramid. Through shared-access models (e.g., Internet kiosks), wireless infrastructure, and focused technology development, companies are dramatically reducing the cost of being connected. For example, voice and data connectivity typically costs companies $850 to $2,800 per line in the developed world; CorDECT has reduced this cost to less than $400 per line, with a goal of $100 per line, which would bring telecommunications within reach of virtually everyone in the developing world.

Recognizing an enormous business and development opportunity, Hewlett-Packard Company has articulated a vision of “world e-inclusion,” with a focus on providing technology, products, and services appropriate to the needs of the world’s poor. As part of this strategy, HP has entered into a venture with the MIT Media Lab and the Foundation for Sustainable Development of Costa Rica — led by former President Jose Maria Figueres Olsen — to develop and implement “telecenters” for villages in remote areas. These digital town centers provide modern information technology equipment with a high-speed Internet connection at a price that is affordable, through credit vehicles, at the village level.

Bringing such technology to villages in Tier 4 makes possible a number of applications, including tele-education, telemedicine, microbanking, agricultural extension services, and environmental monitoring, all of which help to spur microenterprise, economic development, and access to world markets. This project, named Lincos, is expected to spread from today’s pilot sites in Central America and the Caribbean to Asia, Africa, and Central Europe.
Tailoring Local SolutionsAs we enter the new century, the combined sales of the world’s top 200 MNCs equal nearly 30 percent of total world gross domestic product. Yet these same corporations employ less than 1 percent of the world’s labor force. Of the world’s 100 largest economies, 51 are economies internal to corporations. Yet scores of Third World countries have suffered absolute economic stagnation or decline.

If MNCs are to thrive in the 21st century, they must broaden their economic base and share it more widely. They must play a more active role in narrowing the gap between rich and poor. This cannot be achieved if these companies produce only so-called global products for consumption primarily by Tier 1 consumers. They must nurture local markets and cultures, leverage local solutions, and generate wealth at the lowest levels on the pyramid. Producing in, rather than extracting wealth from, these countries will be the guiding principle.
To do this, MNCs must combine their advanced technology with deep local insights. Consider packaging. Consumers in Tier 1 countries have the disposable income and the space to buy in bulk (e.g., 10-pound boxes of detergent from superstores like Sam’s Club) and shop less frequently. They use their spending money to “inventory convenience.” Tier 4 consumers, strapped for cash and with limited living space, shop every day, but not for much. They can’t afford to stock up on household items or be highly selective about what they buy; they look for single-serve packaging. But consumers with small means also have the benefit of experimentation. Unburdened by large quantities of product, they can switch brands every time they buy.

Already in India, 30 percent of personal care products and other consumables, such as shampoo, tea, and cold medicines, are sold in single-serve packages. Most are priced at Rs. 1 (about 1¢). Without innovation in packaging, however, this trend could result in a mountain of solid waste. Dow Chemical Company and Cargill Inc. are experimenting with an organic plastic that would be totally biodegradable. Such packaging clearly has advantages in Tier 4, but it could also revolutionize markets at all four tiers of the world pyramid.For MNCs, the best approach is to marry local capabilities and market knowledge with global best practices. But whether an initiative involves an MNC entering Tier 4 or an entrepreneur from Tier 4, the development principles remain the same: New business models must not disrupt the cultures and lifestyles of local people. An effective combination of local and global knowledge is needed, not a replication of the Western system.

The development of India’s milk industry has many lessons for MNCs. The transformation began around 1946, when the Khira District Milk Cooperative, located in the state of Gujarat, set up its own processing plant under the leadership of Verghese Kurien and created the brand Amul, today one of the most recognized in the country.
Unlike the large industrial dairy farms of the West, in India, milk originates in many small villages. Villagers may own only two to three buffaloes or cows each and bring their milk twice a day to the village collection center. They are paid every day for the milk they deliver, based on fat content and volume. Refrigerated vans transport the milk to central processing plants, where it is pasteurized. Railroad cars then transport the milk to major urban centers. The entire value chain is carefully managed, from the village-based milk production to the world-scale processing facilities. The Khira District cooperative provides such services to the farmers as veterinary care and cattle feed. The cooperative also manages the distribution of pasteurized milk, milk powder, butter, cheese, baby food, and other products. The uniqueness of the Amul cooperative is its blending of decentralized origination with the efficiencies of a modern processing and distribution infrastructure. As a result, previously marginal village farmers are earning steady incomes and being transformed into active market participants.

Twenty years ago, milk was in short supply in India. Today, India is the world’s largest producer of milk. According to India’s National Dairy Development Board, the country’s dairy cooperative network now claims 10.7 million individual farmer member–owners, covers 96,000 village-level societies, includes 170 milk-producer unions, and operates in more than 285 districts. Milk production has increased 4.7 percent per year since 1974. The per capita availability of milk in India has grown from 107 grams to 213 grams per day in 20 years.
Putting It All TogetherCreating buying power, shaping aspirations, improving access, and tailoring local solutions — the four elements of the commercial infrastructure for the bottom of the pyramid are intertwined. Innovation in one leverages innovation in the others. Corporations are only one of the actors; MNCs must work together with NGOs, local and state governments, and communities.

Yet someone must take the lead to make this revolution happen. The question is, Why should it be MNCs?

Even if multinational managers are emotionally persuaded, it is not obvious that large corporations have real advantages over small, local organizations. MNCs may never be able to beat the cost or responsiveness of village entrepreneurs. Indeed, empowering local entrepreneurs and enterprises is key to developing Tier 4 markets. Still, there are several compelling reasons for MNCs to embark on this course:
• Resources. Building a complex commercial infrastructure for the bottom of the pyramid is a resource- and management-intensive task. Developing environmentally sustainable products and services requires significant research. Distribution channels and communication networks are expensive to develop and sustain. Few local entrepreneurs have the managerial or technological resources to create this infrastructure.
• Leverage. MNCs can transfer knowledge from one market to another — from China to Brazil or India — as Avon, Unilever, Citigroup, and others have demonstrated. Although practices and products have to be customized to serve local needs, MNCs, with their unique global knowledge base, have an advantage that is not easily accessible to local entrepreneurs.
• Bridging. MNCs can be nodes for building the commercial infrastructure, providing access to knowledge, managerial imagination, and financial resources. Without MNCs as catalysts, well-intentioned NGOs, communities, local governments, entrepreneurs, and even multilateral development agencies will continue to flounder in their attempts to bring development to the bottom. MNCs are best positioned to unite the range of actors required to develop the Tier 4 market.
• Transfer. Not only can MNCs leverage learning from the bottom of the pyramid, but they also have the capacity to transfer innovations up-market all the way to Tier 1. As we have seen, Tier 4 is a testing ground for sustainable living. Many of the innovations for the bottom can be adapted for use in the resource- and energy-intensive markets of the developed world.
It is imperative, however, that managers recognize the nature of business leadership required in the Tier 4 arena. Creativity, imagination, tolerance for ambiguity, stamina, passion, empathy, and courage may be as important as analytical skill, intelligence, and knowledge. Leaders need a deep understanding of the complexities and subtleties of sustainable development in the context of Tier 4. Finally, managers must have the interpersonal and intercultural skills to work with a wide range of organizations and people.

