Achieving Economic and Social Progress in Latin America: The New Learning FINAL, JULY 11, 2013 AT 2:40 PM Length: 50 minutes presentation + 30 minutes Q&A Time: - Opening remarks 3:00 pm to 3:30 pm EST - Your presentation 3:30 pm to 4:50 pm EST Format: UN Keynote speech Location: At UN headquarters, North Lawn Building. Conference Room 1 [Note: Due to the construction process the visitor entrance has moved. It is actually located on 1st Avenue, between 42nd and 43rd avenue. Maria Loreto, UNDP Consultant, will be there to guide you] Audience: 200 guests = > Ministers of Social and Economic Development from Latin America and the Caribbean (Copy of list of attendees in briefing folder), UNDP high-level officials and members from the Academia Key theme: Beyond Poverty, The New Challenges of Social Cohesion Policies Key social and economic issues and trends to be touch upon during the conference: Today, most developing economies are middle-income (MIC) rather than low-income countries. In the period from 2000 to 2010 alone, 33 countries have transitioned from low- to middle-income status Despite significant social gains, MICs are still home to 960 million poor people, 72 % of the world’s poor For millions of people, the transition from low- to middle-income class can take years and decades. There is a significant development agenda pending for poor and vulnerable citizens in the region The good news is that the possibility of eradicating poverty is within reach (Close to 32 million of the world’s 1.2 billion extreme poor live in LATAN and the Caribbean); jobs and social protection have been a key part of the solution However, inequality still remains a problem. Levels of inequality in LATAN are still the highest in the world. The overall loss by inequality according to the inequality-adjusted HDI is 25.7% in 2012 for LATAN and the Caribbean, more than twice the figure for countries in the very high human development category (10.8%) It is also important to highlight that inequality disproportionately affects women UNDP’s upcoming strategic plan for 2014-2017 moves from the “professional silos” of poverty, environmental or conflict work, to issue-oriented work on extractive industries, clean energy and inclusive jobs –that combine multiple policy challenges at the same time Source: Helen Clark, UNDP Under Secretary General speech transcript (full version in briefing folder) Additional notes: We made adjustments to incorporate shared value and SPI slides You will be introduced by Heraldo Muñoz, Assistant Secretary General and Regional Director for LATAN (I’ll email speakers’ Bio by Monday) Your presentation will help shape social policies in Latin America Professor Michael E. Porter Harvard Business School VI Ministerial Forum for Development United Nations - New York July 11, 2013

The Dual Challenges of Development Economic Development Social Development There is a powerful connection between economic and social development Improving competitiveness requires improving the economic and social context simultaneously 2

Economic Development depends on Competitiveness What is Competitiveness? A country or state is competitive to the extent that firms operating there are able to compete successfully in the regional and global economy while supporting high and rising wages and living standards for the average citizen Competitiveness depends on the long-run productivity of a location as a place to do business Productivity of existing firms and workers Ability to achieve high participation of working age citizens in the workforce Competitiveness is not: Low wages A weak currency Jobs per se What we know is that prosperity comes from productivity Lots of work produces lots goods. It is important in order to sustain high wages Productivity = high return on invested capital Productivity drives wages, wealth and income  determines prosperity Depends on both domestic and foreign firms (though who owns the firms is not important, but rather where the most sophisticated operations are located) Jobs  competitiveness (the only way) Without business there is no prosperity Companies need to seek out the best way to use human/natural resources Countries used to depend on endowments  which led to wealth Endowments are now easy to get (you can simply import it) What is scare is the ability to create an environment which allows companies to be highly productive More that companies can move/goods/services/resources easily The greater the value of knowledge, skills, production techniques. If you don’t have this…you won’t be wealthy Productivity is a function of how high you can charge prices (which is itself a function of quality, uniqueness and innovation) It is about raising the value per unit of the nation’s resources Important to remember that it doesn’t matter what activities a country does…but how it does it Make shoes, semi-conductors…not what you do, just how it’s done Good example is the Italians, who are able to sell $500 shoes (based on quality, designer cache) Another example is California or Holland, where an enormous amount of wealth is created through agriculture sector A bad example is France, which tried to force a high-tech sector to be built (through subsidies) – thinking that would lead to high-paying jobs Countries get rich by creating world class sectors that are more productive than in other countries, in order to attract their share of investment/business activity (didn’t matter in the past, because of trade barriers) Countries must now compete to provide the most productive location, and support high standards of living The idea that some industries are good/bad is not the right thinking There is a fallacy that countries must be in high-tech to compete Foreign firms help create the environment, technical base, and expertise Protecting local industries is usually a failing strategy Countries should encourage foreign firms to come into sectors where there is real domestic strength This goes against development thinking Countries should create environment where best firms want to be in that location (e.g., every life science firm in Massachusetts) The game is who can offer the most productive environment. Both at the industry level and across the entire economy Labor cost isn’t the point. It’s about the total productivity of the system Economies of scale are overrated. Mostly about eliminating competition

