Social enterprises: catalysts of economic transition?

The potential of social enterprises to generate socioeconomic change

Social entrepreneurship is growing fast. However, its success depends on more than quantity alone. Isolated social enterprises cannot deliver impact beyond the microeconomic scale. They need to be part of a broader system and aware of the different layers behind local problems to become more influential and successfully increase impact as change agents.

Both NGOs and the private sector are experimenting with social entrepreneurship. While NGOs are adopting entrepreneurial values (see article ‘Balancing social and entrepreneurial values’), companies are having to get used to the idea of taking social purpose into account in their core business decisions. By focusing on the latter, social entrepreneurship can be seen as a tool for inclusive growth.

Inclusive growth means that the poor, or others who are not included within the economy, benefit from economic growth through participation in such a way that social equity and environmental sustainability issues are accurately factored into economic processes, such as in doing business, in economic policymaking and in financial policy. ¹ Social entrepreneurship embodies the ideal of a social purpose that generates social impact by employing an entrepreneurial approach. Current discourse, however, concentrates mainly on the microeconomic dimensions of social enterprise.

The social entrepreneur’s mostly isolated orientation on local problems can undermine the chances of social entrepreneurship becoming an important catalyst for changing economic power structures, and therefore being a game changer for economic transformation at the macroeconomic level. In terms of the schools of thoughts described in the article, ‘The emerging social enterprise’, this means that social entrepreneurs have to significantly increase their social and economic impacts to become lasting change agents. So how realistic is it to expect social enterprises to become catalysts for economic change towards inclusive growth?

Challenges to compete on the market

Social enterprises operate through the market, where they face fierce competition. ² They may not seek the highest profit; holding costs low is evident to survive on the markets. But, generally speaking, the costs of services and products that social entrepreneurs provide are likely to be much higher on the market than their competitors, because they have to pay decent wages and build sustainable production lines. Furthermore, they focus on special groups who are mostly excluded, who are less accessible(for example, because they live in remote areas), and who are less likely to pay because they do not have a lot money to spend.³

Dealing with competition on the market while at the same time emphasizing the creation of social value, social entrepreneurs face many challenges in their organizations, which affect the social impact they want to achieve and increase over the years. The most important challenge for social enterprises is to deliver a social good or service while earning a form of earned income. Not all social enterprises are able to raise sufficient commercial revenues to cover their costs. Little or no profit limits the possibility of scaling up the activities. ⁴ Without the promise of growth in market share, most commercial financiers are not willing to invest in social enterprises. Social return is important for social entrepreneurs, but as players on the market it is difficult for them to find the right investors for starting up as well as for scaling up their organizations.

It is therefore important to choose a business model based on how the social mission is best achieved, as the article ‘Doing social business right’ shows. However, due to ‘mission drift,’ ⁵social entrepreneurs may need to eventually charge higher prices or expand their customer pool by targeting wealthier and more profitable market segments, thereby taking the focus away from the social mission. The pressure to be financially viable is too high and is a real challenge (this was also one of the conclusions of The Broker’s small survey of 38 social entrepreneurs in the preparation of this dossier). ⁶

Becoming a game changer

In such a competitive environment, social enterprises are less likely to become real game changers for economic transformation. Some impact will be generated at local level; however, the objective of solving societal problems in an entrepreneurial manner is still far away for most social entrepreneurs. Yet, there are a few examples of social enterprises that have been able to scale up and increase their impact significantly at the same time, like BRAC in Bangladesh, the Greenbelt Movement in Kenya, India’s Self Employed Women’s Association (SEWA), Se Servir de la Saison Seche en Savane et au Sahel (Six-S) in Burkina Faso and Valid Nutrition in the UK. There are some general observations from these examples that are important to further learning about social entrepreneurship and social transformation.

Firstly, successful social entrepreneurship initiatives build on local capacities to solve problems. They are engaged with local communities and use their knowledge and networks to find solutions for their problems. The five initiatives mentioned above all treat the assets and capacities of the marginalized groups themselves as vital to the development initiative. This creates the necessity for sharing control and mobilizing resources with local partners while increasing the possibility of sustainable change, because of its grounding in local commitment and capacities. ⁸ The exact way they do this is different. Some focus on organizing local communities and resources to solve local problems, like the work of Six-S and the Greenbelt Movement on village development and BRAC’s organization of poor groups to improve local services. Others emphasize helping individuals or small groups to participate more effectively in local economies, like the Grameen Bank. Still others, like SEWA, help grassroots’ groups organize themselves to be more effective in influencing other actors and political forces.

However, for any improvement of social impact, they have to take over a bigger segment of the market. How they could grow is a mixture of leadership, strategically timed financial support and early access to financial, technical and political support. In general, social enterprises can choose between expanding their operations by organizational growth, or by remaining small but within a powerful alliance with their clients. ⁹ Due to the lack of financial support, but also for strategic reasons related to staying flexible and keeping the social mission at the forefront of the organization, more social enterprises choose to learn to transition ‘from an enterprise to an ecosystem’ in which the size of the network is more important. ¹⁰ This means they have to become part of strategic networks or alliances and adopt a broader, integral and more political approach to reach their goal. For instance, Valid Nutrition cooperates with leading local private sector organizations or joins global initiatives and also works with local manufacturers in Malawi, Kenya and Ethiopia that produce their food products. At the same time, they have also developed partnerships with UNICEF and other large international aid donors.