MNCs must build an organizational infrastructure to address opportunity at the bottom of the pyramid. This means building a local base of support, reorienting R&D to focus on the needs of the poor, forming new alliances, increasing employment intensity, and reinventing cost structures. These five organizational elements are clearly interrelated and mutually reinforcing.
• Build a local base of support. Empowering the poor threatens the existing power structure. Local opposition can emerge very quickly, as Cargill Inc. found in its sunflower-seed business in India. Cargill’s offices were twice burned, and the local politicians accused the firm of destroying locally based seed businesses. But Cargill persisted. Through Cargill’s investments in farmer education, training, and supply of farm inputs, farmers have significantly improved their productivity per acre of land. Today, Cargill is seen as the friend of the farmer. Political opposition has vanished. To overcome comparable problems, MNCs must build a local base of political support. As Monsanto and General Electric Company can attest, the establishment of a coalition of NGOs, community leaders, and local authorities that can counter entrenched interests is essential. Forming such a coalition can be a very slow process. Each player has a different agenda; MNCs have to understand these agendas and create shared aspirations. In China, this problem is less onerous: The local bureaucrats are also the local entrepreneurs, so they can easily see the benefits to their enterprise and their village, town, or province. (See “Profits and Perils in China, Inc.,” First Quarter 2002.) In countries such as India and Brazil, such alignment does not exist. Significant discussion, information sharing, the delineation of benefits to each constituency, and sensitivity to local debates is necessary.
• Conduct R&D focused on the poor. It is necessary to conduct R&D and market research focused on the unique requirements of the poor, by region and by country. In India, China, and North Africa, for example, research on ways to provide safe water for drinking, cooking, washing, and cleaning is a high priority. Research must also seek to adapt foreign solutions to local needs. For example, a daily dosage of vitamins can be added to a wide variety of food and beverage products. For corporations that have distribution and brand presence throughout the developing world, such as Coca-Cola Company, the bottom of the pyramid offers a vast untapped market for such products as water and nutritionals.
Finally, research must identify useful principles and potential applications from local practices. In Tier 4, significant knowledge is transmitted orally from one generation to the next. Being respectful of traditions but willing to analyze them scientifically can lead to new knowledge. The Body Shop’s creative CEO, Ms. Roddick, built a business predicated on understanding the basis for local rituals and practices. For example, she observed that some African women use slices of pineapple to cleanse their skin. On the surface, this practice appears to be a meaningless ritual. However, research showed active ingredients in pineapple that cleared away dead skin cells better than chemical formulations.
MNCs must develop research facilities in emerging markets such as China, India, Brazil, Mexico, and Africa, although few have made a big effort so far. Unilever is an exception; it operates highly regarded research centers in India, employing more than 400 researchers dedicated to the problems of “India-like markets.”
• Form new alliances. MNCs have conventionally formed alliances solely to break into new markets; now they need to broaden their alliance strategies. By entering into alliances to expand in Tier 4 markets, MNCs gain insight into developing countries’ culture and local knowledge. At the same time, MNCs improve their own credibility. They may also secure preferred or exclusive access to a market or raw material. We foresee three kinds of important relationships: Alliances with local firms and cooperatives (such as the Khira District Milk Cooperative); alliances with local and international NGOs (like Starbucks’s alliance with Conservation International in coffee); and alliances with governments (e.g., Merck & Company’s recent alliance in Costa Rica to foster rain forest preservation in exchange for bioprospecting rights).
Given the difficulty and complexity of constructing business models dependent on relationships with national or central governments (e.g., large infrastructure development), we envision more alliances at the local and regional level. To succeed in such alliances, MNC managers must learn to work with people who may not have the same agenda or the same educational and economic background as they do. The challenge and payoff is how to manage and learn from diversity — economic, intellectual, racial, and linguistic.
• Increase employment intensity. MNCs accustomed to Tier 1 markets think in terms of capital intensity and labor productivity. Exactly the opposite logic applies in Tier 4. Given the vast number of people at the bottom of the pyramid, the production and distribution approach must provide jobs for many, as in the case of Ruf & Tuf jeans from Arvind Mills: It employed an army of local tailors as stockers, promoters, distributors, and service providers, even though the cost of the jeans was 80 percent below that of Levi’s. As Arvind demonstrated, MNCs need not employ large numbers of people directly on their payroll, but the organizational model in Tier 4 must increase employment intensity (and incomes) among the poor and groom them to become new customers.
• Reinvent cost structures. Managers must dramatically reduce cost levels relative to those in Tier 1. To create products and services the poor can afford, MNCs must reduce their costs significantly — to, say, 10 percent of what they are today. But this cannot be achieved by fine-tuning the current approaches to product development, production, and logistics. The entire business process must be rethought with a focus on functionality, not on the product itself. For example, financial services need not be distributed only through branch offices open from 9 a.m. to 5 p.m. Such services can be provided at a time and place convenient to the poor consumer — after 8 p.m. and at their homes. Cash-dispensing machines can be placed in safe areas — police stations and post offices. Iris recognition used as a security device could substitute for the tedious personal-identification number and card for identification.
Lowering cost structures also forces a debate on ways to reduce investment costs. This will inevitably lead to greater use of information technology to develop production and distribution systems. As noted, village-based phones are already transforming the pattern of communications throughout the developing world. Add the Internet, and we have a whole new way of communicating and creating economic development in poor, rural areas. Creative use of IT will emerge in these markets as a means to dramatically lower the costs associated with access to products and services, distribution, and credit management.
A Common CauseThe emergence of the 4 billion people who make up the Tier 4 market is a great opportunity for MNCs. It also represents a chance for business, government, and civil society to join together in a common cause. Indeed, we believe that pursuing strategies for the bottom of the pyramid dissolves the conflict between proponents of free trade and global capitalism on one hand, and environmental and social sustainability on the other.
Yet the products and services currently offered to Tier 1 consumers are not appropriate for Tier 4, and accessing this latter market will require approaches fundamentally different from those even in Tiers 2 and 3. Changes in technology, credit, cost, and distribution are critical prerequisites. Only large firms with global reach have the technological, managerial, and financial resources to dip into the well of innovations needed to profit from this opportunity.
New commerce in Tier 4 will not be restricted to businesses filling such basic needs as food, textiles, and housing. The bottom of the pyramid is waiting for high-tech businesses such as financial services, cellular telecommunications, and low-end computers. In fact, for many emerging disruptive technologies (e.g., fuel cells, photovoltaics, satellite-based telecommunications, biotechnology, thin-film microelectronics, and nanotechnology), the bottom of the pyramid may prove to be the most attractive early market.
So far, three kinds of organizations have led the way: local firms such as Amul and Grameen Bank; NGOs such as the World Resources Institute, SELF, The Rainforest Alliance, The Environmental Defense Fund, and Conservation International, among others; and a few MNCs such as Starbucks, Dow, Hewlett-Packard, Unilever, Citigroup, DuPont, Johnson & Johnson, Novartis, and ABB, and global business partnerships such as the World Business Council for Sustainable Business Development. But to date, NGOs and local businesses with far fewer resources than the MNCs have been more innovative and have made more progress in developing these markets.
It is tragic that as Western capitalists we have implicitly assumed that the rich will be served by the corporate sector, while governments and NGOs will protect the poor and the environment. This implicit divide is stronger than most realize. Managers in MNCs, public policymakers, and NGO activists all suffer from this historical division of roles. A huge opportunity lies in breaking this code — linking the poor and the rich across the world in a seamless market organized around the concept of sustainable growth and development.
Collectively, we have only begun to scratch the surface of what is the biggest potential market opportunity in the history of commerce. Those in the private sector who commit their companies to a more inclusive capitalism have the opportunity to prosper and share their prosperity with those who are less fortunate. In a very real sense, the fortune at the bottom of the pyramid represents the loftiest of our global goals

The Subprime Lending Crisis: Causes and Effects of the Mortgage Meltdown

2008-07-05T10:15:00.000-07:00

INTRODUCTION

The subprime mortgage crisis, popularly known as the “mortgage mess” or “mortgage
meltdown,” came to the public’s attention when a steep rise in home foreclosures in 2006
spiraled seemingly out of control in 2007, triggering a national financial crisis that went
global within the year. Consumer spending is down, the housing market has plummeted,
foreclosure numbers continue to rise and the stock market has been shaken. The subprime
crisis and resulting foreclosure fallout has caused dissension among consumers, lenders
and legislators and spawned furious debate over the causes and possible fixes of the
“mess.” International Monetary Fund Report In its semiannual Global Financial Stability Report released on April 8, 2008, the
International Monetary Fund (IMF) said that falling U.S. housing prices and rising
delinquencies on the residential mortgage market could lead to losses of $565 billion
dollars. When combining these factors with losses from other categories of loans
originated and securities issued in the United States related to commercial real estate,
IMF puts potential losses at about $945 billion.
This was the first time that IMF has made an official estimate of the global losses
suffered by banks and other financial institutions in the U.S. credit crunch that began in
2007 amid the rising number of defaults on subprime home loans.
The incredible $945 billion estimate of losses, made in March, represents approximately
$142 per person worldwide and 4 percent of the $23.21-trillion credit market. IMF noted
in its report that global banks likely will carry about half of these losses. The report
cautioned that the loss estimates are just that, estimates, and the actual numbers may be
even higher.
In March, Standard & Poor’s had predicted that global banking firms would write off
approximately $285 billion dollars in various securities linked to U.S. subprime real
estate, with more than half the losses already recognized. Some analysts have put the
figure higher for the subprime market and related losses.
The IMF, whose stated core mission is to promote global financial stability, said there
was "a collective failure to appreciate the extent of leverage taken on by a wide range of
institutions—banks, monoline insurers, government-sponsored entities, hedge funds—
and the associated risks of a disorderly unwinding."
“It is now clear that the current turmoil is more than simply a liquidity event, reflecting
deep-seated balance sheet fragilities and weak capital bases, which means its effects are
likely to be broader, deeper, and more protracted," the report said.

Unique Situation

As recently as mid-2007, many experts believed that the crisis would be contained within
the arena of mortgage issuers who had overloaded on subprime loans. Few would have
predicted that the subprime fallout would be so severe as to threaten the economy to the
extent that it has thus far.
While downturns in the mortgage and housing markets have caused economic problems
before, experts explain that the current situation is unique. In a 2007 interview, Susan M.
Wachter, professor of real estate and finance at Wharton, University of Pennsylvania,
said that in the past such events have created downturns in the overall economy through a
credit crunch in the banking sector. This would be the first time downturns are driven by
a credit crunch in the non-banking sector of finance.

ROOTS OF THE SUBPRIME CRISIS
There are a number of theories as to what led to the mortgage crisis. Many experts and
economists believe it came about though the combination of a number of factors in which
subprime lending played a major part.

Housing Bubble
The current mortgage meltdown actually began with the bursting of the U.S. housing
“bubble” that began in 2001 and reached its peak in 2005. A housing bubble is an
economic bubble that occurs in local or global real estate markets. It is defined by rapid
increases in the valuations of real property until unsustainable levels are reached in
relation to incomes and other indicators of affordability. Following the rapid increases are
decreases in home prices and mortgage debt that is higher than the value of the property.
Housing bubbles generally are identified after a market correction, which occurred in the
United States around 2006. Former Chairman of the Federal Reserve Board, Alan
Greenspan, said in 2007 that “we had a bubble in housing,” and that he “really didn’t get
it until very late in 2005 and 2006.”
Freddie Mac CEO Richard Syron agreed with Greenspan that the United States had a
housing bubble and concurred with Yale economist Robert Shiller’s 2007 warning that
home prices “appeared overvalued” and that the necessary correction could “last years
with trillions of dollars of home value being lost.” Greenspan also warned of “large
double digit declines” in home values, much larger than most would expect.

Historically Low Interest Rates
Many economists believe that the U.S. housing bubble was caused in part by historically
low interest rates. In response to the crash of the dot-com bubble in 2000 and the
subsequent recession that began in 2001, the Federal Reserve Board cut short-term
interest rates from about 6.5 percent to 1 percent. Greenspan admitted in 2007 that the
housing bubble was “fundamentally engendered by the decline in real long-term interest
rates.”
Mortgage rates typically are set in relation to 10-year Treasury bond yields, which, in
turn, are affected by federal funds rates. The Fed has acknowledged the connection
between lower interest rates, higher home values and the increased liquidity that the
higher home values bring to the overall economy. In a 2005 report by the Fed,
“International Finance Discussion Papers, Number 841, House Prices and Monetary
Policy: A Cross-Country Study,” the agency said that house prices, like other asset prices,
are influenced by interest rates, and in some countries the housing market is a key
channel of monetary policy transmission.