What Determines Competitiveness? Endowments have clearly been critical for Botswana and continue to drive its economy: Diamonds, Okovanga delta (tourism), agricultural conditions (cattle farming) Botswana is one of the few countries that has managed to avoid most of the negative dynamics that natural resource wealth can entail (see slide) Much of the research on Botswana has focused on why that has happened Endowments Endowments, including natural resources, geographical location, population, and country size, create a foundation for prosperity, but true prosperity arises from productivity in the use of endowments 4 4

What Determines Competitiveness? Macroeconomic Competitiveness Sound Monetary and Fiscal Policies Human Development and Effective Political Institutions General Comments for the Slide Set context for competitiveness Legal, social, macro, institutional rules, political system Need these elements to be productive – stability allows for businesses to be confident to invest & do business It is a necessary, but not sufficient condition What makes nations/locations competitive Need economic stability, to ensure macroeconomic cycles are well managed Need political stability, a trusted legal framework Social variable is important Prosperity is created in the micro economy, not macro Only actor that can create wealth is the firm (when producing a profit) Profit is created through the design, development and sale of a product at profit (the profit creates wealth) Government can harvest & distribute wealth, but can’t produce it When look at country/region, look at the balance of business environment against the level of business sophistication Business environment needs a stable macroeconomic environment in order to reach full potential Question is making macroeconomic environment harder or easier to create wealth Codependency is often misunderstood What happens if it takes 3 days to get through customs 12 hours to drive across city? Microeconomic conditions How sophisticated are companies Good practices (operational) Good organizational structure? Strategy? Need good business environment (skills, infrastructure, etc.) Endowments Macroeconomic competitiveness sets the economy-wide context for productivity to emerge, but is not sufficient to ensure productivity Endowments, including natural resources, geographical location, population, and country size, create a foundation for prosperity, but true prosperity arises from productivity in the use of endowments 5 5

What Determines Competitiveness? Human Development and Effective Political Institutions Macroeconomic Competitiveness Sound Monetary and Fiscal Policies Human Development and Effective Political Institutions Human Development: Basic education, health care, equal opportunity Rule of Law: Property rights, personal security, and due process Political Institutions: Stable and effective political and governmental organizations and processes Endowments Strongly shaped by rules and behavior at the level of central government; but then revealed through the actions and structures at many levels of government Changes in many parts only relatively slowly; significant legacy effects through culture, behavior, etc. Sets a critical overall context for productivity, and has a significant direct impact on the quality of life for large parts of society But while some literature argues that all other policy choices are endogenous to strong political institutions, the evidence (discussed in more detail later) is not supportive of this view. Strong institutions set a helpful context; they may be necessary, not are not sufficient While there is significant consensus as to what good policies in this area should achieve (deliver education, health care, secure property rights, transparent, inclusive policy process) there is a wide range of specific models and approaches as to how this is done in different countries, depending on country-specific circumstances 6 6 6

