OPPORTUNITIES IN THE BASE OF THE PYRAMID

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Abstract: This thesis provides insights as to why multinationals have not yet engaged in the

renewable energy sector in the “base of the pyramid” despite the positive prospects of this sector. By looking at firm characteristics needed for engaging in this sector successfully and comparing these with general MNC and SME characteristics, it is determined what difficulties MNCs can face. This research is based upon a multiple case study: by looking at both SME and MNC activity in developed Danish island Samsø and developing Indonesian island Sumba, characteristics are found for both types of firms when engaging in both types of markets. Strong SME characteristics for the BoP renewable energy sector include organisational flexibility, local adaptiveness and local market knowledge. Strong MNC characteristics include government negotiation power, a large resource pool and technological superiority. This study recommends to form alliances between MNCs and SMEs and combine strengths in order to engage in the renewable energy sector in the BoP on a large scale.

OF THE PYRAMID

MNCs and SMEs in the Renewable Energy Sector

on Sumba and Samsø

Author: Coen Elferink

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Acknowledgements

In this preface, I would like to express gratitude to certain people, without whom the thesis presented here could not have been written.

First, my gratitude goes out toward Mr. Eco Matser, responsible for the Iconic Island Initiative at Hivos, who has provided me with plenty of data regarding the initiative on Sumba. The information provided by Mr. Matser has proven extremely rich, and has been invaluable in my research.

I would furthermore like to thank my supervisor, Mr. Luchien Karsten, and my co-assessor, Mr. Sjoerd Beugelsdijk. Mr. Karsten’s extensive knowledge and experience on research and developing economies has been crucial in guiding me towards this thesis. His help in determining the aim of my study and patience and understanding in my struggles have been extremely valuable.

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I. Introduction

In the early 2000s, the academic field has seen the rise of a new research field, the “Base of the Pyramid” (BoP) (Prahalad & Hart, 2002; Prahalad, 2004; Karnani, 2007). According to Prahalad (2002), the BoP can be seen as a market consisting of the poorest 65%, or 4 billion people, in the world. Successful poverty alleviation in these markets, according to the views of Prahalad and his proponents, can come from multinationals rather than NGOs. Prahalad and Hart (2002) argued that these markets promise great opportunities for MNCs to create high revenues through economies of scale while alleviating poverty by offering products that are otherwise unreachable for people within these markets. Several critiques have been voiced against this proposition, however (Landrum, 2012). Karnani (2007), for example, noted overestimation of the potential market size by Prahalad and his peers and an underestimation of its dispersion and variability, potential exploitation of the BoP by creating a demand that did not previously exist, and questioned whether the proposed strategies actually alleviate poverty. The concept of business in the BoP has been widely adopted in both academic literature (London, 2008; Landrum, 2012) as well as business practice (Hart et al., 2013; Business Call to Action, 2014; Payaud, 2014), showing evidence of both Prahalad’s (2004) and Karnani’s (2007) propositions. Several companies, ranging from small local initiatives to big multinational conglomerates, have conducted business in the BoP, with the people either as consumers, producers, or both. Business Call to Action (2014) has shown that BoP initiatives are taken in a wide range of industries by both large MNCs and local SMEs in their report on their 94 member firms.

One particularly interesting industry that is frequently served in the BoP, is the renewable energy sector (Business Call to Action, 2014). Around 1.4 billion people have no access to electricity and moreover, around 40% of the world’s population relies solely on unsustainable energy sources such as biomass and coal. For the private sector, a huge potential lies in this market, not only because of the currently already high demand for energy, but also because of the increasing need for creative (portable) solutions in the BoP in relation to other new products and services. Several companies, for example in microfinancing and education, have strongly focused on portable IT equipment, such as cheap phones and tablets, and portable solar energy solutions have proven very successful here (Business Call to Action, 2014).

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exception of the biofuel market. This seems odd when taking into account the huge potential for high revenue that MNCs could achieve in this industry through economies of scale, which according to Prahalad and Hart’s (2002) original propositions, is the main source of revenue for firms entering the BoP. Economies of scale are particularly prevalent when products have high fixed costs (Krugman, 1980), which seems especially the case in the energy sector. Unlike some emerging industries in the BoP, such as microfinance and educational services, the energy sector’s core activity concerns manufacturing products, and therefore needs production plants, machinery, etc., all of which lead to higher fixed costs and therefore potential for economies of scale. Despite the potential that the market offers, the large companies do not seem to tap into that yet. As Willem Nolens, Managing Director of SolarNow put it: “Solar in Africa – how obvious does that sound? But you go to villages and you don’t see it anywhere. Bigger companies, the MNCs should look into it. They are still ignoring the market, except in their CSR. There is space for us all to compete – I would welcome it.” (Business Call to Action, 2014: 36).

A. Problem formulation

This study intends to research whether the proposed opportunities in the energy sector in the BoP for MNCs as described indeed do exist. Despite Business Call to Action (2014) giving a very comprehensive review of the present day field, they had no conclusive answer regarding this question. In academic literature, different views regarding multinationals achieving economies of scale in the BoP exist, with some stating that high revenue in the BoP can only be achieved through economies of scale (Prahalad & Hart, 2002; Hart, 2004; London, 2008) whereas others state that this cannot be achieved at all (Karnani, 2007; Landrum, 2012). First, an analysis regarding what firm characteristics influence value creation in the energy sector in the BoP – both value for the people of the BoP as well as value for the firm – will be conducted. The question that will thus be answered in this thesis is:

RQ. What firm characteristics contribute to successful value creation in the renewable energy sector in BoP markets?

These specific characteristics will then be compared with the general characteristics, strengths and weaknesses of MNCs and SMEs, thus creating knowledge on the possibilities for multinationals in the energy sector in the BoP.

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among which MNCs, local SMEs, NGOs and governments, with the aim of supplying the entire island – on which currently 70% of the population has no access to energy at all – with renewable energy by 2025 (Vel & Nugrohowardhani, 2012). By looking at the various initiatives, their stakeholders and their stakeholders’ motives and cooperation, the characteristics of success in the renewable energy sector in Sumba should be found. Further search for the factors needed for successful implementation of renewable energy are found by looking at the case of Samsø, a Danish island, which has successfully become fully green (Visit Samsø, 2015). By looking at activities by both MNCs and SMEs on Sumba, a BoP economy, and Samsø, a developed economy, it should become apparent what kind of activities are typical for both types of organisations in the renewable energy sector in the BoP.

B. Relevance

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performance as well as the market that it serves. This fits perfectly within CSR, which focuses on making People, Profit and Planet its main goal (Bendell, 2005).

Moreover, as described before, MNCs potentially face huge opportunities in the BoP market. By achieving economies of scale, the potential arises to cooperate (or compete) with the already very successful emerging SMEs. The results of this study can provide insights to the top management of multinationals and by that, raise their awareness of new opportunities. If multinationals get involved in this business, millions or even billions of people could be reached with sustainable and affordable energy solutions, greatly impacting life in the base of the pyramid.