Criticism of Greenspan
Some have criticized then-Chairman Greenspan for “engineering” the housing bubble,
saying it was the Fed’s decline in rates that inflated the bubble. In a December 2007
interview, Greenspan disputes that claim, stating that the housing bubble had far less to
do with the Fed’s policy on interest rates than on a global surplus in savings that drove
down interest rates and pushed up housing prices in countries around the world.
In March 2007, Greenspan led a Q&A session at the Futures Industry Association’s
annual convention. In answer to a question about the causes of the subprime crisis,
Greenspan said that it was more an issue of house prices than mortgage credit. The
former Fed Chairman said that the increase in subprime lending was new. Subprime
borrowers who “came late in the game,” borrowing after prices had already gone up,
were not able to build enough equity before interest rates rose.
Despite Greenspan’s argument that low interest rates did not contribute to the housing
bubble, Richard W. Fisher, President and CEO of the Federal Reserve Bank of Dallas,
has stated that the Fed’s interest rate policy during the period of 2000–2003 was
misguided by erroneously low inflation data, thus contributing to the housing bubble.
Speaking before the New York Association for Business Economics in November 2006,
Fisher said:
A good central banker knows how costly imperfect data
can be for the economy. This is especially true of inflation
data. In late 2002 and early 2003, for example, core PCE
measurements were indicating inflation rates that werecrossing below the 1 percent “lower boundary.” At the
time, the economy was expanding in fits and starts. Given
the incidence of negative shocks during the prior two years,
the Fed was worried about the economy's ability to
withstand another one. Determined to get growth going in
this potentially deflationary environment, the FOMC
adopted an easy policy and promised to keep rates low. A
couple of years later, however, after the inflation numbers
had undergone a few revisions, we learned that inflation
had actually been a half point higher than first thought.
In retrospect, the real fed funds rate turned out to be lower
than what was deemed appropriate at the time and was held
lower longer that it should have been. In this case, poor
data led to a policy action that amplified speculative
activity in the housing and other markets. Today, as
anybody not from the former planet of Pluto knows, the
housing market is undergoing a substantial correction and
inflicting real costs to millions of homeowners across the
country. It is complicating the task of achieving our
monetary objective of creating the conditions for
sustainable non-inflationary growth.

The Bubble Bursts
Between 2004 and 2006, the Federal Reserve Board raised interest rates 17 times,
increasing them from 1 percent to 5.25 percent. The Fed stopped raising rates because of
fears that an accelerating downturn in the housing market could undermine the overall
economy. Some economists, like New York University economist Nouriel Roubini, feel
that the Fed should have tightened up on the rates earlier than it did “to avoid a festering
of the housing bubble early on.”
Roubini also warned that because of slumping sales and prices in August 2006, the
housing sector was in “free fall” and would derail the rest of the economy, causing a
recession in 2007.
In August 2006, Barron’s magazine warned that a housing crisis was approaching and
noted that the median price of new homes had dropped about 3 percent since January
2006. At that time the magazine also predicted that the national median price of housing
would fall about 30 percent in the next three years.

Housing Market Correction
Adding to the growing crisis was the prediction by many economists and business writers
in 2006 and 2007 that there would be a housing market correction because of the over
valuation of homes during the bubble period. Estimates ranged from a correction of a few
points to 50 percent or more from peak values.
Chief economist Mark Zandi of the economic research firm Moody’s Economy.com,
predicted a “crash” of double-digit depreciation by 2007-2009. In August 2007, in a
paper presented at a Fed economic symposium, Yale University economist Robert Shiller
warned that “past cycles indicate that major declines in real home prices—even 50
percent declines in some places—are entirely possible going forward from today or from
the not too distant future.”

The Rise of Subprime Lending
Subprime borrowing was a major factor in the increase in home ownership rates and the
demand for housing during the bubble years. The U.S. ownership rate increased from 64
percent in 1994 to an all-time high peak of 69.2 percent in 2004. The demand helped fuel
the rise of housing prices and consumer spending, creating an unheard of increase in
home values of 124 percent between 1997 and 2006. Some homeowners took advantage
of the increased property values of their home to refinance their homes with lower
interest rates and take out second mortgages against the added value to use for consumer
spending. In turn, U.S. household debt as a percentage of income rose to 130 percent in
2007, 30 percent higher than the average amount earlier in the decade.
With the collapse of the housing bubble came high default rates on subprime, adjustable
rate, “Alt-A” and other mortgage loans made to higher-risk borrowers with lower income
or lesser credit history than “prime” borrowers. Alt-A is a classification of mortgages in
which the risk profile falls between prime and subprime. The borrowers behind these
mortgages typically will have clean credit histories, but the mortgage itself generally will
have some issues that increase its risk profile. These issues include higher loan-to-value
and debt-to-income ratios or inadequate documentation of the borrower's income.
The share of subprime mortgages to total originations increased from 9 percent in 1996 to
20 percent in 2006 according to Forbes. Subprime mortgages totaled $600 billion in
2006, accounting for approximately one-fifth of the U.S. home loan market. An estimated
$1.3 trillion in subprime loans are outstanding.
The number of subprime loans rose as rising real estate values led to lenders taking more
risks. Some experts believe that Wall Street encouraged this type of behavior by bundling
the loans into securities that were sold to pension funds and other institutional investors
seeking higher returns.

Foreign Exchange Reserves

2007-12-05T21:56:00.000-08:00

India’s foreign exchange reserves were US $ 261.1 billion as on October 19, 2007, higher by US $ 62.0 billion over end-March 2007. The increase in reserves was mainly due to an increase in foreign currency assets from US $ 191.9 billion during end-March 2007 to US $ 253.3 billion as on October 19, 2007 (Table 58).
India holds the fifth largest stock of reserves among the emerging market economies and sixth largest in the world. The overall approach to the management of India’s foreign exchange reserves in recent years reflects the changing composition of the balance of payments and the ‘liquidity risks’ associated with different types of flows and other requirements. Taking these factors into account, India’s foreign exchange reserves continued to be at a comfortable level and consistent with the rate of growth, the share of external sector in the economy and the size of risk-adjusted capital flows.
External Debt
India’s total external debt was placed at US $ 165.4 billion at end-June 2007, recording an increase of US $ 8.7 billion (5.6 per cent) over end-March 2007. The increase in external debt during the period was mainly on account of higher external commercial borrowings, followed by higher NRI deposits and short-term trade credit. Over 50 per cent of the external debt stock was denominated in US dollars followed by the Indian rupee (18.0 per cent), SDR (12.3 per cent) and Japanese yen (12.0 per cent). Debt sustainability indicators such as the ratio of short-term to total debt and short-term debt to reserves increased marginally between end-March 2007 and end-June 2007. Foreign exchange reserves remained in excess of the stock of external debt (Table 59).
International Investment Position
India’s net international liabilities declined by US $ 2.7 billion between end-March 2006 and end-March 2007, as the increase in international assets (US $ 60.8 billion) exceeded the increase in international liabilities (US $ 58.1 billion) (Table 60). The increase in international assets was mainly on account of reserve assets, which registered an increase of US $ 47.6 billion between end-March 2006 and end-March 2007, followed by direct investment abroad whichincreased by US $ 11 billion during the same period. International liabilities reflected increases in direct and portfolio investment and loans at end-March 2007 from their levels at end-March 2006. A major part of the liabilities like direct and portfolio investments reflects cumulative inflows, which are at historical prices.

Capital flows to India

2007-12-05T21:50:00.000-08:00

Capital flows to India have remained buoyant during the financial year 2007-08 so far. Among the major components of capital flows, foreign investment recorded an inflow of US $ 20.7 billion during April-July 2007. Inflows under foreign direct investment (FDI) into India at US $ 6.6 billion during April-July 2007 (US $ 3.7 billion in April-July 2006) witnessed significant increase, reflecting the continuing pace of expansion of domestic activities, positive investment climate, and long-term view of India as the investment destination. FDI was channelled mainly into services sector (34.2 per cent), followed by construction industry (20.6 per cent). While Mauritius continued as the dominant sources of FDI to India, FDI from Singapore exceeded that from the US.
Foreign institutional investors (FIIs) inflows (net) have aggregated US $ 21.2 billion during the current financial year so far (up to October 19, 2007), reflecting, inter alia, strong corporate performance and strong domestic equity markets (Table 57). The number of FIIs registered with the SEBI increased from 997 by end-March 2007 to 1,113 by October 15, 2007. Capital inflows through American depository receipts (ADRs)/global depository receipts (GDRs) abroad amounted to US $ 2.3 billion during April-July 2007.
During the first quarter of 2007-08 (April-June 2007), net inflows under external commercial borrowings (ECBs) continued to be buoyant at US $ 7.0 billion. Ongoing technological upgradation and modernisation combined with expansion of domestic industrial activities have led to increased investment demand by Indian companies, and some hardening of domestic interest rates, which is reflected in higher recourse to ECBs.

Derivatives

2007-03-09T08:22:00.000-08:00

INTRODUCTION
BSE created history on June 9, 2000 by launching the first Exchange traded Index Derivative Contract i.e. futures on the capital market benchmark index - the BSE Sensex. The inauguration of trading was done by Prof. J.R. Varma, member of SEBI and chairman of the committee responsible for formulation of risk containment measures for the Derivatives market. The first historical trade of 5 contracts of June series was done on June 9, 2000 at 9:55:03 a.m. between M/s Kaji & Maulik Securities Pvt. Ltd. and M/s Emkay Share & Stock Brokers Ltd. at the rate of 4755.In the sequence of product innovation, the exchange commenced trading in Index Options on Sensex on June 1, 2001. Stock options were introduced on 31 stocks on July 9, 2001 and single stock futures were launched on November 9, 2002.September 13, 2004 marked another milestone in the history of Indian Capital Markets, the day on which the Bombay Stock Exchange launched Weekly Options, a unique product unparallel in derivatives markets, both domestic and international. BSE permitted trading in weekly contracts in options in the shares of four leading companies namely Reliance, Satyam, State Bank of India, and Tisco in addition to the flagship index-Sensex.

TYPES OF PRODUCTS

Index Futures

A futures contract is a standardized contract to buy or sell a specific security at a future date at an agreed price.An index future is, as the name suggests, a future on the index i.e. the underlying is the index itself. There is no underlying security or a stock, which is to be delivered to fulfill the obligations as index futures are cash settled. As other derivatives, the contract derives its value from the underlying index. The underlying indices in this case will be the various eligible indices and as permitted by the Regulator from time to time.
Click here for list of Index Futures Products

Index Options

Options contract give its holder the right, but not the obligation, to buy or sell something on or before a specified date at a stated price. Generally index options are European Style. European Style options are those option contracts that can be exercised only on the expiration date. The underlying indices for index options are the various eligible indices and as permitted by the Regulator from time to time.
Click here for list of Index Options Products

Stock Futures

A stock futures contract is a standardized contract to buy or sell a specific stock at a future date at an agreed price. A stock future is, as the name suggests, a future on a stock i.e. the underlying is a stock. The contract derives its value from the underlying stock. Single stock futures are cash settled.
Click here for list of Stock Futures Products

Stock Options

Options on Individual Stocks are options contracts where the underlyings are individual stocks. Based on eligibility criteria and subject to the approval from the regulator, stocks are selected on which options are introduced. These contracts are cash settled and are American style. American Style options are those option contracts that can be exercised on or before the expiration date.
Click here for list of Stock Options Products

Weekly Options

Equity Futures & Options were introduced in India having a maximum life of 3 months. These options expire on the last Thursday of the expiring month. There was a need felt in the market for options of shorter maturity. To cater to this need of the market participants BSE launched weekly options on September 13, 2004 on 4 stocks and the BSE Sensex.Weekly options have the same characteristics as that of the Monthly Stock Options (stocks and indices) except that these options settle on Friday of every week. These options are introduced on Monday of every week and have a maturity of 2 weeks, expiring on Friday of the expiring week.