What Determines Competitiveness? Microeconomic Competitiveness Quality of the Business Environment State of Cluster Development Sophistication of Company Operations and Strategy Macroeconomic Competitiveness Sound Monetary and Fiscal Policies Human Development and Effective Political Institutions General Comments for the Slide Set context for competitiveness Legal, social, macro, institutional rules, political system Need these elements to be productive – stability allows for businesses to be confident to invest & do business It is a necessary, but not sufficient condition What makes nations/locations competitive Need economic stability, to ensure macroeconomic cycles are well managed Need political stability, a trusted legal framework Social variable is important Prosperity is created in the micro economy, not macro Only actor that can create wealth is the firm (when producing a profit) Profit is created through the design, development and sale of a product at profit (the profit creates wealth) Government can harvest & distribute wealth, but can’t produce it When look at country/region, look at the balance of business environment against the level of business sophistication Business environment needs a stable macroeconomic environment in order to reach full potential Question is making macroeconomic environment harder or easier to create wealth Codependency is often misunderstood What happens if it takes 3 days to get through customs 12 hours to drive across city? Microeconomic conditions How sophisticated are companies Good practices (operational) Good organizational structure? Strategy? Need good business environment (skills, infrastructure, etc.) Endowments Productivity ultimately depends on improving the microeconomic capability of the economy and the sophistication of local competition revealed at the level of firms, clusters, and regions Macroeconomic competitiveness sets the economy-wide context for productivity to emerge, but is not sufficient to ensure productivity Endowments, including natural resources, geographical location, population, and country size, create a foundation for prosperity, but true prosperity arises from productivity in the use of endowments 7 7

Peru’s National Business Environment, 2012 MOC 2012 Prep Notes The Diamond is about causes, not outcomes The diamond is a tool for looking holistically at a location It can be at different levels: National Regional City Cluster The Diamond is based on a systems view and many things matter Economic development is the process of upgrading the diamond The diamond is immediately connected with firms Context for Firm Strategy and Rivalry Openness to foreign investment, trade, capital flows Improvements in investor protections Efforts to strengthen competition policy Rigidity of employment Difficulty in business formation Low intensity of local competition High Informality of the economy Factor (Input) Conditions Demand Conditions Abundant resources: mineral, agricultural, fishing, and cultural Advantageous location Improving administrative infrastructure Simplified customs procedures Sound banking system, but high interest spreads Improving financial markets, but limited venture capital availability Poor physical infrastructure Low skill levels in the labor force, mismatch with demand Weak university-industry research collaboration Few high-quality research and scientific institutions Improving consumer protection regulation Improving sophistication of local buyers Weak environmental standards enforcement NOTES Related and Supporting Industries Limited local suppliers and supporting industries Shallow clusters

Geographic Influences on Competitiveness Nation Regions and Cities Regions compete and regional business environments are shaped by policies at different geographic levels While the focus has traditionally been on the national level, neighboring countries and sub-national regions provide crucial leverage points Regions are the most important economic unit for competitiveness in larger countries, especially countries beyond subsistence development 9 9

Prosperity of Mexican States Campeche (-4.9%, $333,700) Mexico Real Growth Rate of GDP per Capita: 1.36% Distrito Federal Nuevo Leon Tabasco Coahuila Baja California Sur Quintana Roo Gross Domestic Product per Capita , 2010 (in constant 2003 Mexican Pesos) Querétaro Tamaulipas Aguascalientes Mexico GDP per Capita: $77,212 Chihuahua Colima Sonora Baja California Jalisco Guanajuato Durango Yucatán Sinaloa Morelos San Luis Potosí México Puebla Michoacán Nayarit Veracruz Zacatecas Hidalgo Tlaxcala Guerrero Chiapas Oaxaca Real Growth Rate of GDP per capita, 2003-2010 Source: INEGI. Sistema de Cuentas Nacionales de México.