C. Structure

The structure of the remainder of this paper is as follows. In the next chapter, a theoretical framework will be presented. In this framework, the several concepts will be outlined further, and the relations between these concepts will be explained. In the third chapter, the methodology will be explained. In chapters four and five, data concerning Samsø and Sumba are described. These cases are compared and analysed in chapter six. Chapter seven provides a discussion and an interpretation of the analysis. Based on this interpretation, a conclusion and recommendations for MNC strategy are given in chapter eight. Last, chapter nine describes this study’s limitations and suggestions for future research.

II. Theoretical background

This chapter contains the academic framework on which this study builds. It contains an outline of the base of the pyramid and the various perspectives that exist on this in academic literature, following a definition of the BoP that will be used in this study. Moreover, this chapter provides an explanation regarding the characteristics of multinationals. Lastly, using the resource-based view of the firm (Penrose, 1959) and its extension, the relational view (Dyer & Singh, 1998), factors influencing multinational success will be linked to the BoP environment.

A. The BoP field in motion

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i. The original premise of the BoP

The premise of the Bottom of the Pyramid has evolved during the last ten years. The concept was first introduced by Prahalad and Hart in their article “The Fortune at the Bottom of the Pyramid” (2002). Prahalad and Hart defined the base of the pyramid as the 4 billion people, whose annual per capita income is less than $1500, and stated that the potential market is worth $13 trillion. They proposed that MNCs can potentially make significant profits by selling products and offering services to consumers in the BoP, whilst at the same time alleviating poverty. Offered goods ought to be cheap, either through technology or though for example repackaging existing goods in smaller, more affordable packages (Payaud, 2014). Due to the immense size of the BoP market, it was believed that multinationals could gain great profits not due to the profit margin per product, but due to achieving high economies of scale, which requires a huge potential market (Krugman, 1980; Prahalad & Hart, 2002; Hart, 2004).

ii. Criticism and the BoP 2.0

After these initial publications, extensive criticism has arisen (Landrum, 2007; 2012). Karnani (2007) for example contested the numbers Prahalad and Hart proposed regarding the size of the BoP. He believed that, although the exact number is unclear, the population of the BoP is lower than the earlier proposed 4 billion, and furthermore used a different measure regarding the daily consumption of the average consumer in the BoP. When basing his numbers on different estimations, Karnani found that the market worth may be as low as $0.3 billion, obviously sharply deviating from Prahalad’s (2004) original proposition. Moreover, he found that many of the cases described by Prahalad have not been profitable or were projects by non-profit organisations. Additionally, he found that often cases were aimed at people with incomes higher than $2 per day, sometimes as high as $16. While this still can be considered poor, it does not meet Prahalad and Hart’s (2002) original definition.

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does not make the actual price per volume of good cheaper; it just makes the poor more inclined to buy products they do not strictly need. Because this would lead to a waste of money, products by multinationals in the BoP could ultimately hamper poverty alleviation.

A last major critique is that Prahalad assumed too easily that economies of scale can be achieved (Karnani, 2007). Although the BoP is big, it is also diverse and geographically dispersed. For this reason, Karnani (2007; 2008) stated that economies of scale are not possible; local adaptation to each BoP is necessary. This led to his belief that local, emerging companies rather than MNCs are better suited to successfully do business in the BoP.

Following this criticism, a stream of academic literature developed an alternative approach to the BoP, perceiving the BoP as ‘producers’ rather than ‘consumers’ (London & Hart, 2004; London, 2008; Karnani, 2008). The term ‘BoP 2.0’ was coined for this. This approach has faced less opposition than the original premise of the BoP. This is because unlike with the BoP-as-consumer strategy, by employing the BoP as producers, poverty is reduced in absolute terms, by increasing real income. Moreover, the BoP is empowered through ‘skill building, knowledge sharing and active engagement with MNCs’ (Munier et al., 2010: 258). The premise of the BoP 2.0 has been institutionalised in the BoP Protocol (Simanis & Hart, 2008). This protocol favours a bottom-up rather than a top-down approach in the BoP and encourages co-creation with the poor.

iii. The BoP in the present

Today, it seems that both the BoP-as-consumer and BoP-as-producer strategy are used by companies, and in some cases both are used within the same initiative. Business Call to Action (2014), in its publication ‘Breaking Through: Inclusive Business and the Business Call to Action Today’, portrayed 49 of its member initiatives that all conduct inclusive business in the BoP. These ventures have been initiated in various diverse industries within the BoP, around the world and by both MNEs and local emerging companies. Both the BoP-as-consumer and the BoP-as-producer strategy can be found within the BCtA portfolio. With the majority of initiatives having reached their performance targets – both financially and regarding the creation of value for the BoP – it seems that firms have the possibility to be successful with both strategies. BCtA moreover noted that the potential for inclusive business in the BoP is huge; emerging companies are growing extremely fast due to the immense market size.

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responsibility is profit maximisation (Friedman, 1970). Over the last decades however, calls have been raised for a broader social responsibility for corporations; a firm additionally should behave legally responsible, ethically responsible, and meet the behaviours of the community (Matten & Crane, 2005). For corporations to behave in a socially responsible manner, it is important that they focus on the three Ps: Profit (ensuring that the company performs well financially), People (ensuring that projects executed by the company positively influence all of its stakeholders) and Planet (the company’s projects should not harm, or possibly even improve, the environment) (Bendell, 2005). These principles are at the core of inclusive business in the BoP (Business Call to Action, 2014).

B. Understanding value creation in the BoP

Creating value consists of multiple components when looking at the BoP perspective (London, 2008). BoP initiatives should create profits for private firms on the one hand, while contributing to the alleviation of poverty on the other hand. Moreover, these initiatives should not harm the environment in which they operate. Value creation is therefore split in two subcategories: firm value creation and BoP value creation.

i. Firm value creation

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ii. BoP value creation

Value creation for the BoP market takes into account whether an initiative actually improves the situation in the BoP market. This is one of the cornerstones of the BoP market strategy. Prahalad and Hart (2002) believe that value can be created for the BoP in the following ways:

 Creating buying power. This can be achieved by raising earnings potential for the poor and giving access to credit. Access to credit has in the past proven vital in successfully creating market economies (De Soto, 2000), since it enhances opportunity for entrepreneurial activity. The BoP, being part of the informal economy (London, 2008), has traditionally not had access. When following the BoP-as-producers strategy, a firm can obviously raise earnings potential as well, by employing the poor and paying fair wages (Karnani, 2007; Landrum, 2007).

 Creating sustainable innovations. Sustainability here can address clean water, energy supply and similar goods and services that can drastically improve the BoP’s living standard. Moreover, Prahalad and Hart (2002) referred to innovating in consumer education to make the poor aware of the possibilities that arise after said goods and services are offered. Karnani (2007) emphasised the need for goods and services offered to have societal benefits as well.