Click here for the list of Weekly Stock and Index Option Contracts

Source:-http://www.bseindia.com

SENSEX - THE BAROMETER OF INDIAN CAPITAL MARKETS

2007-03-09T08:01:00.000-08:00

For the premier Stock Exchange that pioneered the stock broking activity in India, 128 years of experience seems to be a proud milestone. A lot has changed since 1875 when 318 persons became members of what today is called "The Stock Exchange, Mumbai" by paying a princely amount of Re1.Since then, the country's capital markets have passed through both good and bad periods. The journey in the 20th century has not been an easy one.

Till the decade of eighties, there was no scale to measure the ups and downs in the Indian stock market. The Stock Exchange, Mumbai (BSE) in 1986 came out with a stock index that subsequently became the barometer of the Indian stock market.SENSEX is not only scientifically designed but also based on globally accepted construction and review methodology. First compiled in 1986, SENSEX is a basket of 30 constituent stocks representing a sample of large, liquid and representative companies.

The base year of SENSEX is 1978-79 and the base value is 100. The index is widely reported in both domestic and international markets through print as well as electronic media.The Index was initially calculated based on the "Full Market Capitalization" methodology but was shifted to the free-float methodology with effect from September 1, 2003. The "Free-float Market Capitalization" methodology of index construction is regarded as an industry best practice globally. All major index providers like MSCI, FTSE, STOXX, S&P and Dow Jones use the Free-float methodology.Due to is wide acceptance amongst the Indian investors; SENSEX is regarded to be the pulse of the Indian stock market. As the oldest index in the country, it provides the time series data over a fairly long period of time (From 1979 onwards). Small wonder, the SENSEX has over the years become one of the most prominent brands in the country.The growth of equity markets in India has been phenomenal in the decade gone by. Right from early nineties the stock market witnessed heightened activity in terms of various bull and bear runs. The SENSEX captured all these events in the most judicial manner. One can identify the booms and busts of the Indian stock market through SENSEX.

SENSEX Calculation Methodology

SENSEX is calculated using the "Free-float Market Capitalization" methodology. As per this methodology, the level of index at any point of time reflects the Free-float market value of 30 component stocks relative to a base period. The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company. This market capitalization is further multiplied by the free-float factor to determine the free-float market capitalization.The base period of SENSEX is 1978-79 and the base value is 100 index points. This is often indicated by the notation 1978-79=100. The calculation of SENSEX involves dividing the Free-float market capitalization of 30 companies in the Index by a number called the Index Divisor. The Divisor is the only link to the original base period value of the SENSEX. It keeps the Index comparable over time and is the adjustment point for all Index adjustments arising out of corporate actions, replacement of scrips etc. During market hours, prices of the index scrips, at which latest trades are executed, are used by the trading system to calculate SENSEX every 15 seconds and disseminated in real time.

Dollex-30

BSE also calculates a dollar-linked version of SENSEX and historical values of this index are available since its inception. (For more details click ‘Dollex series of BSE indices’)

Understanding Free-float MethodologyConcept:

Free-float Methodology refers to an index construction methodology that takes into consideration only the free-float market capitalization of a company for the purpose of index calculation and assigning weight to stocks in Index. Free-float market capitalization is defined as that proportion of total shares issued by the company that are readily available for trading in the market. It generally excludes promoters' holding, government holding, strategic holding and other locked-in shares that will not come to the market for trading in the normal course. In other words, the market capitalization of each company in a Free-float index is reduced to the extent of its readily available shares in the market.In India, BSE pioneered the concept of Free-float by launching BSE TECk in July 2001 and BANKEX in June 2003. While BSE TECk Index is a TMT benchmark, BANKEX is positioned as a benchmark for the banking sector stocks. SENSEX becomes the third index in India to be based on the globally accepted Free-float Methodology.Major advantages of Free-float Methodology:

· A Free-float index reflects the market trends more rationally as it takes into consideration only those shares that are available for trading in the market.

· Free-float Methodology makes the index more broad-based by reducing the concentration of top few companies in Index. For example, the concentration of top five companies in SENSEX has fallen under the free-float scenario thereby making the SENSEX more diversified and broad-based.

· A Free-float index aids both active and passive investing styles. It aids active managers by enabling them to benchmark their fund returns vis-à-vis an investable index. This enables an apple-to-apple comparison thereby facilitating better evaluation of performance of active managers. Being a perfectly replicable portfolio of stocks, a Free-float adjusted index is best suited for the passive managers as it enables them to track the index with the least tracking error.

· Free-float Methodology improves index flexibility in terms of including any stock from the universe of listed stocks. This improves market coverage and sector coverage of the index. For example, under a Full-market capitalization methodology, companies with large market capitalization and low free-float cannot generally be included in the Index because they tend to distort the index by having an undue influence on the index movement. However, under the Free-float Methodology, since only the free-float market capitalization of each company is considered for index calculation, it becomes possible to include such closely held companies in the index while at the same time preventing their undue influence on the index movement.

· Globally, the Free-float Methodology of index construction is considered to be an industry best practice and all major index providers like MSCI, FTSE, S&P and STOXX have adopted the same. MSCI, a leading global index provider, shifted all its indices to the Free-float Methodology in 2002. The MSCI India Standard Index, which is followed by Foreign Institutional Investors (FIIs) to track Indian equities, is also based on the Free-float Methodology. NASDAQ-100, the underlying index to the famous Exchange Traded Fund (ETF) - QQQ is based on the Free-float Methodology.
Definition of Free-float:
Share holdings held by investors that would not, in the normal course come into the open market for trading are treated as 'Controlling/ Strategic Holdings' and hence not included in free-float. In specific, the following categories of holding are generally excluded from the definition of Free-float:

Holdings by founders/directors/ acquirers which has control element
Holdings by persons/ bodies with "Controlling Interest"
Government holding as promoter/acquirer
Holdings through the FDI Route
Strategic stakes by private corporate bodies/ individuals
Equity held by associate/group companies (cross-holdings)
Equity held by Employee Welfare Trusts
Locked-in shares and shares which would not be sold in the open market in normal course.
The remaining shareholders would fall under the Free-float category.Determining Free-float factors of companies:
BSE has designed a Free-float format, which is filled and submitted by all index companies on a quarterly basis with the Exchange. (Format available on http://www.bseindia.com/) The Exchange determines the Free-float factor for each company based on the detailed information submitted by the companies in the prescribed format. Free-float factor is a multiple with which the total market capitalization of a company is adjusted to arrive at the Free-float market capitalization. Once the Free-float of a company is determined, it is rounded-off to the higher multiple of 5 and each company is categorized into one of the 20 bands given below. A Free-float factor of say 0.55 means that only 55% of the market capitalization of the company will be considered for index calculation.Free-float Bands:

% Free-Float Free Float Factor
>0 – 5% 0.05 >50 – 55% 0.55
>5 – 10% 0.10 >55 – 60% 0.60
>10 – 15% 0.15 >60 – 65% 0.65
>15 – 20% 0.20 >65 – 70% 0.70
>20 – 25% 0.25 >70 – 75% 0.75
>25 – 30% 0.30 >75 – 80% 0.80
>30 – 35% 0.35 >80 – 85% 0.85
>35 – 40% 0.40 >85 – 90% 0.90
>40 – 45% 0.45 >90 – 95% 0.95
>45 – 50% 0.50 >95 – 100% 1.00

Index Closure Algorithm
The closing SENSEX on any trading day is computed taking the weighted average of all the trades on SENSEX constituents in the last 30 minutes of trading session. If a SENSEX constituent has not traded in the last 30 minutes, the last traded price is taken for computation of the Index closure. If a SENSEX constituent has not traded at all in a day, then its last day's closing price is taken for computation of Index closure. The use of Index Closure Algorithm prevents any intentional manipulation of the closing index value.Maintenance of SENSEXOne of the important aspects of maintaining continuity with the past is to update the base year average. The base year value adjustment ensures that replacement of stocks in Index, additional issue of capital and other corporate announcements like 'rights issue' etc. do not destroy the historical value of the index. The beauty of maintenance lies in the fact that adjustments for corporate actions in the Index should not per se affect the index values.The Index Cell of the exchange does the day-to-day maintenance of the index within the broad index policy framework set by the Index Committee. The Index Cell ensures that SENSEX and all the other BSE indices maintain their benchmark properties by striking a delicate balance between frequent replacements in index and maintaining its historical continuity. The Index Committee of the Exchange comprises of experts on capital markets from all major market segments. They include Academicians, Fund-managers from leading Mutual Funds, Finance-Journalists, Market Participants, Independent Governing Board members, and Exchange administration.On-Line Computation of the Index:During market hours, prices of the index scrips, at which trades are executed, are automatically used by the trading computer to calculate the SENSEX every 15 seconds and continuously updated on all trading workstations connected to the BSE trading computer in real time.Adjustment for Bonus, Rights and Newly issued Capital:The arithmetic calculation involved in calculating SENSEX is simple, but problem arises when one of the component stocks pays a bonus or issues rights shares. If no adjustments were made, a discontinuity would arise between the current value of the index and its previous value despite the non-occurrence of any economic activity of substance. At the Index Cell of the Exchange, the base value is adjusted, which is used to alter market capitalization of the component stocks to arrive at the SENSEX value.The Index Cell of the Exchange keeps a close watch on the events that might affect the index on a regular basis and carries out daily maintenance of all the 14 Indices.
· Adjustments for Rights Issues:When a company, included in the compilation of the index, issues right shares, the free-float market capitalisation of that company is increased by the number of additional shares issued based on the theoretical (ex-right) price. An offsetting or proportionate adjustment is then made to the Base Market Capitalisation (see 'Base Market Capitalisation Adjustment' below).
· Adjustments for Bonus Issue:When a company, included in the compilation of the index, issues bonus shares, the market capitalisation of that company does not undergo any change. Therefore, there is no change in the Base Market Capitalisation, only the 'number of shares' in the formula is updated.
· Other Issues:Base Market Capitalisation Adjustment is required when new shares are issued by way of conversion of debentures, mergers, spin-offs etc. or when equity is reduced by way of buy-back of shares, corporate restructuring etc.