The Role of Regions in Economic Development Many essential levers of competitiveness reside at the regional level Regions specialize in different sets of clusters Sub National Regions: Summary Sub-national regions are the locus of many of the most important determinants of competitiveness Economic policy must encompass this geographic level in every country, especially larger countries Healthy and open competition among regions is highly beneficial for competitiveness Regional economic specialization drives productivity and productivity growth Competitiveness is enhanced if large economies behave as a series of smaller economies The secret weapon of the U.S., China, and India Appropriate responsibility and accountability for economic development should also reside at the regional level, especially in larger countries Improving policy implementation Improving motivation and accountability 11

Traded Cluster Composition of the Puebla Economy Overall change in the Puebla Share of Mexican Traded Employment: +0.09% Construction Materials Textiles Apparel Automotive Added Jobs Lost Jobs Employment 2003-2008 Building Fixtures, Equipment and Services Puebla’s national employment share, 2008 Processed Food Furniture Leather and Related Products Education and Knowledge Creation Forest Products Puebla Overall Share of Mexican Traded Employment: 4.20% Distribution Services Heavy Machinery Information Technology Chemical Products Change in Puebla’s share of National Employment, 2003 to 2008 Employees 5,000 = Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Contributions by Prof. Niels Ketelhohn. 12

The Role of Regions in Economic Development Many essential levers of competitiveness reside at the regional level Regions specialize in different sets of clusters Regions are a critical unit in competitiveness Each region needs its own distinctive strategy and action agenda Business environment improvement Cluster upgrading Improving government effectiveness Sub National Regions: Summary Sub-national regions are the locus of many of the most important determinants of competitiveness Economic policy must encompass this geographic level in every country, especially larger countries Healthy and open competition among regions is highly beneficial for competitiveness Regional economic specialization drives productivity and productivity growth Competitiveness is enhanced if large economies behave as a series of smaller economies The secret weapon of the U.S., China, and India Appropriate responsibility and accountability for economic development should also reside at the regional level, especially in larger countries Improving policy implementation Improving motivation and accountability 13

Developing Clusters Tourism in Cairns, Australia Public Relations & Market Research Services Travel Agents Tour Operators Local Retail, Health Care, and Other Services Food Suppliers Local Transportation Hotels Attractions and Activities e.g., theme parks, casinos, sports Property Services Souvenirs, Duty Free Restaurants Airlines, Cruise Ships Main impact of clusters: productivity, innovation, new firm creation In line with changes in management and innovation practice Outsourcing/core competencies drive reliance on other companies “Open innovation” drives reliance on network of companies and research institutions to drive innovation Cluster is a set of related industries and industries that are co-located within the same region Entities (companies) are not isolated and randomly located The Cairn’s tourism cluster is built around the great barrier reef Had to start with an attractive attraction However, not just the quality of attractions  success is based on many industries/sector/institutions interacting and supporting each other E.g., suppose you have best hotel in the world But need to wait at airport for 5 hours But taxi driver is rude and overcharges customers No good restaurants in the area, and those that are, are prone to food poisoning Trash all over the beach No good entertainment/music/theater in the surrounding area The success of the hotel is dependent upon a group of other organizations doing there job well Success of a cluster is about the co-dependency of related industries, all doing their jobs well Rarely is individual firm competitive … it is clusters that are competitive Couldn’t’ a firm simply import everything it needs? But is that being very productive? This leads to a paradox of the global economy: Anything you can source from a distance is no longer a competitive advantage (b/c so can everyone else!!) Should strive to outsource locally .. this reinforces and strengthens the local structure Added benefit that there are positive externalities (e.g., building up capacity, expertise, skills, etc..) Co-location of competing firms also helps  brings in talent, skills, etc. At the same time, distance doesn’t matter as much Maintenance Services Banks, Foreign Exchange Government Agencies e.g., Australian Tourism Commission, Great Barrier Reef Authority Educational Institutions e.g., James Cook University, Cairns College of TAFE Industry Groups e.g., Queensland Tourism Industry Council Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden

Developing Clusters Peruvian Asparagus Inputs Related Clusters Fertilizer Financial Services Institutions for collaboration Asparagus Industry Group (IPEH) Peru Export Association (ADEX) Agroexporters Guild (AGAP) SME Promotion (PROMPEX) Seed/Seedlings Gastronomy Pesticides Transportation/Logistics Ports (Salaverry) Asparagus Growers Irrigation Systems Green Asparagus White Asparagus Cold Chain Transportation (Frío Aéreo) Machinery Fresh Asparagus Processed/Frozen Asparagus Railways Processing Equipment NOTES Airports Packing Material Government Institutions Export Promotion (PROMPERU) Agriculture Sanitation (SENASA) Universities (Trujillo, UNAM, UPN) Technical Standards (ANTCS) Customs Agencies Other Equipment Imports/Weaknesses Domestic Production/Strengths Source: Interviews with industry representatives, team analysis 15

Organize Public Policy around Clusters Business Attraction Education and Workforce Training Export Promotion Clusters Science and Technology Infrastructure (e.g., centers, university departments, technology transfer) Market Information and Disclosure Quality and environmental standards Specialized Physical Infrastructure More impact, because it creates spill-overs More social benefits, because it reduces gap between public and private returns Better decisions, because policy design can take cluster-specific factors into consideration through cluster dialogue Natural Resource Protection Clusters provide a framework for organizing the implementation of many public policies and public investments directed at economic development

Economic Development and Social Progress Economic progress has a positive impact on social progress, but rising GDP per Capita does not guarantee social progress We must measure social progress directly in order to understand performance and inform improvement The Social Progress Index is a new tool to do so Holistic framework Outcomes (not inputs) Separate from economic By separating social and economic progress, we can better understand performance and how social and economic performance are linked 2 2 17 17 17

What is Social Progress? Social progress is the capacity of a society to meet the basic human needs of its citizens, establish the building blocks that allow citizens and communities to enhance and sustain the quality of their lives, and create the conditions for all individuals to reach their full potential. www.socialprogressimperative.org

The Social Progress Index Framework Selection of indicators 52 indicators, 2-6 per component. b) Geographic availability

Costa Rica

Comparing country Performance: Costa Rica vs. South Africa

Traditional Thinking – Maximizing Shareholder Value The Role of Business in Social and Economic Development Evolving Approaches Philanthropy Donations to worthy social causes Volunteering Companies should approach social issues through a portfolio approach. Many companies engage in philanthropy. It’s an important part of a company’s obligation to its communities. However, all too often, companies limit their engagement in their communities to traditional philanthropy Traditional Thinking – Maximizing Shareholder Value Philanthropy Company foundations How much of profits to give

The Role of Business in Social and Economic Development Evolving Approaches Philanthropy Corporate Social Responsibility (CSR) Donations to worthy social causes Volunteering Compliance with community standards Good corporate citizenship “Sustainability” Mitigate risk and harm Discuss the importance of a portfolio Companies are trying to engage their communities The question is how? Most companies do CSR to mitigate risk; activities are often disconnected from the core business. Traditional Thinking – Maximizing Shareholder Value Philanthropy CSR Company foundations How much of profits to give Broader Still give basic / redistribution Placate critics How to do it well? Aligned with business Focus (lots of causes are worthy) Value not just amount of giving But what is the impact???

Corporate Social Responsibility (CSR) Creating Shared Value (CSV) The Role of Business in Social and Economic Development Evolving Approaches Philanthropy Corporate Social Responsibility (CSR) Creating Shared Value (CSV) Donations to worthy social causes Volunteering Compliance with community standards Good corporate citizenship “Sustainability” Mitigate risk and harm Integrating social needs and challenges into economic value creation itself Shared value is different. Shared value is about solving societal problems through core business activities, while creating economic value for your company. It is exciting to see that companies are making this shift from more traditional philanthropic activities to shared value as part of a portfolio. We see even the most advanced companies who are pursuing shared value, still have a portfolio. They understand the importance of allocating resources and making investments in each of these areas, and they coordinate them, so that they are mutually reinforcing and supporting the same overall goals. Philanthropy CSR Harnessing Capitalism Itself Corporate foundations How much of profits to give Broader Still give basic / redistribution Placate critics Capitalism is magic: value creation Capitalism is most powerful force available Sustainable Scalable (social issues at scale!) Disciplined: no value / no success Dispassionate / fair Discuss the importance of a portfolio Philanthropy and CSR serve as platform investments for CSV, helping incubate CSV solutions Companies are trying to engage their communities The question is how? Can be a continuing role for CSR / Philanthropy