 Improving distribution and communication systems. Currently, the BoP is often relatively isolated from the rest of the world, both physically and economically (Prahalad & Hart, 2002). By improving infrastructure in rural regions, goods can be transported more cheaply to and from the BoP. Furthermore, the BoP greatly benefits from improvements in local information and communication technology, which can provide opportunities in “tele-education, telemedicine, microbanking, agricultural extension services, and environmental monitoring” (Prahalad & Hart, 2002: 10).  Tailoring goods and services to the local environment. Firms should adapt to local

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cases resulted “in the promotion of stereotypes, an anticipated increase in e-waste under already hazardous recycling conditions in India and Africa, a loss of social capital, and worsened economic conditions” (Landrum, 2012: 50). In order to avoid these scenarios and successfully create value, it is therefore necessary to ensure full understanding of the market, avoid oversimplification, and put less emphasis on consumerism and more on improving the BoP, according to the BoP 2.0 protocol (Simanis & Hart, 2008). Evaluation of an initiative is thus only possible after implementation.

C. Characteristics of multinationals and SMEs

Multinational enterprises are organisations that own or control production and/or sales facilities in multiple countries (Pitelis & Sugden, 2000), and are usually very large (Doob, 2013). There is some debate over the exact definition of a multinational corporation (Iowa State, 2015). In the context of this study, however, it is appropriate to look specifically at corporations that can achieve significant economies of scale, a core competency typically found in large multinationals (Prahalad & Hamel, 1990), since these capabilities are needed to successfully implement BoP strategies on a large scale according to Prahalad (2004). Thus, when using the term multinational, the largest and most influential (Ghoshal & Bartlett, 1990) internationally operating firms are meant. The international scale of multinationals stimulates diversity, which is a driver for the diffusion of innovation (Hewlett, Marshall & Sherbin, 2013), and the large size of firms creates the opportunity to achieve economies of scale, thus becoming increasingly efficient (Krugman, 1980). Moreover, these firms are often large enough to have such a socio-economic impact, that they can exert political pressure if necessary (Bartlett & Beamish, 2011). These MNCs often have rather formalised procedures and are therefore relatively rigid (De Jong, 2014), dominate technology flows (Tsakalerou & Lee, 2013) and focus on constant growth (Bartlett & Beamish, 2011).

De Jong (2014) described SMEs as being more flexible, due to informal processes, and having strong local market knowledge. Their resource pool is small compared to MNCs (Bartlett & Beamish, 2011). They are less visible in society than MNCs and as a result have less political influence and responsibility. Last, rather than growth, SMEs tend to focus on survival (Tsakalerou & Lee, 2013).

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characteristics and differences between MNCs and SMEs. Despite this, SMEs remain dominant in the renewable energy sector in the BoP (Business Call to Action, 2014).

Table 1: Characteristics of MNCs and SMEs (sources: De Jong, 2014; Bartlett & Beamish, 2011; Bauman-Pauly et al., 2013; Tsakalerou & Lee, 2013)

D. External parties

The UNDP (2014) has shown how the private sectors can, through several efforts, contribute in alleviating poverty in the BoP. This increasing role for the private sector does not always occur on private firms’ own initiative. The UNDP found that several actors can help guide, encourage and facilitate the private sector in the BoP. Their findings will be presented in this paragraph.

 First, governments can aid the private sector, by removing legal barriers, reduce the risk associated with operating in developing economies and ensure a level playing field for all investors. Furthermore, through subsidies, tax reductions and other forms of reward, they can incentivise firms to work towards poverty alleviation in the BoP. By investing in infrastructure, governments can further facilitate private sector activity in the BoP.  International organisations can further contribute to the entry of the private sector in the

BoP by focusing attention on issues that are relevant in a particular region, generating knowledge about this region, and serving as a bridge between the (foreign) private sector and local players in the BoP. These types of organisations span international boundaries, and include, for example, the United Nations and World Trade Organisation. They can intermediate between these parties, and promote inclusive business models to private firms. Moreover, they can issue funds to be used for issuing grants to firms that engage in inclusive business.

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 NGOs have capabilities in non-commercial areas that may increase inclusive business in the BoP. NGOs are generally more trusted within a community than private firms and this can be leveraged for local contacts and knowledge.

 Development goals are increasingly often financed by non-traditional means, such as “microfinance, social impact bonds, patient capital and social impact insurance, grants, and various shared risk instrument” (UNDP, 2014: 26). These financial innovations often share a focus on both social and financial returns, and in doing so account for the risks that are associated with low income markets. Furthermore, a relatively new practice that has come up together with the rise of IT is crowdfunding (Recrowdfunding, 2015), “the practice of funding a project or venture by raising small amounts of money from a large number of people, typically via the internet”. Several channels already exist through which crowdfunding for renewable energy initiatives can be accessed.

 The introduction of new technology can facilitate poverty alleviation in the BoP. The rise of information and communication technology can enhance BoP employee skills, and create knowledge here. Opportunities moreover exist for business to reduce poverty. New technology can give access to cleaner and cheaper energy (Business Call to Action, 2014) and, through IT, create opportunities to collect fees for this easily. As such, new technology can be directly beneficial for the BoP, as well as facilitate different types of BoP ventures.

E. RBV, relational view, and MNCs in the BoP

To explain the potential for success that multinationals can achieve through operating in the renewable energy sector in the BoP, the study relies on three main theories of firm success, being the resource-based view of the firm (Penrose, 1959; Wernerfelt, 1984; Barney, 1991) and the relational view of the firm, an extension of the resource-based view (Dyer & Singh, 1998). Following the resource-based view (Penrose, 1959) it is believed that multinationals have certain competences that will allow them to acquire above-average returns. Specifically, in order for an asset to create competitive advantage it must be (Wernerfelt, 1984; Barney, 1991):

 Valuable; the asset must create value for the firm in some way.

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 Inimitable; if a (potential) competitor could easily imitate the asset, competitive advantage cannot be sustained.

 Non-substitutable; if for competitors, a substitute of the asset is available, competitive advantage cannot be sustained.

Multinationals, having a portfolio of assets that is generally different from local SMEs, will therefore have different opportunities to create competitive advantage. The resource-based view of the firm is useful to this research, because it explains why certain firm characteristics deliver success in the BoP. When a certain firm characteristic brings sustainable competitive advantage as defined by Barney (1991), it will yield higher performance in the BoP.