Base Market Capitalisation Adjustment:

The formula for adjusting the Base Market Capitalisation is as follows:

New Base Market Capitalisation =Old Base Market Capitalisation x (New Market Capitalisation/Old Market Capitalisation)

To illustrate, suppose a company issues right shares which increases the market capitalisation of the shares of that company by say, Rs.100 crores. The existing Base Market Capitalisation (Old Base Market Capitalisation), say, is Rs.2450 crores and the aggregate market capitalisation of all the shares included in the index before the right issue is made is, say Rs.4781 crores. The "New Base Market Capitalisation " will then be:

2450 x (4781+100)/4781 = Rs.2501.24 crores

This figure of 2501.24 will be used as the Base Market Capitalisation for calculating the index number from then onwards till the next base change becomes necessary.

SENSEX - Scrip selection criteria:

The general guidelines for selection of constituents in SENSEX are as follows:

Listed History:The scrip should have a listing history of at least 3 months at BSE. Exception may be considered if full market capitalisation of a newly listed company ranks among top 10 in the list of BSE universe. In case, a company is listed on account of merger/ demerger/ amalgamation, minimum listing history would not be required.
Trading Frequency:The scrip should have been traded on each and every trading day in the last three months. Exceptions can be made for extreme reasons like scrip suspension etc.

Final Rank:The scrip should figure in the top 100 companies listed by final rank. The final rank is arrived at by assigning 75% weightage to the rank on the basis of three-month average full market capitalisation and 25% weightage to the liquidity rank based on three-month average daily turnover & three-month average impact cost.

Market Capitalization Weightage:The weightage of each scrip in SENSEX based on three-month average free-float market capitalisation should be at least 0.5% of the Index.

Industry Representation:Scrip selection would generally take into account a balanced representation of the listed companies in the universe of BSE.

Track Record:In the opinion of the Committee, the company should have an acceptable track record.

Index Review Frequency:The Index Committee meets every quarter to discuss index related issues. In case of a revision in the Index constituents, the announcement of the incoming and outgoing scrips is made six weeks in advance of the actual implementation of the revision of the Index.

Source:- http://www.bseindia.com

Without Indians, US economy won't be same:Report

2007-01-12T08:46:00.000-08:00

Indian immigrants are a significant driving force behind the creation of new engineering and technology companies in the United States in the past decade than their counterparts from the UK, China, Taiwan and Japan put together. Of an estimated 73-hundred US tech startups founded by immigrants, 26 per cent have Indian founders, CEOs, presidents or head researchers, a new study says. "Indians have beaten the Chinese in start-up hotbeds like Silicon Valley with a share of 15.5 per cent, up from 7 per cent between 1980 to 1998," says the study, ‘Silicon Valley's New Immigrant Entrepreneurs’ , by researchers in the master of engineering management programme at the Pratt School of Engineering at the Duke University.

The study, which covered 28,766 firms with annual sales of more than USD 1 million and 20 or more employees, comes nearly eight years after an influential report from the University of California, Berkeley, on the impact of foreign-born entrepreneurs.

"This study shows the tremendous contribution immigrants in general and Indians in particular are making to the US economy and global competitiveness. This is a win-win for America and for the immigrants that make it here," Vivek Wadhwa, Delhi-born Duke's executive in residence and the founder of two tech startups in North Carolina's Research Triangle said. Wadhwa, project's lead researcher, stressed that "the country should make the most of its ability to "get the best and brightest from around the world."

"Indians constitute less than one per cent of the US population and are starting many times the businesses as other groups. They are creating jobs and contributing tens of billions to the US economy. Without Indian entrepreneurs, it would not be the same", Wadhwa said. AnnaLee Saxenian, study co-author and dean of the School of Information at UC-Berkeley, estimated immigrants founded about 25 per cent of Silicon Valley tech companies in 1999. The Duke study found the percentage had more than doubled, to 52 per cent in 2005.

The research debunks some recent myths about the notion that immigrants who come to the United States take jobs from Americans. "The advantage of entrepreneurs is that they're generally creating new opportunities and new wealth that didn't even exist before them," Saxenian said. "Just by leaving your home country, you're taking a risk, and that means you're willing to take risks in business. You put them in an environment that supports entrepreneurship, and this is the logical outcome." Immigrants from the UK set up 7.1 per cent of the companies, followed by China with 6.9 per cent and Taiwan with 5.8 per cent. Immigrant entrepreneurs' companies employed 450,000 workers and generated USD 52 billion in sales in 2005, according to the survey.

The share of Chinese and Taiwanese start-ups, which was 17 per cent in 1990-98 period, came down to 12.8 per cent between 1995 and 2005. The report adds that the number of Indian scientists and engineers in Silicon Valley has grown by 646 per cent between 1990 and 2000. Indian immigrants dominated even on a state-wise basis. While in New Jersey, the share of Indian start-ups was a whopping 47 per cent, in Texas, it stood at 25 per cent. This was followed by California with 20 per cent, Florida with 18 per cent, New York with 14 per cent and Massachusetts with 10 per cent. The study reveals that California, which houses the Silicon Valley, has emerged as the favourite destination for immigrant Indian entrepreneurs. Around 26 per cent Indian startups were set up there. Around 36 per cent companies in the software sector were Indian, while in the innovation and manufacturing- related services, the figure was 24 per cent. In semiconductors, Indian start-ups shared the top place with the Chinese with a share of 15 per cent each.

However, the Indians failed to dominate in sectors like computers and communications, where their share stood at 15 per cent, lower than the Chinese (19 per cent) and Taiwanese (17 per cent). The study shows that the largest number of companies started by Indians are in the software sector (46 per cent), followed by start-ups in the innovation and manufacturing- related services (44 per cent). The Duke study found that 52 per cent of Silicon Valley companies -- and 39 per cent of California startups -- were founded by foreign-born entrepreneurs.

Source:The Indian Express

The secret behind successful SOP(essay)

2006-12-30T08:32:00.000-08:00

1. Edit your essaysRead through for logic, and be sure to use your computer’s spelling and grammar check. This won’t catch everything, but it will help.

2. Have someone who knows you well read your essaysAsk them if that describes you. Is it an accurate picture? What do they NOT say? Friends and colleagues are often a good source for singling out your accomplishments, strengths, and weaknesses.

3. Have someone who does NOT know you read your essaysAsk a friend of a friend. Find someone who only knows you professionally. The admissions committee does not know you personally, so this can give you a better feeling for the tone your essays are setting for a stranger.There are an increasing number of admissions consulting services available to candidates that can help to focus your work and strengthen your key messages. It is important that such services stop short of actually writing for you, but they can provide very valuable impartial input.

4. Think before you writeThe writing can be the easy part; deciding what you want to say can be harder. You have limited space to convey a lot of information about yourself and you should use it most effectively and efficiently.

5. Be interestingIf you are naturally funny and light hearted, let some of that show in your essays. While you should certainly take the essays seriously, make sure you allow some personality to show through.

6. Be true to yourself
Do not write what you think the Admissions Office wants to read if it does not accurately reflect the “real” you.

7. Be a contributorWharton does not want to admit someone who is smart but unlikely to add to the greater community. Through your application, show what you can add to the experience of your classmates – whether that be through extracurricular activities, a unique professional background, or your quirky sense of humor.

What B-schools are looking for in your essays

The essays are where you can provide the “how” and the “why” behind the “what” and “when” of the data forms. Before reading your essays, a reader will have looked at the data forms and your resume. Use the essays to explain the path you have taken, what you have learned along the way, and what you can offer to the school community.The essay questions give candidates the chance to express what they think is important to the admissions committee, in addition to answering more typical questions regarding the candidate’s reasons for obtaining an MBA, path, goals, and interest in the a particular school’s MBA. What we would therefore remind you is that there is no one response to each essay, but to give you tools to ensure that you are addressing the question, and thinking about it in terms that better enable the admissions committee to evaluate you for their school.This is your chance to convey a sense of self – a level of self understanding that validates your previous experience whilst conveying your potential for future achievement. You might be talking about your values – what is important to you, what are your priorities in life? Equally you can communicate your goals – what do you intend to achieve, what are your ambitions? To be truly convincing, make sure that you provide concrete examples. When the school asks you about your strengths and weaknesses, convey each strength with a specific illustration. Telling the school, “People say that I am very creative”, will not get you very far. It is only when you back up your claim that you can impress the school. “A good example of my creativity would be the investment proposal that I put together for Company X, which provided an innovative solution to …”It is also important at this stage to avoid lists – nobody remembers them, least of all a school handling thousands of applications a year. It is far more effective to limit yourself to two or three strengths, or to focus on a singular achievement, and provide a valuable insight as to what this says about you as a person.To fully grasp this idea, and use is to your advantage in your essays, compare your résumé with your answers to the school questions. A résumé will provide dates, locations, either job titles or qualifications, and a brief description of your responsibilities. For example:2004-2006 Financial Analyst, Mumbai- Advised on US investment for key Asian accounts- Averaged 12,7% return on portfolio investmentIn comparison, the essay is the chance to convey the characteristics that made such an experience a success, or tells the admissions team about your personality. What attracted you to this position? Maybe it is because you love to face new challenges, and are open-minded to business with an international context. Over the two-year period you had to demonstrate be determined and even single-minded when completing your research. These are the stories and illustrations that bring your admissions file to life, and help you to stand out from the other applicants.The other golden rule is to always answer the question, whether in an essay or during an interview. If the interviewer asks you about a weakness, a shrug and the answer “I don’t have any weaknesses” has just had the opposite effect, and highlighted a major weakness of self awareness! Most candidates struggle with the dilemma of either providing an honest answer that ruins one’s chances, or the rehearsed answer which leaves one looking evasive, phony, or guilty of giving yet another tired cliché. How many times have the admissions team heard “My greatest weakness is that I'm a perfectionist, and work too hard”?Such a candidate has obviously tried to rely on the idea of naming a fault that's not really a fault. Impatience with incompetence might be another example. If you do try this technique, again be sure to use a real example to give the story some interest and substance. An alternative is to provide a weakness that is actually related to others.

“I get frustrated when committees or institutions fail to respond decisively or in a timely fashion. Worse though is when they avoid taking a decision, pass it on to another department or group, and then criticize how it’s done.” Your answer should be in keeping with the school to which you are applying. Telling a school that emphasizes leadership and finance that you are a shy person, or that you don’t like mathematics, would make a school renowned for its leadership training and quantitative program quite concerned. It is often better to avoid interpersonal issues, because explaining that you don’t get along with people challenges the importance of the shared student experience on campus.