Creating Shared Value: What is Shared Value? Creating Shared Value: Addressing a social issue with a business model NOTES

Social Needs and Economic Value Creation Environmental Improvement Energy Use Community Economic Development Water Use Supplier Access and Viability Company Productivity Affordable Housing Worker Skills Health Worker Safety Tradeoffs not there Not “externality” Expand boundaries Higher form of capitalism and what matters _____________________________________________________________________________________________________________________ As we learn more about social issues – we see the big points of congruence List of social issues here, not exhaustive Workplace Safety Old way to look at this was to think about the optimum number of accidents; how to have a good balance with the cost of safety programs New way to look at this involves CEOs who now understand that investing in eliminating accidents has one of the highest ROI they can make Improves process, making them more rational Zero accidents = higher profits This is not a tradeoff – but a win-win situation Environment Old way: if you meet strict environment standards you become less competitive. Companies should fight all environmental standards New way: sign of wasted / underutilized resources. Can make profit in the short term, but results in catastrophe over the long-run Saving energy makes companies more competitive; reduce pollution / discharge / waste means that resources are being used more effectively Conception of productivity drivers is deepening. It used to be about “beating up your suppliers. Now we know that you won’t be productive if your suppliers aren’t productive. Make suppliers better/more productive, and they can provide you with better inputs Employee Health Old: was cost, should minimize health benefits – beat down premiums New: cost of poor health is 3 times the cost of health benefits Eroded benefits for health is counterproductive for a firm’s productivity Now firms are expanding the idea of employee health: Wellness programs; exercise programs; on site clinics, etc. Lending: if cannot pay back, punitive fees, etc to make money vs. allowing customer to restructure Danger of self-contained idea of the company Everything outside of the firm used to be considered a cost Now we must think about how to increase productivity  including by engaging outside agents Old approaches costly in the long term Migrating jobs to lower wage countries ->Retraining, additional capital investments De-skilling through automation->Lack of innovation, more training needed for value added activities Lax environmental standards->Costs of cleanup, high costs of polluting inputs (e.g., oil) New emphasis on a living wage, retention and training, eliminating pollution, improving quality, and reducing rework Social deficits create economic costs “Externalities” affect internal company productivity Social needs represent the largest market opportunities

Levels of Shared Value Meeting social needs through products and underserved customers Redefining productivity in the value chain Improving the local and regional business environment These 3 levels are important to understand because they take the theory of shared value to a more practical level. These levels are important because they help to explain our SV is different from sustainability, philanthropy, CSR or other language that is out there to describe corporate social engagement.

Creating Shared Value in Products and Markets Jain Irrigation Systems Drip irrigation equipment for small farmers in Africa and India Serves 4 million farmers worldwide as of 2012 Reduces water use by over 40% Enables higher crop yields that improve food security while raising farmers’ income Jain is now a $820 million business that is rapidly growing XXXXXX

