In an insightful new analysis, two Harvard professors have revealed why the corporate sector plugging ‘institutional‘ gaps in societies can lead to economic prosperity for both the companies and the nations in which they invest.

The value of social investments in emerging markets and why western companies looking to expand should consider making it a core instrument of their business plans is tackled in the latest book by Harvard Business School professors Tarun Khanna and Krishna Palepu, “Winning in Emerging Markets: A Road Map for Strategy and Execution“.

The pair have spent over a decade studying how international companies operate in emerging markets, in particular India and China and claim that ”institutional voids” exist in emerging markets, from the gaps in the judiciary to labour market and education limitations; the two recommend that Western businesses assess these gaps as prospective business opportunities.

The professors then note that emerging market entrepreneurs make social investment decisions not simply for moral reasons but because filling these voids is “imperative” for their businesses. We tend to agree from the perspective of political stability equating to economic prosperity and international investment.

While talking to Prof Khanna in London recently, he said: “[American economist] Milton Friedman is reported to have said: ‘The business of business is business.’ I am saying, ‘Not really’.You may be Procter & Gamble and selling soap but if you are in India you may also have to do housing. I am saying that it might very well be in your shareholders’ interests that you deal with shortages of housing.”

He added: “It is self-serving in the long run. Companies will slant what they contribute in a way that favours them. But they are still providing their expertise.”

The book also contains a large number of case study examples of companies that have exploited this idea well, such as India’s Tata Consulting, and those that have struggled, such as Microsoft in China and Wal-Mart in Korea.

It notes that the list of corporate towns in India and China is a long one, but they are also common elsewhere in Asia. They echo the 19th century role played by large Western firms such as chocolate makers Hershey and Cadbury in the US and UK.

“You are becoming seen as a corporate citizen and over time that builds you some currency to participate. Most companies have taken 10 to 15 years to work this out,” said Prof Khanna.

He added that if companies do not feel comfortable with tackling “voids” they should seriously consider not entering the market at all.

Prof Khanna is conscious that Western multinationals may feel uncomfortable with the idea of direct, branded social investment. It could smack of economic imperialism.

But he added: “The mistakes of the past have informed this caution. It is a good thing because they don’t want to repeat the mistakes. But it’s the wrong lesson to draw as they can be agents of change. In instance after instance, there is an acceptance that there’s value to be added.”

Kris Taenar Wiluan, founder of Indonesian oil and gas services company PT Citra Tubindo, has built hospitals, sports centres, schools, orphanages and provided health care in the north Indonesian island of Batam, where he operates.

He said: “I think a lot of multi-national companies are starting to realise that this is part of the business.“