These resources alone may not be enough. Many, if not all, cases of multinationals venturing in the BoP involved partnerships with local partners (Prahalad & Hart, 2002; Payaud, 2014), leading to the belief that both multinationals and local firms apparently need to bundle their resources in order to achieve above-average returns. Dyer and Singh’s (1998) extension on the resource-based view, the relational view, can explain this. The relational view states that, besides internal firm characteristics, relational characteristics between multiple firms can jointly create above-average returns as well (Dyer & Singh, 1998). Dyer & Singh stated that this occurs when the joint use of two firms’ resources create more value than the cumulative value of the resources of these firms when used separately. Relations between these various parties have often proved vital when conducting business in the BoP (Prahalad, 2004; Karnani, 2007; 2008, London, 2008). The traditional resource-based view does not account for the value that is created by joint assets and capabilities when a relation is formed between two or more parties (Dyer & Singh, 1998). In this paper, this gap in the RBV is filled by considering the relational view as well.

F. Questions and conceptual model

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characteristics of MNCs and SMEs. These characteristics are useful for determining which specific characteristics both firm types need in order to successfully operate in the BoP. In order to find out whether MNCs are suitable to operate in the renewable energy sector of the BoP, it is useful to see what kind of specific characteristics are needed when operating in the in this market, both for achieving firm value and BoP value. The first question therefore is:

Question 1a: What specific firm characteristics drive the ability to achieve firm value targets in the BoP?

Question 1b: What specific firm characteristics lead to a firm’s positive impact on the BoP?

When all of the specific firm characteristics needed are mapped, these characteristics should be compared to firm characteristics typically associated with MNCs. These typical characteristics are grounded in existing literature and can be found in table 1 as well. To see if these characteristics match the specific characteristics needed for conducting business successfully in the BoP, the following question is asked:

Question 2: How do the specific characteristics and relations with external parties relate to general MNC and SME characteristics?

Figure 1: conceptual model

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reflected in the first questions of this paper. Moreover, this paper’s second question focuses on how these characteristics compare with general SME and MNC characteristics, as described in table 1.

III. Methodology

The research question in this study is “What firm characteristics contribute to successful value creation in the renewable energy sector in BoP markets?” This chapter further addresses the methodology used to answer this question.

A. Research strategy

Because of the firm characteristics that lead to successful value creation in the BoP not yet being predetermined, a qualitative approach in this study was deemed most appropriate (Thomas, 2004). A multiple case study was conducted concerning initiatives currently undertaken in Sumba, an island part of the Indonesian archipelago, and initiatives recently undertaken in Samsø, a Danish island. A case study is suitable for this research, because of its focus on an open question, the researcher’s inability to manipulate the behaviour of those involved in the study, and the relevance of contextual conditions to the study (Yin, 2003; Baxter & Jack, 2008). This study is exploratory in nature, looking at a situation with no clearly set outcomes yet (Yin, 2003). The unit of analysis is the firm, or more specifically: private firms operating on Sumba and Samsø, because this was required to find specific MNC characteristics that contribute to value creation in the BoP. Yin (2003) has suggested that to avoid case research becoming too broad, it is wise to establish clear boundaries of the case study. Therefore, cases on Sumba in this thesis had to be:

 Initiatives concerning the renewable energy sector for BoP consumers;  Located on Sumba;

 Initiated in the last ten years;

 Concerning at least one actor from the private sector.

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B. Choice for Sumba and Samsø

The island of Sumba was chosen because of the recent interest in renewable energy occurring here. Sumba currently sees a lot of activity regarding renewable energy conducted by various parties, such as MNCs, local business, NGOs and governments, with the intention of supplying the island in its entirety with renewable energy by 2025 (Vel & Nugrohowardhani, 2012). These initiatives are part of the greater “Iconic Island” initiative by Dutch NGO Hivos (Humanist Institute for Co-operation with Developing Countries). The Sumba case was suitable because of the diversity it offers: many initiatives are being undertaken by a range of diverse parties, concerning several types of renewable energy generation, such as biogas, hydropower, wind power and solar energy. The diversity of initiatives and actors here provided this research with a wide range of answers to the research question from various sources, increasing the validity of a case study (Yin, 2003).

Furthermore, initiatives on the Danish island of Samsø have been chosen because of their similarities and differences to the initiatives undertaken on Sumba (Visit Samsø, 2015). With the entire island being completely self-sufficient in energy production, and with the use of 100% renewable energy, Samsø has achieved the targets that Hivos and its partners have set for themselves on Sumba as well. Furthermore, by comparing the Sumba and Samsø cases, predictions were made for the outcomes of the initiatives undertaken on Sumba. Through comparison, differences between engaging in the renewable energy sector in developed and developing economies have become apparent. This comparison has led to a matrix comparing MNC and SME activity, in both developed and developing countries. Necessary characteristics for firms in these regions thus became apparent.

C. Data collection and analysis

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possible disadvantage of being too general, the vast amount of available data from diverse sources will likely account for this issue. Moreover, although some of the data regarding Sumba is relatively old, Hivos has assured the data are still relevant at this day.

In order to create a theory regarding the concepts and relations described in chapter two of this proposal, the data was codified using Strauss and Corbin’s (1990) open coding and axial coding methods. Open coding is concerned with describing phenomena in the text. Chunks of text are taken and their overall content is placed in certain categories. In this study, codes relating to performance of the BoP initiative, as well as codes relating to general firm and BoP venture characteristics and codes describing the BoP market were most relevant. With axial coding, codes that are derived from the open coding are linked to each other, by means of deductive and inductive thinking. This way, relationships are formed. In this study, the relation between BoP performance-related codes and firm characteristic-related codes was examined during the axial coding process. Using mainly open coding, as well as axial coding, it was possible to find the relations between value in the BoP, value for the firm, and characteristics of the firm and BoP venture.

IV. Case data: Samsø

This chapter contains a description of the Samsø case, starting with a general description of the island, after which the Renewable Energy Island initiative will be explained. The following sections describe how value is created for firms and Samsø, and the final section deals with challenges and solutions.

A. Description of Samsø

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Figure 2: Map of Samsø Figure 3: Map of Denmark, Samsø in red

B. Denmark’s Renewable Energy Island

Winning this contest meant that Samsø was supposed to be relying completely on renewable energy within ten years. Little government subsidy was made available to create a single staff position fort his programme, which was filled by Søren Hermansen, an inhabitant of Samsø. As a Samsinger, he was able to slowly convince the entire population to actively participate in the programme.

A rough timetable plan was set up by PlanEnergi (English: PlanEnergy), to ensure that within the indicated ten years, Samsø would be 100% relying on renewable energy (Saastamoinen, 2009). This was mainly intended to be achieved by the following means (Saastamoinen, 2009):  Increasing efficiency and cutting consumption of energy, mostly in terms of heat,

electricity and transport.

 Utilisation of biomass resources.

 Expanding individual heating systems, through the use of renewable sources such as heat pumps, solar energy and biomass.

 Construction of wind turbines, both on- and offshore.

 Conversing transport resources from oil to electrical power. This was later expanded to include hydrogen energy.

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channels with the rest of Denmark; the ferries are still heavily dependent on fossil fuels, despite being a part of Samsø.