When social enterprises are embedded within a powerful alliance with clients, suppliers, governments, international institutions and local movements, they are more likely to expand their social impact much further than the increase required in the size of their organization.¹¹ For example, Valid Nutrition managed to increase its impact a hundred fold whereas their organization only just doubled in size. ¹² Most social enterprises, however, are largely working in isolation as competitive businesses. They are not likely to achieve any social development goals that comprehensively tackle the complex and multiple challenges involved. ¹³ Therefore, and because there is very little evidence as yet whether social entrepreneurship alone can deliver welfare interventions and systemic changes on the same scale as governments, it is important to build an enabling environment in which social enterprises can flourish, by making the most of the opportunities available and being part of a wider movement.

Looking for solutions

A number of basic policy and legal measures can create an appropriate environment for social enterprise development that can improve the impact of social entrepreneurship on society. The principal requirement is to create a favourable legal context which treats social enterprises similar to business organizations, such as has been done in the United States with Low-profit Limited Liability Companies (L3Cs) and  in the United Kingdom with Charitable Incorporated Organizations (CIOs), which have been instituted to specifically support social enterprises. ¹⁴

Governments are willing to make reforms if they understand that social enterprises can overcome specific problems and provide goods and services that for-profit and public organizations have overlooked. As a result, public authorities can consider compensating in the form of fiscal advantages, for example in tax credits for social enterprises. ¹⁵ There are two major arguments that justify the granting of fiscal advantages to social enterprises. On the one hand, unlike the case in traditional enterprises, fiscal advantages should aim to compensate for the disadvantages dealt with by social enterprises (e.g. disadvantaged workers integrated into the work force). On the other hand, fiscal advantages should be granted to social enterprises when they contribute to the public interest and well-being of communities as they can minimize collateral costs to society. ¹⁶

The institutional context could also be adapted to ensure that social enterprises can have access to equivalent financial, product and service markets as small and medium-sized enterprises (SMEs), despite the different goals they pursue and their different modes of operation. In particular, social entrepreneurs should get preferential access to public procurement markets.

It is, however, not only about government policies. Changes in pension fund policies, like investing a minimal percentage of the money in social enterprises, can also help social entrepreneurs to scale up their activities and increase impact. They have in common that they look for solutions by creating new separate social institutions—a social stock exchange, social venture capital funds, a social legal entity. However, positioning social entrepreneurship too much as a separate entity outside the mainstream economy may decrease its attractiveness for commercial business to engage with it, and will therefore limit its potential to become a catalyst for economic transition. ¹⁷

Therefore, to some extent, another change is required; that is, to integrate the idea of creating social value in business within the core curriculum of business schools and not isolate it from mainstream economic business research. Accordingly, business educators have to take responsibility for moving social entrepreneurship forward as a core discipline within a new understanding of what the economic structures and business are all about. ¹⁸ This also can trigger the development of a social enterprise sector large and successful enough to raise consumer expectations, so as to increase the market returns to social responsibility.

Going the extra mile

A dramatic shift of thinking about the economy is required to enable social entrepreneurship to become successful (see Box Keeping business onboard). The private sector should be motivated with incentives created by consumers and citizens and government regulations that aim to encourage businesses to go the extra mile and further than the old repertoire of carrots (tax breaks) and sticks (regulatory compliance). Corporate business, if not challenged by governments and consumers, largely believes that economic activity already creates enough social value because companies offer goods and services that people want to pay for, they provide employment, pay taxes and spend part of their profits. As long as this remains the dominant idea, there is no encouragement for them to go beyond simply creating a healthy, profitable business.

At the same time, there is now a belief in society that the way out of the economic crisis is to create inclusive and sustainable markets. ²³ New policy briefs and research are mentioning the importance of inclusiveness for economic development; however, how to translate this into policies and implement them remains difficult. ²⁴ This is where social entrepreneurship can be an interesting basis on which to build policies. Especially now, there is more attention to the role of SMEs as key to employment creation and domestic economic development and this gives social entrepreneurship the opportunity to show the added value of doing business and generating socioeconomic impact at the same time. ²⁵

But these social enterprises should not focus on isolated problems or selling one product or service. That is not enough if they are really motivated to deliver a socioeconomic impact. Social entrepreneurs have to understand not only the immediate problems they want to tackle in society, but also the larger social system and its interdependencies. ²⁶ If they look to local problems in such interrelated ways, they can bring products and services to the market that no longer only solve isolated local problems, but really do trigger mutually-reinforcing changes that can make social and economic change happen. Furthermore, social enterprises are not only about how to make a profit by doing good, but also how to reinvest profits to accelerate social and economic impact.

Nevertheless, the challenges social entrepreneurs face in achieving impact by operating through the market is a limiting force for them to fulfil their social mission. It is even reasonable to question whether social entrepreneurs can deliver such promises, as most of them are struggling to keep their social businesses running while attempting to generate some kind of social impact. If most of them continue to struggle , the potential for social entrepreneurship to serve as a serious alternative to doing mainstream business, will remain unfulfilled.

It is therefore important to place the current opportunities and challenges of social entrepreneurship more in line with the wider context in which social entrepreneurs have to operate. Being successful as a social entrepreneur depends on many things, but it should be clear that the social mission does not stop at just creating a social impact. Such missions cannot be achieved without broader support – from governments, the financial sector, business schools, consumers, the private sector and civil society. Only when the right conditions can be met to work with all of these partners can social entrepreneurs become catalysts for economic and social transition in such a way that attracts and pushes business leaders to follow in their footsteps.

Footnotes