Shared Value in the Value Chain Fibria, Brazil Fibria, a large manufacturer of pulp for paper, utilizes planted eucalyptus trees rather than native and old growth forests The company also encourages small-scale producers near its mills to plant eucalyptus in conjunction with other crops, assisting them with technical training and inputs Fibria achieves far greater resource efficiency versus old growth forest production, with eucalyptus yielding 30 times higher yield per acre of wood pulp Small scale producers contribute 27% of the raw material volume utilized in Fibria mills, improving efficiency 4000 households have significantly increased their income Updated 06/14/2013 In the regions where it has activities, Fibria works through forestry partnerships, whereby rural landowners can become important alternative suppliers of timber. Fibria encourages farmers located near its pulp mills to plant eucalyptus and sell it to the company, providing technical training, as well as creating mechanisms for financing resources and inputs. Besides reducing the need for Fibria to purchase land and assuring the supply of alternative wood sources, the forestry partners program is one way of fostering income generation, jobs and agricultural diversity The main aim of the Forestry Partners program is to integrate the local communities with the forestry business, leading to social inclusion, improved quality of life, environmental conservation and rural development. Fibria encourages the cultivation of eucalyptus in integration with other crops - in a system known as agroforestry - by farmers who participate in the Forest Partnership programs In 2012, the Forest Partnership program totaled 102.3 thousand hectares of planted forests in 3,321 contracts. The supply of wood by autonomous producers and partners in 2012 represented 27% of the volume of raw material consumed by Fibria's pulp mills In 2012, 354,697 of the 989,381 hectacres (36%) of forest area owned by Fibria had been set aside for the conservation of biodiversity and ecological processes In 2012, Fibria’s socioenvironmental responsibility programs and activities reached out to around 150,000 people, spread across 254 municipalities in seven Brazilian states CSR Preserves 170,000 hectares of native reserves (more than 37% of its planted areas), ensuring ecosystem balance and biodiversity

Improving the Business Environment: Upgrading Channels Arca Continental Arca Continental is the second largest bottling company in Latin America, and one of the largest Coca-Cola bottlers in the world Arca Continental established a program to train and invest in the micro-entrepreneur retailers who sell more than 60% of the Company’s products, including management, sales and marketing and merchandising Invests in low energy use coolers and fixture improvements Participating retailers register sales increases of 25% or more, with improved customer satisfaction, leading to similar increases in the sales of Arca’s products Arca Continental recovers its investment in 6 months or less Beginning in Mexico, the program is being extended to Argentina and Ecuador Mexico-based Arca Continental is the second largest bottling company in Latin America and one of the most important worldwide. It serves a market of over 53 million people in northern and western Mexico, as well as in Ecuador and the northern region of Argentina. Arca Continental boasts 814,000 points of sale and 31 plants Arca Continental also has a program that has to do with water usage and productivity in the value chain, and the company is involved in a number of CSR-type community and employee-related programs as well