10 offshore and 11 onshore wind turbines have been built, which has exceeded the previously set targets and thus makes up for the energy that the transportation sector uses (Saastamoinen, 2009). Most of the heat consumption is also provided by the three new heating plants, which are all based on renewable energy. Encouragement on saving energy and decreasing fossil fuel use in transportation have been less successful, however, with both increasing about 5% (Saastamoinen, 2009).

C. Firm value

Jørgenson (2007) showed that the private sector’s participation has occurred solely with commercial intentions. Private sector projects did not occur through CSR programmes; in all cases, projects were undertaken because of potential profit in Samsø. The profitability of renewable energy for the private sector becomes apparent here.

Private firms generally sought to create profit through the setup and subsequent sale of wind or solar installations (Jørgenson, 2007). The primary firm concerned with the installation of wind turbines was multinational VESTAS. Due to the long term positive financial benefits of investing in renewable energy for Samsø’s population, the Samsingers were very willing to invest in these installations. Firms furthermore provided training to the locals to create local maintenance skill. Private sector firms were thus able to sell installations, such as wind turbines and solar panels, to the Samsingers, and as such made engaging in renewable energy initiatives on Samsø financially feasible.

D. Value for Samsø

Value creation in Samsø occurred primarily following a bottom-up approach (Saastamoinen, 2009). Citizen involvement has been stressed from the outset of the project. Hermansen, the first Samsinger employed for the project, knew that resistance from the rather conservative population would be likely. The main challenge was to generate willingness to participate in the project throughout the island, and creating awareness of the benefits that renewable energy would bring to Samsø.

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created by the campaign. Samsingers were given the opportunity to invest in new technology regarding renewable energy on the island, which, together with the initial energy-saving, would create economic benefits on the long term (Jørgenson, 2007). Value for Samsø was thus twofold; the initiative had a great environmental impact, while also creating economic benefit for the Samsingers. Investment by the local population was great; estimations state that roughly 53.3 million EUR has been invested in the initiative by the population, whereas only 4 million EUR has come from various public funds (Saastamoinen, 2009). These costs have proven lower than the initially expected costs of 78.7 million EUR investment and 9.1 million EUR public funds; the project has thus been quite cost-effective.

Technology came mostly from the private sector (Saastamoinen, 2009). Business has been responsible for learning about and installing renewable energy technology and implementing the various training projects that prepared the local population for maintaining this.

Concluding, the initiative has in several ways benefitted Samsø. Firstly, Samsø’s environmental footprint has decreased to almost zero. Secondly, Samsingers on average spend less on their energy than before the initiative started. Thirdly, employment opportunities and tourism on the island have increased (Jørgenson, 2007).

E. Challenges and solutions

As stated before, a great challenge for Samsø was to gain participation from all of the population. Initial interest was created through the efforts of Samsø resident Søren Hermansen, who was familiar with the island’s opinion makers and sought to convince them of the benefits of renewable energy (Saastamoinen, 2009). After convincing these influential Samsingers, the rest of the population quickly followed.

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From the outset, the project was supported by both the Danish national government and the local Samsinger municipal government. They aided in enhancing participation throughout the island by using the social pressure that is inherent to small communities (Saastamoinen, 2009). Through this social pressure, participation quickly spread. Other NGOs immediately offered support to spread the programme as well, such as the European Union’s ALTERNER programme, the Danish Energy Authority and the NRGi (Jørgenson, 2007).

Once the project went into the implementation phase, the population itself made investments in these technologies. Investment were attractive because of calculations that indicated that the investment in wind turbines – the most prominent form of renewable energy on Samsø – would become economically profitable compared to traditional forms of energy within an eight year period (Saastamoinen, 2009). Heating was immediately cheaper than oil usage, and although initial investment for solar panels is high, solar energy repays itself on the long run as well. Knowledge of renewable energy technology was low among the local population. To ensure that installation and, even more importantly, maintenance of these technologies could be performed locally, education (and certification) was given to local blacksmiths, plumbers, heating service providers, etc. (Saastamoinen, 2009).

V. Case data: Sumba

This chapter contains a description of the Sumba case. First, a general description of the island is given, after which the Iconic Island initiative will be explained. The following sections describe how value is created for firms and the locals in the BoP on Sumba, and the final section deals with challenges and solutions.

A. Description of Sumba

Sumba, is an island in the province of East Nusa Tenggara in Indonesia. Its area is 11,052 km2 and it has a population of 685,186 people, according to the 2010 census (Vel & Nugrohowardhani, 2012), with most of the population living in the greener western part of the island and the dry east being largely unpopulated. Sumba has to major “urban centres”, Waikabubak in the western part of the island and Waingapu, the island’s largest settlement, in the east.

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(Hivos, 2013). The more densely populated western coast shows retail, fishery and transport as well (Lambooy & Van ‘t Foort, 2013).

Figure 4: Map of Sumba (Lambooy & Van ‘t Foort, 2013)

Figure 5: Map of Indonesia, showing Sumba in red (Lambooy & Van ‘t Foort, 2013)

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initial fee of €41.24 (Ritter, 2011). These costs can however still be too high for a large part of Sumba’s population.

Hivos (2013) has found that Sumba is comparable to many other ‘forgotten’ islands in terms of its remoteness and isolation, climate, cultural differences, etc. It is because of this that their renewable energy project is located here; Sumba is intended to be an “iconic island”, an example for the many disadvantaged regions that are left in the world.

B. Sumba Iconic Island

Currently, a lot of projects concerning renewable energy are being undertaken on Sumba, as part of the Iconic Island initiative by Hivos (2015a). Hivos (Humanist Institute for Co-operation with Developing Countries) is “an international organisation that seeks new solutions to persistent global issues” (Hivos, 2015b). They intend to do so by cooperating with business, citizens and NGOs throughout the world, and aim for sustainable economies and inclusive societies.

Hivos (2015a) sought for an island on which they could show that renewable energy could, even in remote areas, alleviate economic poverty, and saw Sumba as the ideal candidate for this in 2009. This was, other than due to its isolated position, because of its low economic prospects and the extremely low electrification ratio. After research, Hivos found that Sumba showed great potential for renewable energy from various sources, such as hydropower, solar power, biogas and wind power. Following this conclusion, they created the Iconic Island Initiative, with its main aim being to supply all of Sumba with 100% renewable energy by 2025. As of now, many initiatives are currently being implemented or developed to meet this goal (Hivos, 2013; 2015a; Vel & Nugrohowardhani, 2012; Lambooy & Van ‘t Foort, 2013). Examples of these include:

 A hydropower plant in the remote, off-grid villages Kamanggih, Cinta Mekar and Mbaku Hau together with partner IBEKA (Hivos, 2012; 2013).

 A wind turbine project set up by Hivos and MNC Sewatama (Lambooy & Van ‘t Foort, 2013).