You could consider naming a real weakness, but one you're taking steps to improve. This shows that you are aware of a situation, and are taking the initiative to do something about it.Examples could include learning another language, or improving your comfort level with technology. As business schools emphasize, there is no one right answer – just the freedom to express what you feel is important, and says something about the real you.

Matt Symonds is co-founder of the QS World MBA Tour , and author of the bestselling book on applying to b-school, “Getting the MBA Admissions Edge”. An experienced public speaker in more than 40 countries on TV, radio and at conferences and seminars public presentations, Matt is an authority on Graduate Executive Management Education. Source: TopMBA.com

Triple bottom line

2006-12-28T08:14:00.000-08:00

Triple bottom line
The triple bottom line, a.k.a. "3BL" or "People, Planet, Profit", captures an expanded spectrum of values and criteria for measuring organizational (and societal) success—economic, environmental and social. For some a commitment to Corporate Social Responsibility brings with it a need to institute triple bottom line reporting.

Definition

In practical terms, triple bottom line accounting means expanding the traditional company reporting framework to take into account environmental and social performance in addition to financial performance. The phrase was coined by John Ellington, co-founder of the business consultancy Sustainability in 1994. It was later expanded and articulated in his 1998 book Cannibals with Forks: the Triple Bottom Line of 21st Century Business. (Ref Business and Sustainable Development: A Global Guide)

Arguments in favor of the concept

Fiscal policy of governments usually claims to be concerned with identifying social and natural deficits on a less formal basis. However, in a democracy at least, such choices are usually guided more by ideology than by economics. The primary benefit of embedding one approach to measurement of these deficits would be first to direct monetary policy to reduce them, and eventually achieve a global monetary reform by which they could be systematically and globally reduced in some uniform way.
The argument is that the Earth's carrying capacity is itself at risk, and that in order to avoid catastrophic breakdown of climate or nature's services, there is a need for a comprehensive reform in global financial institutions similar in scale to that undertaken at Bretton Woods in 1944, and not since. This argument has been made most coherently by Marilyn Waring, perhaps the only individual to have actually read all the documents that arose from that meeting.
Mainstream acceptance of her view has steadily grown. With the emergence of an externally-consistent green economics and agreement on definitions of potentially contentious terms such as full-cost accounting, natural capital and social capital, the prospect of formal metrics for ecological and social loss or risk has grown less remote through the 1990s.
In the United Kingdom in particular, the London Health Observatory has undertaken a formal program to address social deficits via a fuller understanding of what "social capital" is, how it functions in a real community (that being the City of London), and how losses of it tend to require both financial capital and significant political and social attention from volunteers and professionals to help resolve. The data they rely on is extensive, building on decades of statistics of the Greater London Council since World War II. There are some similar studies in North America, although with less rigorous methods, less uniform data, and which tend to be more regionally based.
Studies of nature's services and assessments of the value of Earth have tried to determine what might constitute an ecological or natural life deficit. The Kyoto Protocol relies on some measures of this sort, and actually relies on some value of life calculations that, among other things, are explicit about the ratio of the price of a human life between developed and developing nations (about 15 to 1). While the motive of this number was to simply assign responsibility for a cleanup, such stark honesty opens not just an economic but political door to some kind of negotiation - presumably to reduce that ratio in time to something seen as more equitable. As it is, people in developed nations can be said to benefit 15 times more from ecological devastation than in developing nations, in pure financial terms. According to the IPCC, they are thus obliged to pay 15 times more per life to avoid a loss of each such life to climate change—Kyoto seeks to implement exactly this formula, and is therefore sometimes cited as a first step towards getting nations to accept formal liability for damage inflicted on ecosystems shared globally.
Advocacy for triple bottom line reforms is common in Green Parties. However, the principle is increasingly popular among those of other stripes, e.g. in Islamic economics and in creditor economics. It is increasingly common also in United Nations circles as well. Some of the measures undertaken in the European Union towards the Euro currency integration standardize the reporting of ecological and social losses in such a way as to seem to endorse in principle the notion of unified accounts, or unit of account, for these deficits.

Arguments against the concept

While many people agree with the importance of good social conditions and preservation of the environment, there are also many who disagree with the 'Triple Bottom Line' as the way to enhance these conditions. The main arguments against it may be summarized as;
Division of Labor, which is characteristic of rich societies and a major contributor to their wealth, leading to the view that organizations contribute most to the welfare of society in all respects when they focus on what they do best... the baker exchanges his loaves with the shoemaker rather than making his own shoes to the benefit of both and by extension the whole of society. In the case of business the expertise is in satisfying the needs of society and generating a Value added surplus. Thus the 'triple bottom line' is thought to be harmful by diverting business attention away from its core competency. Just as charitable organizations like the Salvation Army would not be expected to attend to environmental issues or pay a cash dividend, and Greenpeace would not be expected to make a profit or succor the homeless, business should not be expected to take on concerns outside its core expertise.

Effectiveness: It is observed that concern for social and environmental matters is rare in poor societies (a hungry person would rather eat the whale than photograph it). As a society becomes richer its citizens develop an increasing desire for a clean environment and protected wildlife, and both the willingness and financial ability to contribute to this and to a compassionate society. Indeed support for the concept of the 'Triple Bottom Line' itself is said to be an example of the choices available to the citizens of a society made wealthy by businesses attending to business.
Thus by unencumbered attention to business alone, Adam Smith's Invisible Hand will ensure that business contributes most effectively to the improvement of all areas of society, social and environmental as well as economic.

Nationalism: Some countries adopt a nationalistic approach with the view that they must look after their own citizens first. This view is not confined to one sector of society, having support from elements of business, labor unions, and politicians.

Libertarian: As it is possible for a socially responsible person to sincerely believe that the 'Triple Bottom Line' is harmful to society, the libertarian view is that it would be arrogant to force them to support a mechanism for the improvement of society that may, or may not, be the best available. That is, those who would not force Greenpeace and the Salvation Army to generate a profit should not force businesses to take responsibilities outside their area of expertise.

Inertia: The difficulty of achieving global agreement on simultaneous policy may render such measures at best advisory - and thus not enforceable. For example, people may be unwilling to undergo a depression or even sustained recession to replenish lost ecosystems

PREPARATION FOR INTERVIEWS

2006-12-19T08:37:00.000-08:00

Because communication skills are such an integral part of effective management, some schools include personal interviews as part of the admissions process.

Some tips to help you prepare for an interview: o Review your application; the interviewer is likely to ask specific questions about it.

o Be ready to provide examples and specifics and to elaborate on info on your resume and application.

o Be open and honest.

o Ask questions, since the interview is as much an opportunity for you to learn about the school as for the school to learn about you.

o Follow proper business decorum.

o Watch your nonverbal clues, such as eye contact, posture, and fidgeting.

o Be courteous to the administrative staff, since how you treat them can have an impact (positive or negative).

Some Frequently Asked Questions on Interviews :