Skill and Supplier Development Rio Tinto, Canada Rio Tinto’s Diavik Diamond mine has helped create a variety of community based training partnerships with communities, contractors, governments and educational institutions in remote Northern Canada Education: Promotes careers in diamond mining. Offers apprenticeships that employ and train students Worker training: Partners with communities, colleges and government to train workers in mining related activities Supplier development: Sources local inputs and capacity building for local providers of goods and services Rio Tinto hires 62% of its employees locally The company sources 71% of goods and services locally UPDATED 06/21/2013 The Diavik Diamond Mine, a Canada’s Top 100 Employer for 2012, is located 300 kilometres northeast of Yellowknife, Northwest Territories, Canada, and is an unincorporated joint venture between Diavik Diamond Mines Inc. (60%) and Harry Winston Diamond Limited Partnership (40%) Early in the development, Diavik committed to health, safety, and environmental protection as core values Since the Diavik diamond mine was developed in the Northwest Territories of Canada, it has helped create a variety of community based training partnerships with communities, contractors, governments and educational institutions During the construction phase, classroom study was made available for employees, along with hands on training on community infrastructure projects Diavik’s community based training partnerships have created some 230 graduates during construction, most of whom have found employment with Diavik contractors or local community governments, or at other mine sites. A number of these graduates ultimately joined the Diavik operations workforce [NOTE: NUMBERS ON THE SLIDE REFLECTS 2010 DATA. 2012 DATA IS ONLY AVAILABLE FOR % OF LOCAL HIRES – SEE NEXT BULLET POINT – BUT NOT LOCAL PURCHASES] Diavik committed to employing a 66 percent northern workforce with 40 percent Aboriginal during mine operations. At December 31,2013 the Diavik Diamond Mine employed 1,071 people of which 508 are Northerners and 238 are Aboriginal (~ 70% of total workforce) Workplace learning centre Diavik maintains a workplace learning centre at the mine site. The centre is intended to help employees build their skills in tasks directly related to their daily work role including computer and academic skills as well as GED preparation and GED exam invigilation. Employees who are writing exams for other courses can also write them here under Supervision in the Learning centre. A training adviser is available to provide learning support to apprentices who are preparing to attend technical training In addition, the workplace learning centre is the first point of contact for new employees and contractors. The training mine site administrators provide direction and support to all new hires as they complete the on line Diavik Safety Training System Northern leadership development program To help increase the number of qualified Aboriginal people at the supervisory and management level, Diavik developed an Aboriginal development program in partnership with SAIT Poly technic. The program includes DDMI and contractor employees. As well as covering the customized curriculum which is based on Rio Tinto leadership competencies, participants are matched with a DDMI supervisor for mentoring. Since 2005, 67 individuals have completed the program. All graduates receive a certificate from SAIT recognizing their achievement In 2010, Diavik expanded the program and two individuals with De Beers Canada, along with four DDMI employees, completed the program. In 2011, the program transitioned to Aurora College. In 2012 six Diavik employees completed that year’s program and this year, nine Diavik employees are enrolled in the program. Skilled trades Diavik has committed to train between eight and 18 apprentices annually. At year end 2012, Diavik supported 32 apprentices; all northern and 20 Aboriginal. Five Diavik apprentices are working towards dual journeyperson certifications. During the year, two apprentices working at the Diavik Diamond Mine achieved journey person certification. Since 2003, 34 apprentices have successfully completed their apprenticeships at Diavik and achieved journeyperson certifications from the Government of the Northwest Territories. Source: FSG, Diavik Diamond Mine 2012 socio-economic monitoring report (April 2013) and company website (link: http://www.diavik.ca/543_building_northern_communities.asp)

Novartis Arogya Parivar Initiative Rural India Reconceiving Products and Markets Redefining Productivity in Value Chain Enabling Regional Development Portfolio of the appropriate and affordable medicines from its originals, generics, and over-the- counter (OTC) businesses Adapted packs of some OTC medicines (appeal and size) to address limited consumers’ ability to spend out-of- pocket on healthcare Local sales teams that know the culture and speak the dialect, which provided access to crucial market intelligence and reduced mistrust Dense network of local distributors to reduce stock-outs      Community health education program to address lack of health- seeking behavior Frequent health camps with physicians brought into rural areas Microfinance partners to improve healthcare infrastructure and access to working capital NOTES

New Stakeholder Roles and Relationships Shared value thinking is driving new relationships between companies, philanthropists, NGOs, and government in addressing social issues Traditional Roles New Roles Companies Donate to charitable causes Initiate and scale shared value strategies Philanthropists Donate to charitable causes Partner with companies and NGOs to catalyze shared value initiatives NGOs Receive grants to provide social services Enable implementation of new shared value business models Examples of disruptive innovations that “bust” tradeoffs and expand frontier New R&D Less product complexity Local production New partnerships for sales and consumer education Governments Tax business and regulate business practices; operate social programs Partner with companies and NGOs to make platform investments and support shared value strategies

Redefining the Role of Business Businesses acting as businesses, not as charitable givers, are arguably the most powerful force for addressing many of the pressing issues facing our society Shared value gives rise to far broader opportunities for economic success than conventional management thinking Shared value thinking will drive the next wave of innovation, productivity, and economic growth A transformation of business practice around shared value gives purpose to the corporation Not reputation but what we do! 34

The Dual Challenges of Development Economic Development Social Development There is a powerful connection between economic and social development Improving competitiveness requires improving the economic and social context simultaneously 35