 Instalment of over 90 biogas plants in various villages, financed by Hivos’ own support base, Indonesian bank BNI and Dutch travel organisation Sawadee (Lambooy & Van ‘t Foort, 2013).

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 Initial ideas for a biomass production factory based on wood plantations by multinational General Electric (Lambooy & Van ‘t Foort, 2013).

 The introduction of solar home systems in remote locations (Hivos, 2012).

 Creating “mini-grids” to connect several villages and thus create joint energy production in these villages by REwiRE (“Rural Electrification with Renewable Energy”), with several partners such as IBEKA (REwiRE, 2015).

Types of renewable energy that seem suitable for Sumba are solar energy, wind energy, water energy, biofuel and biogas (Lambooy & Van ‘t Foort, 2013). Each brings certain advantages and disadvantages with it, and suitability on Sumba differs per type as well. Water energy, for example, is applicable through the use of micro-hydro power plants. These are however not suitable for large parts of the terrain, and are likely to provide sufficient electricity only wherever the water supply does not run dry during the dry season.

Most firms currently engaging in this project are involved with Hivos, and as such have access to several financing methods that Hivos set up (Lambooy & Van ‘t Foort, 2013; Hivos, 2012). Hivos has funded its projects through alliances with private firms, donations from firms such as Sawadee, as well as donations from government and international organisations such as BNI (the National Bank of Indonesia), the Asian Development Bank and the International Finance Corporation (among others). BAPPENAS, the Indonesian Ministry of National Development Planning, is responsible for allocation of Indonesian government funds. They are currently involved in several projects on islands in the Nusa Tenggara Timur province, among which Sumba (BAPPENAS, 2015). Moreover, they finance their project by crowdfunding through their own website. Despite these sources of finance, the projects are not by definition donations in the form of development aid; many Sumba projects are intended to become commercially profitable on the long run.

C. Firm value

This section describes how firms create value on Sumba, either by pursuing financial or other goals.

i. Financial goals

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While some of Sumba’s initiatives are run purely on subsidy or external funds, several initiatives have a more commercial focus. Entec focuses on the creation of (micro)hydro sites that can be run at a commercial scale (Lambooy & Van ‘t Foort, 2013). It has been suggested to sell PLN’s SEHEN energy package in smaller units, and as such create higher affordability for Sumba’s consumers. In West-Sumba, a microcredit scheme to connect Sumba’s consumers to the grid has been set up, thereby enhancing the affordability of energy for the consumers. Of particular interest is that renewable energy on Sumba is considered to be cheaper and more reliable than energy sources currently used (REwiRE, 2015). The diesel currently in use is expensive, which is further enhanced due to Sumba’s remoteness, which greatly enhances the transportation costs. Moreover, generators on the island are found to fail often. To this, it can be added that the population of Sumba is generally willing to pay for renewable energy; however, they still often lack the capability (Bajgain, 2011).

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consumers have shown to be willing to pay this premium due to the unreliability of current energy sources. It should be noted that diesel’s competitiveness here is fully derived from it being subsidised; without subsidy its price would lie around 20 to 25 cent per kWh (REwiRE, 2015). If only a small fraction of this subsidy could be moved towards hydro-energy, it would thus be cheaper than currently available diesel (Hivos, 2012). BAPPENAS, responsible for development planning in Indonesia, could also be of great help here (BAPPENAS, 2015). A further strategy currently implemented in Sumba is the introduction of solar charging stations in off-grid places by the PLN. Power generation is centralised in these stations, from which remote households can “lend” their power. The projects that have been set up are likely to turn profitable within 5 – 7 years (Craine, 2013). With a target revenue of $1 per week per customer from 3000 customers, an annual revenue of roughly $150,000 per year is expected, of which 10% is expected to go to the local agent of the initiative to maintain the plant and collect fees. Operating fees are expected to be roughly €40,000 per year, which means that the profit margin is high, once the project runs on full scale, showing that private commercial benefits can indeed be achieved through this strategy.

Private firms have shown little interest in investing in renewable energy opportunities, likely due to the unattractive rates of return associated with it; although profitable results can be achieved, it often takes a relatively long period of time (Winrock, 2010). The aforementioned high subsidy of diesel energy in Indonesia likely further contributes to this. It seems therefore that firms pursuing commercial benefits are in need of further incentive to invest in renewable energy. Currently, large MNC investments have been made mostly in wind energy and biomass plantations, which can both be used to supply energy on a large scale to grid-connected locations. McKinsey has already advised firms that the time to invest in renewable energy is now; but the private sector itself yet needs to see this (Hivos, 2013).

ii. Other firm goals

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Because of this, firms engaging in CSR seem more suitable to operate in Sumba’s renewable energy industry, an industry that generally only offers profitable returns on a longer term (Craine, 2013). Because of this, Hivos has sought out private sector partners mainly through their CSR initiatives (Lambooy & Van ‘t Foort, 2013).

Additionally, private gains can be achieved for firms in Sumba by leveraging the population’s access to (renewable) energy in order to achieve different gains, through extending business advice to the Sumbanese. It is well recorded that access to energy provides stronger opportunity for entrepreneurial activities, and energy suppliers in Sumba can address this due to giving advice and optionally providing start capital to (potential) entrepreneurs. Success of this can be further achieved by creating willingness to buy products and services of the entrepreneur by the population (Ritter, 2011).

D. Value for Sumba

Rural electrification has positive effects for a region’s population on household income, public health, education, as well as general quality of life (REwiRE, 2015). Through these life improvements, rural electrification can lead to alleviating poverty. As stated before, much of Sumba’s population currently does not have any access to energy and therefore lacks many of these opportunities. After the introduction of micro-hydro facilities in remote areas of Sumba, a decrease in the income gap between on-grid and off-grid location has already been observed (Lambooy & Van ‘t Foort, 2013). The value of creating access to electricity is thus obviously great for Sumba.

Currently, many Sumbanese households are dependent on diesel for their electricity and cooking equipment, which is both more expensive and unhealthier than the renewable energy alternatives that are presently offered (Hivos, 2012).

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Foort, 2013). Especially in off-grid locations this has been a strong necessity. Due to electricity previously being scarce here, renewable energy projects have had a major impact on society. Socialisation is partly realised through the previously introduced co-op model, that is for example implemented by IBEKA and REwiRE (REwiRE, 2015). This model uses part of its revenue to finance the connection costs of the poorest members of society, thus leading to a high social impact. Furthermore, the co-ops create tariff reductions for business connected to the mini-grid, thereby enhancing the villagers’ creditability and ability to pay for the asset during its lifetime. Due to these innovative pricing methods, inclusiveness is guaranteed. Moreover, micro-hydro has stimulated conservation of ecosystems in close proximity of the installations. Micro-hydro installations need clean water intake. A steady water supply is necessary, which can be achieved by ensuring effective forest management, even in the dry season (Lambooy & Van ‘t Foort, 2013). The environmental effect of renewable energy is thus twofold; not only will carbon-emission be lower, the installation of micro-hydro will lead to better care of Sumba’s natural environment as well.

i. Negative effects

Producing energy feedstock on a large scale is likely to yield negative societal consequences for the people on Sumba. Due to Sumba’s culture, which is highly class-based, it is unlikely that people will be willing to work plantations, as this is seen as work for the lower class. In the event that large scale biofuel production is set up on the island, it is likely that big corporations will become involved and will try to manage the entire production process, keeping Sumbanese society at the bottom of their production chain (Lambooy & Van ‘t Foort, 2013). Despite the improved job availability on the island, the societal disruption would be too great.

