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Exploring the Links Between

International Business and


Poverty Reduction:
a case study of
Unilever in Indonesia
An Oxfam GB, Novib, Unilever and Unilever
Indonesia joint research project

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Background
Why this research project?
• Shared interest in increasing
contribution of international business
to poverty reduction
• UN Global Compact/MDGs
What is this report about?
• a ‘learning’ project; not an audit of
Unilever or UI.
• The goal: to understand how wealth
generated by a multinational
company’s local operating company
can have positive or negative impacts
on people living in poverty
• To do this, we looked at UI’s entire
value chain from small-scale producer
to low-income consumer to understand
the points of entry and leverage to
reduce poverty. 2
Four areas of research

• UI’s ‘macro-economic’ level impacts


• UI’s employment impacts
• The value chain from supply to distribution
• Low-income consumers in the marketplace

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The UI business

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Foreign exchange, trade & human resource flows

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UI’s distribution of profits

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Value Chain

Estimated
employment linked
to UI value chain
(2003)

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Value Chain

Estimated
distribution of value
generated along UI’s
value chain (2003)

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The supply chain
Direct suppliers
• UI had 334 suppliers, spending approx Rp 3,591 billion (US$ 419m)
• 80% of suppliers are domestic, 20% are international
• Top 10 suppliers by value are all Indonesian and account for 34% of
purchases
• Domestic suppliers provided 84% of goods and services
• All UI suppliers required to observe Unilever’s Code of Business
Principles
• UI maintains basic standards through negotiations, on-going dialogue, and
a rolling three-year audit programme
• UI supplier companies exceed legal regulations governing wages and
benefits in Indonesia but pay and employment conditions’ for suppliers’
employees and contract workers were lower than those for UI’s direct
workforce

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The supply chain (cont.)
Producers of raw materials
• UI products are made from raw materials sourced
mainly from Indonesian producers, traders and
processors
• Producers growing agricultural products are among
the poorest people in UI’s value chain
• Five agricultural raw materials entering UI’s local
supply chain stand out in this regard—tea, palm
oil, cassava, coconut sugar, and black soybean
• The market for coconut sugar – a key ingredient
for Kecap Bango—is characterised by oversupply,
with farmers selling through middlemen and
experiencing high levels of debt which keep them
in debt peonage
• Where there is a business case for alternative
supply chains, these can have positive impacts for
poor producers
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The distribution chain

• UI’s distribution side of the value chain creates


more employment and value than the supply
side
• The distribution chain creates twice as many
jobs (62.5%) as the supply chain side (27.1%)
• This includes thousands of jobs among an
estimated 1.8 million small stores and vendors
• This employment is often overlooked as a
contributor to economic development and
poverty reduction
• The closer to UI that distributors and retailers
are in the chain, the more likely they are to gain
skills and knowledge, negotiate better prices
and conditions, experience higher employment
standards and incomes, and be able to build up
business capital
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Value chain insights

Employment
• More than 300,000 people (FTEs) make their livelihoods in UI’s
value chain
• More than half this employment is found in the distribution
and retail chain

Value
• Total value generated along the chain was estimated at
US$633m: 1/3 UI 2/3 in the chain; the government receives
(from UI alone) 26% of the total value generated
• The value captured by poorer people working at either end of
the value chain is much lower than the value captured by those
who are in direct interaction with UI

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Lessons learned from project

• Understand the ‘job’ multiplier in UI’s total value chain, and potential
use of value chain policies as tool in sustainable poverty reduction
• Value-adding activity creates a broad tax base - essential for
development of formal economy and funding of government
programmes
• FMCG value chains can offer poor people an opportunity to gain basic
skills and earn incremental, regular income
• Although imperfect, may be useful first steps towards increasing skills,
accumulating assets, and improving quality of life
• The scrutiny of UI’s relationship with low-income consumers and its
contractor review processes suggested ways in which the company
could improve its interactions with people living in poverty

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Lessons learned from
project

• Highly embedded MNCs and large domestic companies might in


future provide a focus for useful work on private sector poverty
impacts and poverty reduction strategies.
• This project has increased our understanding of UI’s impacts and
interactions with people living in poverty in Indonesia.
• Gained a better understanding of the potential of distribution chains to
generate employment and income
• But participation in value chains does not guarantee improvements for
poor people
• Often difficult to define what constitutes ‘fair practice’ by companies.

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Follow up actions

Unilever

Oxfam GB / Novib

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Exploring the Links Between
International Business and
Poverty Reduction:
a case study of
Unilever in Indonesia

Questions & Discussion

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