"Tell us about yourself"? In an interview how does one handle the question "Tell us about yourself?". An often asked opening question. Perhaps the most frequently asked question across interviews. Your opening statement needs to be a summary of your goals, overall professional capabilities, achievements, background (educational and family), strengths, professional objectives and anything about your personality that is relevant and interesting. This question represents an opportunity to lead the interviewer in the direction you want him to go e.g., your speciality or whatever else you may wish to highlight. Your intention should be to try subtly convincing the interviewers that you are a good candidate, you have proved that in the past and have a personality that fits the requirement. Remember that the first impression you create will go a long way in the ultimate selection. Keep in mind, most candidates who are asked this question just blurt out their schooling, college, marks and qualifications. All this is already there in the CV. Why tell the interviewer something he already knows? A final word on approaching this question. Once you have said what you have to say - shut up. Don't drone on for the sake of speaking for you just might say something foolish. Sometimes interviewers don't interrupt in order to give the candidate the impression that he has not spoken enough. This is just a stress/error-inducing tactic. Don't fall for it, especially if you feel you have spoken enough. In case the pause gets too awkward for your liking, just add something like, "Is there something specific that you wish to know about me?" Is it better to have a longer selection interview or a shorter one? The length of an interview in no way is an indicator of how well an interview went. This is especially so when there are a number of candidates to be interviewed, like in the Civil Services interview or the MBA entrance interview. In the past, a number of candidates have reported varying lengths of interviews. Nothing positive or negative should be read into this. An interview is only a device whereby the panel seeks information about the candidate. Information that will help the panel decide whether or not the candidate should be selected. If the panel feels that it has gathered enough information about the candidate in 15 minutes of the interview commencing and that it has no further questions to ask the interview will be terminated in 15 minutes. If on the other hand the panel takes an hour to gather the information required to take a decision the interview will last for an hour. In either case the decision could be positive or negative. It is a fallacy to believe that interview panels take longer interviews of candidates whom they are more interested in. No panel likes to waste its time. If an interview is lasting longer than usual then it only means that the panel is seeking more information about the candidate in order to take a decision. In the MBA entrance interview how do I justify my decision to pursue the MBA programme? When you are asked this for God's sake don't tell the panel that you are looking for a"challenging job in a good firm with lots of money, status and glamour". That is the first answer that most candidates think of. Unfortunately, it is the last answer that will get you admission. In the answer to a direct question on this subject you must convey to the interview panel that you have made a rational and informed decision about your career choice and your intended course of higher study. There are broadly four areas which your answer could touch upon: Career Objectives : You could talk about your career objectives and how the two year MBA programme will help you achieve them. This implies that you have a clear idea of what your career objectives are and how you wish to achieve them. For example, you may want to be an entrepreneur and wish to set up your independent enterprise after doing your MBA and then working for a few years in a professionally managed company. You could explain to the panel that the MBA programme will provide you with the necessary inputs to help you run your business enterprise better. But then you must be clear about what the inputs you will receive in the MBA programme are. Value Addition : That brings us to the second area that your answer should touch upon. What is the value you will add to yourself during your two year study of management. Value addition will essentially be in two forms knowledge and skills. Knowledge of the various areas of management e.g. marketing, finance, systems, HRD etc. and skills of analysis and communication. You will find it useful to talk to a few people who are either doing their MBA or have already done it. They will be able to give you a more detailed idea of what they gained from their MBA. Background : Remember, there must be no inconsistency between your proposed study of management and your past subject of study or your past work experience. If you have studied commerce in college then management is a natural course of higher studies. If you are an engineer this is a tricky area. You must never say that by pursuing a career in management you will be wasting your engineering degree. Try and say that the MBA course and your engineering degree will help you do your job better in the company that you will join. But then you should be able to justify how your engineering qualification will help. Opportunities and Rewards : You could also at this stage mention the opportunities that are opening up in organizations for management graduates. Highlight with examples. At the end you may mention that while monetary rewards are not everything they are also important and MBAs do get paid well. You must not mention these reasons as your primary motivators even if that may be the case. What to Expect ? In general, B-school interviews are not formulaic. The focus can range from specific questions about your job responsibilities to broad discussions of life. Approach the interview as a conversation to be enjoyed, not as a question-and-answer ordeal to get through. You may talk more about your hobbies or recent cross-country trip. This doesn't mean that it won't feel like a job interview. It just means you're being sized up as a person and future professional in all your dimensions. Try to be your witty, charming, natural self. Interviews are conducted by students, faculty, admissions personnel and alumni. Don't dismiss students as the lightweights; they follow a tight script and report back to the committee. However, because they're inexperienced beyond the script, their interviews are most likely to be duds. You may have to work harder to get your points across. How to Prepare ? Prepare for the interview in several ways: Expect to discuss many things about yourself. Be ready to go into greater depth than you did in your essays (but don't assume the interviewer has read them). Put together two or three points about yourself that you want the interviewer to remember you by. Go in with examples, or even a portfolio of your work, to showcase your achievements. Practice speaking about your accomplishments without a lot of "I did this, I did that." Finally, be prepared to give a strong and convincing answer to the interviewer's inevitable question: "Why here?" Self Awareness 1. How would you describe yourself ? 2. Tell me about yourself ? 3. How do you think a friend or professor who knows you would describe you? 4. What motivates you to put forth your best effort ? 5. How do you determine or evaluate success ? 6. What academic subjects did you like best ? Least ? 7. What led you to choose the career for which you are preparing ? 8. What personal characteristics are necessary for succeeding in the career that you are interested in ? 9. What is your philosophy of life ? 10. Why have you switched career fields ? Weaknesses / Negatives 1. What major problems have you encountered and how have you dealt with them ? 2. What have you learnt form your mistakes ? 3. What do you consider to be your greatest weakness ? 4. Did you ever have problems with your supervisor ? Skills / Abilities / Qualifications 1. What do you consider to be your greatest strength ? 2. Are you creative ? Give an example. 3. What qualifications do you have that makes you think you will be successful ? 4. In what way do you think you can make a contribution to society? 5. Why should we take you ? 6. What are your own special abilities ? 7. Why should we take you over another candidate ?8. What is your managing style ? 9. Why do you want to join this institute ? 10. What do you know about our institute ? Values 1. What is your attitude towards working hard ? 2. What part does your family play in your life ? 3. What are the most important rewards you expect in your career ? 4. What is more important to you : money offered, or the type of job ? 5. Do you enjoy independent research ? 6. In what kind of a work environment are you most comfortable ? 7. How would you describe the ideal job for you ? 8. What two or three things are most important to you in your job ? 9. Do you prefer working with others or all by yourself ? 10. How do you like to work ? 11. Under what conditions do you work best ? 12. What is the highest form of praise ? Experience 1. In what part-time or summer job have you been most interested ? 2. Tell me about your experience. 3. What jobs have you held ? 4. How did your previous employer treat you ? 5. What have you learnt from some of the jobs that you have held ? 6. What jobs have you enjoyed most ? Least ? Why ? 7. What have you done that shows initiative and willingness to work ? 8. Describe your current job. 9. What did you like least about your last job ? 10. What did you like most about your last job ? Goals / Objectives 1. What are your short-term and long-term goals and objectives ? 2. What specific goals other than those related to your occupation have you chosen for yourself for the next 10 years ? 3. What do you see yourself doing 5 years from now ? 4. What do you really want to do in life ? 5. How do you plan to achieve your career goals ? Education 1. How has your education prepared you for a career ? 2. Describe your most rewarding college experience. 3. Why did you select your college or university ? 4. If you could, would you plan your academic study differently ? 5. Do you think grades are a good indication of your academic achievement ? 6. What have you learnt from participation in extracurricular activities ? 7. Do you have plans for continuing your studies ? 8. Why did you pick your programme ? 9. What courses did you like best and why ? 10. What courses did you like least and why ? 11. How has your college experience prepared you for this job ? 12. How did you pick your dissertation ? 13. Describe your dissertation process. Salary 1. What do you expect to earn in 5 years ? 2. What did you earn in your last job ? Interests 1. What are your outside interests ? 2. What do you do with your free time ? 3. What are your hobbies ? 4. What types of books do you read ? 5. How interested are you in sports ? 6. How did you spend your vacations in school ? General 1. What qualities should a successful manager possess ? 2. Describe the relationship that should exist between a supervisor and a subordinate. 3. What 3 accomplishments have given you the greatest satisfaction ? 4. If you were taking a graduate for this institute, what qualities would you look for ? 5. What can I do for you ? 6. Tell me a story.7. Define cooperation. Stress Questions 1. What causes you to lose your temper ? 2. How often have you been absent from school, work or training ? 3. Have you ever had trouble with other people on the job ? 4. Can you take instructions without getting upset ? 5. Don't you feel you are a little to old/young for this job ? 6. How does your family like you being away on business trips ? 7. With your background, we believe that you are overqualified to join this institute. 8. You haven't had sufficient experience in this field. 9. Our experience with women on this job has not been good. 10. What would irritate you most if I as a manager did it ? Influencing Others 1. Tell me about the time you were most persuasive in overcoming resistance to your ideas or point of view. 2. Tell me about the last time someone made an unreasonable request of you. 3. Describe the most disappointing and frustrating experience in gaining the support of others for an idea or proposal. Interpersonal Skills 1. Describe a situation where it was most important for you to display tact and diplomacy. 2. Tell me about the last time you had a clash or disagreement with someone at school/college/workplace. 3. Tell me about a time when you felt most frustrated and disappointed at a person with whom you had worked. Personal Adaptability 1. Tell me about the last time you were criticized by a supervisor or a professor. 2. Tell me about the time when you felt most pressured or stressed at work/ school/internship. 3. Tell me about the time when you felt most frustrated at your school/workplace. 4. In what aspects of your work/internship do you have the most confidence in your abilities. Communication Skills 1. Tell me about the time when you felt best about your ability to draw out or solicit information from another person. 2. Tell me about the time when you had to work your hardest in order to fully understand what another person was saying to you. 3. Describe the last time when someone at school/work misunderstood what you were trying to communicate. Motivation 1. Tell me about the most long term, sustained extra hours of effort that you put into your work/college/internship. 2. Describe a time when you felt most frustrated or discouraged in reaching your goals or objectives. 3. What do you feel has been your most significant work/school/internship related achievement within the past year or so ? 4. Describe the last time you did something well which went beyond the expectations in your work/internship. Administrative Skills 1. Tell me how you go about organizing your work and scheduling your own time. 2. What do you do to ensure that your goals and objectives are met in a timely way ? 3. Describe the most extensive planning that you have ever done. Problem Solving and Decision Making 1.Tell me about the most difficult problem that you faced in your work/school/internship ?2.Tell me about the last time you made a decision that backfired. 3.Tell me about the time when you regretted most not getting advice before you went ahead ? Conflict Management Skills 1. Tell me about the last significant crisis situation that you faced in your work. 2. Tell me about a time when you were most persuasive in overcoming resistance to your ideas. 3. Tell me about the time when you had a disagreement with someone at work.

Milton Friedman- A LIVING LEGEND

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Milton Friedman
Born
July 31, 1912 Brooklyn, New York City
Died
November 16, 2006 San Francisco, California
Nationality
American
Field
Economics
Institution
Hoover Institution (1977-2006)Univ. of Chicago (1946-1976)
Alma Mater
Rutgers University
Academic Advisor
Simon Kuznets
Notable Students
Gary Becker Tom Campbell Thomas Sowell
Known for
Monetarism Permanent income hypothesisCritique of Phillips curve
Notable Prizes
Nobel Memorial Prize (1976)
Milton Friedman (July 31, 1912 – November 16, 2006) was an American economist and public intellectual who made major contributions to the fields of macroeconomics, microeconomics, economic history and statistics while fiercly advocating laissez-faire capitalism. In 1976, he was awarded the Nobel Memorial Prize for his achievements in the fields of consumption analysis, monetary history and theory and for his demonstration of the complexity of stabilization policy.[1]
Friedman, along with John Maynard Keynes, is considered to be one of the two most influential economists of the 20th century.[2] In his 1962 book Capitalism and Freedom, he advocated minimizing the role of government in a free market as a means of creating political and social freedom. In his television series Free to Choose, which aired on the Public Broadcasting Service (PBS) in 1980, Friedman explained how the free market works, emphasizing that its principles have shown to solve social and political problems that other systems have failed to adequately address. It was later released as a book, co-authored with his wife, Rose Friedman. The book was widely read, as were his columns for Newsweek magazine. His writings were circulated underground behind the Iron Curtain before it fell in 1989, [3]
In statistics, he devised the Friedman test. His political philosophy, which Friedman himself considered more classically liberal, stressing the advantages of the marketplace and the disadvantages of government intervention shaped the outlook of American conservatives and libertarians and had a major impact on the economic policy of the Richard Nixon and Ronald Reagan administrations in the United States and in many other countries after 1980.
The 1980s were a watershed decade for the acceptance of Friedman's ideas. His views of monetary policy, taxation, privatization and deregulation informed the policy of governments around the globe, especially the administrations of Ronald Reagan in the United States and Margaret Thatcher in the United Kingdom. His ideas were studied throughout the world, and played a major role in the transformation of China's economy.

Corporate social responsibility (CSR)

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Corporate social responsibility (CSR) is a concept that suggests that commercial corporations have a duty of care to all of their stakeholders in all aspects of their business operations. A company’s stakeholders are all those who are influenced by, or can influence, a business’s decisions and actions. These can include (but are not limited to): employees, customers, suppliers, community organizations, subsidiaries and affiliates, joint venture partners, local neighborhoods, investors, and shareholders.

CSR requires that businesses account for and measure the actual or potential economic, social and environmental impacts of their decisions. In some cases the application of a strong CSR policy by a business can involve actions being taken which exceed the mere compliance with minimum legal requirements. This can sometimes give a company a competitive/reputational advantage by demonstrating that they have the interests of society at large as an integral part of their policy making. CSR goes beyond simple philanthropy and is more about corporate behaviour than it is about a company's charitable donation budget.