Furthermore, large scale plantations may lead to a food shortage. Due to large parts of the island being made available for biofuel production, availability of land for food production would become lower, thereby harming Sumba’s food security (Lambooy & Van ‘t Foort, 2013). Changing food availability may lead to a change in nutrition habits. Change in eating patterns may lead to under- or malnutrition, which is therefore another negative consequence of the introduction of biofuel plantations on the island.

E. Challenges and solutions

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remains hard to create affordability for all Sumbanese consumers (Lambooy & Van ‘t Foort, 2013). Affordability has in part been created through offering microcredit to energy consumers (Ritter, 2011). This has however in some cases seen a low repayment rate. A high willingness to pay (back) for energy has been shown in Sumba, however, the people often lack the funds for this. This shows that there is an apparent need for innovative ways that make a grid-connection affordable.

Renewable energy is not necessarily more expensive than the currently available diesel. Due to high subsidies for PLN’s diesel energy, diesel is competitively priced over its renewable alternatives. Government support for PLN and its diesel is key here, and in order to truly successfully operate with renewable energy in Sumba, it seems that the support of the national government, BAPPENAS, as well as the PLN, is necessary (Lambooy & Van ‘t Foort, 2013). Hivos’ initial plans were only able to fully take ground in Sumba after support of these parties was assured (Lambooy & Van ‘t Foort, 2013).

Larger companies have a tendency to focus solely on larger projects, such as grid expansion. While this creates benefits for part of the population, it makes it less likely for Sumbanese people in remote areas to benefit from the projects that are initiated by larger organisations (Lambooy & Van ‘t Foort, 2013). Thus, initially it seems that smaller, off-grid projects are better served by smaller organisations. It should however be noted that these small scale projects can often be repeated in large numbers – there are for example more than 90 biogas installations already on Sumba. This makes it increasingly interesting for large firms.

While the setup of renewable energy installations on Sumba can be done by third party organisations, it is hard to maintain the plants through the use of these third parties. Maintenance must be done locally, which requires improvement of knowledge of the local population. To ensure that this maintenance process is not overly complicated, alternatives that require little maintenance and do not depend on expensive constructions should be considered (Lambooy & Van ‘t Foort, 2013). Moreover, extensive training and co-creation with the locals is necessary to ensure proper understanding of the mechanics behind renewable energy installations (Hivos, 2012).

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Moreover, with cattle currently roaming free, it is unlikely that enough dung can be collected to meet the fuel requirements of a Sumbanese household (Bajgain, 2011; Frederiks, 2013). Other cases of renewable energy generation have however seen less resistant from the people. By convincing and allying with the local government, indigenous religious institutions, and other high ranking members of society of the worth of renewable energy for Sumba, local support for renewable energy projects in microhydro, wind energy and solar energy has been generated by Hivos (Lambooy & Van ‘t Foort, 2013). The ability to negotiate with local parties has been conclusive in achieving this support.

VI. Comparison of Sumba and Samsø

In order to explore opportunities for multinationals to successfully enter the renewable energy markets in BoP economies, both Sumba and Samsø provide interesting data. Sumba is, as Hivos (2015) put it, an iconic island. Initiatives that are successfully undertaken on this island can be generalised and copied in many similar BoP regions throughout the world, that are characterised by their poor living standards, grid connections and remoteness. Samsø, on the other hand, is interesting due to it being one of the first regions in the world that has already successfully implemented 100% renewable energy in its entirety (Visit Samsø, 2015). Despite this, obvious differences between Samsø and BoP regions exist; Samsø, being a part of Denmark, is a highly developed region, and its population’s welfare and standard of living are high.

To answer the question what is needed to successfully create value with renewable energy in developing regions, a comparison of the Sumbanese and the Samsinger case was therefore made, looking at their similarities and differences.

A. Similarities

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Both in Sumba and Samsø, participation from the locals has been stressed from the outset of the programme. 100% renewable energy brought with it considerable societal impact, and locals needed to be accepting of this. In both cases, this was done by convincing influential island residents. In the case of Sumba, a highly class-based system was in place, in which convincing higher class people of renewable energy’s worth resulted in acceptance throughout the island. Moreover, religious leaders from Sumba’s indigenous religion were convinced as well. This especially occurred in off-grid locations, where co-creation was stressed more than in grid-connected locations. In the case of Samsø, Samsinger Herman Sørensen was familiar with Samsø’s more influential residents, and set out to convince them of the worth of renewable energy. The cases show that in order to drastically change the energy supply within a society, acceptance is necessary throughout the population, and that this is best done by convincing more influential locals, after which the rest will likely follow.

On both islands, co-ownership of the various renewable energy installations was encouraged. On Samsø, residents invested in the various wind turbines that were set up around the island. On Sumba, various micro hydro installations and biogas installations were co-owned by local communities as well. Co-ownership makes the setup of installations affordable for the locals, due to the sharing of costs. These initiatives were mostly started by small companies. It seems that larger companies are less interested in this, possibly due to the small scale of each individual plant.

Large MNCs are present on both islands, mainly engaging in wind energy for grid-connected locations (which, in the case of Samsø, is the entire island). Through large scale wind turbines, firms can reach a high amount of consumers – assuming that they are connected to the grid. As a result, SME activity is less prevalent in grid-connected locations; larger MNCs are very well-suited to exploit the existing grid to reach a large amount of energy consumers through their large scale projects.

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$0.08); absent these subsidies, diesel cannot compete with renewable forms of energy when regarding price. Convincing BAPPENAS, who is responsible for allocating government development budgets, to further support the project is imperative to further increase the competitiveness of renewable energy – if the price can further be lowered, it outcompetes diesel. In both cases, economic gains for the private sector and the islands’ residents can thus be achieved.

B. Differences

Many of the private firms – such as Sawadee, WinRock and others - operating on Sumba do so without seeking explicit commercial gain. Rather, they want to aid in developing Sumba – in some cases through their CSR initiatives. This is seen in the various pro bono assignments, discounts, or special financial arrangements that were made between parties. Such arrangements do not exist on Samsø; private firms operate here solely for financial gains. Due to the already high standard of living on the Danish island, firms have less intention of including Samsø in their CSR initiatives.