CSR is closely linked with the principles of Sustainable Development which argue that enterprises should be obliged to make decisions based not only on financial/economic factors (e.g. Profits, Return on Investment, dividend payments etc.) but also on the social, environmental and other consequences of their activities.

Development and analysis
Today’s heightened interest in the role of businesses in society has been promoted by increased sensitivity to, and awareness of environmental and ethical issues. Issues like environmental damage, improper treatment of workers, and faulty production leading to customers inconvenience or danger, are highlighted in the media. In some countries government regulation regarding environmental and social issues has increased, and standards and laws are also often set at a supranational level (e.g., by the European Union). Some investors and investment fund managers have begun to take account of a corporation’s CSR policy in making investment decisions (so called "ethical investing"). Some consumers have become increasingly sensitive to the CSR performance of the companies from which they buy their goods and services. These trends have contributed to the pressure on companies to operate in an economically, socially and environmentally sustainable way.

It is important to distinguish CSR from charitable donations and "good works" (i.e., philanthropy, e.g., Habitat for Humanity or Ronald McDonald House). Corporations have often, in the past, spent money on community projects, the endowment of scholarships, and the establishment of foundations. They have also often encouraged their employees to volunteer to take part in community work and thereby create goodwill in the community which will directly enhance the reputation of the company and strengthen its brand. CSR goes beyond charity and requires that a responsible company take into full account their impact on all stakeholders and on the environment when making decisions. This requires them to balance the needs of all stakeholders with their need to make a profit and reward their shareholders adequately.

A widely quoted definition by the World Business Council for Sustainable Development states that "Corporate social responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large." (CSR: Meeting Changing Expectations, 1999). This holistic approach to business regards organizations as (for example) being full partners in their communities, rather than seeing them more narrowly as being primarily in business to make profits and serve the needs of their shareholders.

Auditing and reporting
To demonstrate good business citizenship, firms can report compliance with a number of CSR standards, including:

AccountAbility's AA1000 standard, based on John Elkington's triple bottom line (3BL) reporting
Global Reporting Initiative's Sustainability Reporting Guidelines
Social Accountability International's SA8000 standard
The ISO 14000 environmental management standard
Some nations require CSR reporting, though agreement on meaningful measurements of social and environmental performance is difficult. Many companies now produce externally audited annual reports that cover Sustainable Development and CSR issues, but the reports vary widely in format, style, and evaluation methodology (even within the same industry). Critics dismiss these reports as lip service, a charge that carries some weight given notable examples: Enron's yearly "Corporate Responsibility Annual Report" and tobacco corporations' social reports.

CSR reporting draws much inspiration from its much older cousin, environmental and sustainability reporting (e.g., in Germany).

The business case for CSR
The benefits of CSR to businesses vary depending on the nature of the enterprise, and are difficult to quantify, though there is a large body of literature exhorting business to adopt measures beyond financial ones (e.g., Deming's Fourteen Points, balanced scorecards). Orlizty, Schmidt, and Rynes found a correlation between social/environmental performance and financial performance. However, businesses may not be looking at short-run financial returns when developing their CSR strategy.

The definition of CSR used within business can vary from the strict "stakeholder impacts" definition used in this article and will often include charitable efforts and volunteering. CSR may be based within the human resources, business development or PR departments of a company, or may be given a separate unit reporting to the CEO or in some cases directly to the board. Progressive companies do not have a CSR department or function at all -- the concept is so ingrained in the company itself that employees implement the company's values directly.[citation needed]

The business case for CSR within a company will likely rest on one or more of these arguments:

Human Resources

Corporate Social Responsibility can be an important aid to recruitment and retention, particularly within the competitive graduate student market. Potential recruits are increasingly likely to ask about a firm's CSR policy during an interview and having a comprehensive policy can give an advantage. CSR can also help to build a "feel good" atmosphere among existing staff, particularly when they can become involved through payroll giving, fundraising activities or community volunteering.

Risk Management

Managing risk is a central part of many corporate strategies. Reputations that take decades to build up can be ruined in hours through incidents such as corruption scandals or environmental accidents. These events can also draw unwanted attention from regulators, courts, governments and media. Building a genuine culture of 'doing the right thing' within a corporation can offset these risks.

Brand Differentiation

In crowded marketplaces companies strive for 'X Factors' which can separate them from the competition in the minds of consumers. Several major brands, such as The Co-operative Group and The Body Shop are built on ethical values. Business service organisations can benefit too from building a reputation for integrity and best practice.

License to operate

Corporations are keen to avoid interference in their business through taxation or regulations. By taking substantive voluntary steps they can persuade governments and the wider public that they are taking current issues like health and safety, diversity or the environment seriously and so avoid intervention. This also applies to firms seeking to justify eye-catching profits and high levels of boardroom pay. Those operating away from their home country can make sure they stay welcome by being good corporate citizens with respect to labour standards and impacts on the environment.

Critics of CSR will attribute other business motives, which the companies would dispute. For example, some believe that CSR programmes are often undertaken in an effort to distract the public from the ethical questions posed by their core operations. Some that have been accused of this motivation include British American Tobacco (BAT) which produces major CSR reports and the petroleum giant BP which is well known for its high profile advertising campaigns on environmental aspects of their operations.

Criticism
Some critics of CSR, such as the economist Milton Friedman, argue that a corporation's principal purpose is to maximize returns to its shareholders, while obeying the laws of the countries within which it works. Others argue that the only reason corporations put in place social projects is utilitarian; that they see a commercial benefit in raising their reputation with the public or with government. Proponents of CSR, however, would suggest a number of reasons why self-interested corporations, solely seeking to maximise profits are unable to advance the interests of society as a whole.

Key challenges to the idea of CSR include:

The rule of corporate law that a corporation's directors are prohibited from any activity that would reduce profits
Other mechanisms established to manage the principal-agent problem, such as accounting oversight, stock options, performance evaluations, deferred compensation and other mechanisms to increase accountability to shareholders.
Because of this, it has been suggested that CSR activity is most effective in achieving social or environmental outcomes when there is a direct link to profits: hence the CSR slogan "Doing Well by Doing Good". Note that this requires that the resources applied to CSR activities must have at least as good a return as that that these resources could generate if applied anywhere else, e.g. capital or productivity investment, lobbying for tax relief, outsourcing, offshoring, fighting against unionization, taking regulatory risks, or taking market risks—all of which are frequently-pursued strategies. This means that the possible scope of CSR activities is drastically narrowed. And corporations, with their constant incentive to maximize profits, often have identified all areas where profits could be increased, including those that have positive external social and environmental outcomes. The scope for CSR is thus narrowed to situations in which:

Resources are available for investment
The CSR activity will yield higher profits than any other potential investment or activity
The corporation has been remiss in identifying this profit opportunity
A conflict can arise when a corporation espouses CSR and its commitment to Sustainable Development on the one hand, whilst damaging revelations about its business practices emerge on the other. For example the McDonald's Corporation has been criticised by CSR campaigners for unethical business practices, and was the subject of a decision by Justice Roger Bell in the McLibel case (which upheld some of these claims, regarding mistreatment of workers, misleading advertising, and unnecessary cruelty to animals). Similarly Shell has a much publicised CSR policy and was a pioneer in triple bottom line reporting, but was involved in 2004 in a scandal over the misreporting of its oil reserves which seriously damaged its reputation and led to charges of hypocrisy.

Universities and business schools, many of them with keen advocates of CSR amongst their teaching staffs, have themselves come in for criticism concerning their dealings with corporations (note the different stances taken by ESADE and Wheeling Jesuit University with regard to Aramark).

Critics of the role of business in society argue that:

Corporations care little for the welfare of workers, and given the opportunity will move production to sweatshops in less well regulated countries.
Unchecked, companies will squander scarce resources.
Companies do not pay the full costs of their impact. For example the costs of cleaning pollution often fall on society in general. As a result profits of corporations are enhanced at the expense of social or ecological welfare.
Regulation is the best way to ensure that companies remain socially responsible.
Supporters of a more market based approach argue that:

By and large, free markets and capitalism have been at the centre of economic and social development over the past two hundred years and that improvements in health, longevity or infant mortality (for example) have only been possible because economies - driven by free enterprise - have progressed.
In order to attract quality workers, it is necessary for companies to offer better pay and conditions which leads to an overall rise in standards and to wealth creation.
Investment in less developed countries contributes to the welfare of those societies, notwithstanding that these countries have fewer protections in place for workers. Failure to invest in these countries decreases the opportunity to increase social welfare.
Free markets contribute to the effective management of scarce resources. The prices of many commodities have fallen in recent years. This contradicts the notion of scarcity, and may be attributed to improvements in technology leading to the more efficient use of resources.
There are indeed occasions when externalities, such as the costs of pollution are not built into normal market prices in a free market. In these circumstances, regulatory intervention is important to redress the balance, to ensure that costs and benefits are correctly aligned.
Whilst regulation is necessary in certain circumstances, over regulation creates barriers to entry into a market. These barriers increase the opportunities for excess profits, to the delight of the market participants, but do little to serve the interests of society as a whole.

[edit] Other perspectives
Some would argue that it is self-evidently “good” that businesses should seek to minimize any negative social and environmental impact resulting from their economic activity. It can also be beneficial for a company’s reputation to publicise (for example) any environmentally beneficial business activities. A company which develops new engine technology to reduce fuel consumption will be able (if it chooses) to promote its CSR credentials as well as increase profits.

Some commentators are cynical about the true level of commitment of corporations to ideas like CSR and Sustainable Development, and their actual motivations for responsible behaviour. (Corporations that create the appearance of acting responsibly just for its public relations value are said to be "greenwashing.")

Such commentators also say, citing Friedman's dictum, that the idea of an “ethical company” is an oxymoron, since the corporation is by its nature compelled to maximize its own interest, whatever the external price. Corporate executives and employees in turn have strong incentives to internalize the corporation's statutory obligations to maximize profits, sometimes to the extent that they abdicate their individual moral and ethical obligations as human beings. This tendency is, of course, encouraged by the desire to keep one's job, and by a system that judges and rewards performance strictly by bottom-line returns. The results of this tendency were clearly seen in the many corporate scandals of the late twentieth and early twenty-first centuries.

So the CSR movement may perhaps be understood as an attempt not so much to regulate the activities of corporations per se, as to remind the people who constitute these corporations that they nonetheless have other responsibilities beyond the corporate ones.