Differences also lie in the payment structures for energy in the two islands. Whereas in Samsø investments were made directly by the island’s residents, in Sumba, elaborate financing structures had to be set up to account for the poverty on the island. Most initiatives were accompanied with a microcredit programme to ensure that access to renewable energy was made affordable. Due to Samsø’s higher wealth, this was not necessary here.

Different methods for energy generation were prevalent on the islands; on Samsø, renewable energy came mostly from wind turbines, whereas Sumba’s renewable energy came mostly from micro hydro, solar and biogas installations, especially in the more remote areas of the island. This seems to be because of two reasons. Firstly, due to Samsø being completely connected to the grid, energy generation can be done centrally, after which the grid can be used to disperse it. As such, a small number of wind turbines can provide energy for the entire island. On Sumba, many regions are hard to connect and are therefore dependent on more local energy generation, thus explaining the need for small micro hydro, solar, or biogas plants. Secondly, renewable energy generation is dependent on available natural resources, which can be different per region.

C. MNCs and SMEs in developed and BoP regions

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Table 2: MNCs and SMEs in developed and BoP regions

MNCs seem to be primarily interested in projects through which they can reach a large group of (potential) consumers at once. Because of this, both in Sumba and Samsø, MNC projects used already existing grid connections, creating alternative energy forms to supply connected households. The initiatives – wind energy by VESTAS on Samsø and Sewatama on Sumba, and biomass plantations on Sumba by Wilmar and General Electric – are all aimed at supplying people already connected through the grid.

Samsø sees little local SME activity. This is likely due to the fact that the market is completely saturated by present MNCs; after all, VESTAS’ wind turbines serve all grid-connected households, which in Samsø’s case is the entire island. Because of this, there seems to be little demand for small SME solutions.

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often aiming at serving a community, village or even individual household. The projects are highly localised, compared to MNC projects. For each project, it is taken into account what kind of energy generation is most suitable, how this will affect the region’s environment, how the local population can be best adapted to the change that renewable energy brings, and how energy can be made affordable to the locals. Multinationals currently seem to be unwilling to enter these markets, and as a result, SMEs prevail here.

Project funding by SMEs comes from various sources, such as donations from banks, national organisations and the private sector, as well as crowdfunding. On Sumba, this is done through Hivos’ channels. This occurs as well among MNCs in the BoP (ex. Sewatama). However, several MNCs use traditional modes of corporate finance as well for their initiatives (ex. GE, Wilmar), similarly to MNC activity in developed regions in the renewable energy sector. With the possible exception of biogas on Sumba, most initiatives currently undertaken on both islands have the potential for profit. There is a difference, however, in how this is acquired. On Samsø, a co-op model was implemented, through which locals invested in the wind turbines set up around the island, thus generating profit for the firms installing these. On Sumba, co-op models were implemented as well in many cases, especially in off-grid locations. However, innovative constructs such as microfinance were used to ensure affordability for the poor on the island, both by MNCs and SMEs. Projects such as the creation of mini-grids by REwiRE and solar charging stations by SEHEN moreover enhanced the co-op model, allowing more locals to participate in a project, thus making the projects more affordable for a greater amount of customers.

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VII. Discussion

Based on the previous chapter’s comparison, in this chapter the analysed results are discussed, as well as how they affect MNC potential in the renewable energy sector in the BoP.

A. Strategies in the BoP

The initial question was set out to answer what characteristics were necessary for creating value in the renewable energy sector in the BoP. Following the resource-based view (Barney, 1991), it was proposed that certain firm characteristics were useful for success in the BoP. Looking at the cases, we saw that strategies undertaken by the private sector on Sumba were very different for MNCs and SMEs, and that these corresponded roughly to strategies for grid-connected locations and strategies for off-grid locations.

MNCs focused mostly on expansion of the grid and serving currently connected consumers by replacing the current diesel generators with cheaper and more sustainable alternatives (wind energy and biomass). Their ability to negotiate with local and national governments, as well as state-owned organisations such as PLN and BAPPENAS (Bartlett & Beamish, 2011), is of great benefit for them here. A powerful bargaining position is needed to deal with such institutes. The success of their initiatives relies heavily on the availability of newest technology (Tsakalerou & Lee, 2013), to ensure that renewable energy is not only available for all consumers, but also as affordable as possible. In chapter II, several characteristics of multinationals as well as local SMEs were described. Referring back to table 1, it seems that several MNC characteristics are key in their on-grid strategies:

 Projects such as the setup of a wind turbine park require great initial investment. This is only possible due to the MNCs large pool of resources (Bartlett & Beamish, 2011).  MNCs are often technologically more advanced than their SME counterparts. This

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SMEs prevailed in off-grid locations (Lambooy & Van ‘t Foort, 2013), where they focused on small-scale, localised projects, taking into account the local environment and culture. When implementing their initiatives, great adaptiveness has been shown towards local differences in environment, culture and society. Organisations have shown flexibility in managing these factors, and have moreover shown their great knowledge of local markets. When convincing the population of the need to implement renewable energy on the island, these SMEs were aware of which people were influential, thus successfully targeting their arguments. Referring back to table 1, it seems that the following SME characteristics are key in off-grid strategies:

 Organisational flexibility leads to adaptiveness to diverse environments and cultures (De Jong, 2014), allowing for projects to be implemented in a way appropriate for a particular region.

 Informal processes rather than formalised processes in SMEs aid in creating organisational flexibility (De Jong, 2014) and therefore play a key role as well.

 Strong local market knowledge moreover aids in successful implementation of SME initiatives in off-grid regions in the BoP (De Jong, 2014; Bauman-Pauly et al., 2013). The characteristics listed in this section are unique for MNCs and SMEs respectively. Combined with the fact that these assets are valuable and difficult to substitute, these resources can thus lead to MNCs and SMEs having a competitive advantage over each other in on- and off-grid locations, respectively (Wernerfelt, 1984; Barney, 1991).

B. Potential for synergy

Multinationals seem rigid in their processes (Tsakalerou & Lee, 2013), and as such may not possess the same organisational flexibility as many SMEs do. Previous studies have shown that organisational flexibility and vast knowledge of local markets are crucial when engaging in remote BoP areas (Karnani, 2008; Landrum, 2012); findings confirmed by this study. MNCs lacking this capability therefore may have trouble with successfully initiating renewable energy projects in these areas.

OPPORTUNITIES IN THE BASE OF THE PYRAMID

OF THE PYRAMID

MNCs and SMEs in the Renewable Energy Sector

on Sumba and Samsø

Author: Coen Elferink

Acknowledgements

Table of Contents

I.

Introduction

II.

Theoretical background

III.

Methodology

IV. Case data: Samsø

V.

Case data: Sumba

VI. Comparison of Sumba and Samsø

VII. Discussion