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Some Driftwood

Social enterprises: catalysts of economic transition?

The potential of social enterprises to generate socioeconomic change

Evert-jan Quak | October 29, 2013

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,’ 5 social 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

Stuck in Customs / Trey Ratcliff / Indonesia
Evert-jan Quak

Stuck in Customs / Trey Ratcliff / Indonesia

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. 7 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.

Keeping business on board

Harvard economist Michael Porter is co-initiator, with Mark Kramer, of the Shared Value Initiative. Porter describes social entrepreneurship as a ‘Trojan horse’, a means to get business on board as part of a larger movement calling for ‘a more ethical and socially inclusive capitalism’. 19 In such a way, social entrepreneurship may be the vehicle or catalyst to change the economic system in such a way that profits produce positive social and economic change, and financial markets reward companies for doing that through social entrepreneurship.

However, by inviting mainstream business in, there is always the risk of shifting too far away from a social to an entrepreneurial focus on social entrepreneurship, at least in the short term. How can mainstream business translate social entrepreneurship into action: are they willing to change the core business of their companies? Corporate social responsibility (CSR) has been embraced and adopted by the same businesses over the past two decades but it has become clear that, in many cases, it has not made a significant contribution to generating real social and economic impact. 20 CSR has not become part of most companies’ core business and has remained sidelined, being used mostly as a PR tool (see The Broker articles, ‘A delicate business’ and ‘The CSR debate: keeping business on board’).

One reason why this has happened is that the directors of publicly quoted companies, usually big businesses, seek to maximize value for their shareholders in the short term, as they commonly believe that this is what the shareholders want. Shareholder power has increased over the past two decades, for example through company law, 21 but companies are not obliged to maximize their profits. If their shareholders agree that it is not only profit that matters, there is nothing to stop them from abandoning their policy of maximizing profit. 22 This approach, however, runs against mainstream economic thinking. This means that most company directors take account of CSR issues in their decision making only to the extent that it affects shareholder value positively and not negatively. Consequently, directors, at least those of publicly quoted companies, have many incentives to be as socially irresponsible as they can within the law if it increases profitability, while maintaining their company’s socially responsible image.

The same can happen with social entrepreneurship. However, social entrepreneurship goes further than CSR as it makes social purpose the starting point of the business model (see article 'Doing social business right'). However, in the context in which private actors operate, it is not easy for a publicly quoted company to become a social enterprise, except as a means to increase its profits. In other words, as article 1 also concluded, a mainstream business cannot be a social enterprise in any meaningful sense, to the extent that this is defined by socially-oriented motivation and behaviour.

Alicia Nijdam / Rio de Janeiro
Evert-jan Quak

Alicia Nijdam / Brazil

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.

Co-readers

David Woodward, is an independent consultant on development issues, author of Debt, Adjustment and Poverty in Developing Countries (1992) and The Next Crisis? Direct and Equity Investment in Developing Countries (2001), and is co-editor of Global Public Goods for Health (2003).

Alan Fowler, Independent development adviser and analyst related to international development, governance and civil society. Emeritus Professor at the Institute of Social Studies, Erasmus University, The Hague.

Gerd Junne, Chairman of the board of The Network University (TNU).

Photo credit main picture: Some Driftwood

Footnotes

  • 1.

    There are various definitions of inclusiveness, as described by: Klasen, S (2010) “Measuring and Monitoring Inclusive Growth: Multiple Definitions, Open Questions, and Some Constructive Proposals.” June 2010 Working Paper Series No. 12; and: de Haan, A. and S. Thorat, Inclusive growth: more than safety nets?, SIG working paper 2012/4, December 2012, International Development Research Centre, Ottawa. One, for example, emphasizing the extent to which the poor benefit from growth, is more or less a continuation of the pro-poor growth debate. Another definition, which seems to be embraced by the Growth Commission and the World Bank (see the World Bank resources article ‘What is inclusive growth?’ of 10 February 2009) focuses on participation in generating economic growth (growth is based on the inputs of those, including the poor, who contribute to it). ’This concept of inclusion allows the excluded to be agents whose participation is essential in the design of the development process, rather than simply the welfare targets of development programmes.’ However, heterodox economists like Charles Wheelan, Burton Malkiel, Diana Coyle, Jonathan Schlefer, and others argue that such notions of inclusiveness remain embedded in the neoclassical growth theory. See for example: McGregor, A. (2004) ‘Researching Wellbeing. Communicating between the Needs of Policymakers and the Needs of People’, Global Social Policy, 3: 337-358; Ostrom, E. (2010) ‘Analyzing collective action’, Agricultural Economics, International Association of Agricultural Economists, 41(s1): 155-166; Pouw, N.R.M. (2012) ‘The Inclusive Economy Framework’, GID Working Paper, University of Amsterdam; Schlefer, J. (2012) The Assumptions Economists Make, Harvard University Press; Stiglitz, J., A.K. Sen and J.P. Fitoussi (2008) ‘The Measurement of Economic Performance and Societal Progress’, Paris: International Commission on the Measurement of Economic Performance and Societal Progress; Wheelan, C. and B. Malkiel (2003) Naked Economics. Undressing the Dismal Science, New York: Norton Company. They call for social equity and environmental sustainability issues to be factored more accurately into economic accounting and analysis beforehand, rather than as an afterthought. For them, inclusiveness is less about creating growth and more about reaching a higher stage of wellbeing. Economic development means more than eradicating absolute poverty or creating employment. It is about looking at decent wages, good working conditions and bargaining power for employees, and fine-tuning economic strategies to suit local conditions. See also The Broker’s articles Embracing Inclusive Growth and When Growth is Empty.


  • 2.

    Black, L. and Nicholls, J. (2004), There is no business like social business. How to be socially enterprising, United Kingdom, the Cat’s Pyjamas.


  • 3.

    Isaac Lyne, 2008, How can social enterprise really tackle social exclusion? A comparative study of children’s welfare in the United Kingdom and Cambodia, Education, Knowledge & Economy, Vol. 2, No. 3, November 2008, 175–190.


  • 4.

    Vince Heaney, (2010) Investing in social enterprise: the role of tax incentives, Centre for the Study of Financial Innovation (CSFI), No. 93 (May). Quoting this study: ‘the barriers to growth [for social enterprise] can be addressed in order to realise their full potential. One of the barriers to scale is access to patient, equity-like finance and support that can sustain growth and support ambitious but realistic social entrepreneurs. Although the sector is growing, the majority of social enterprises are currently illiquid with few external assessments of and platforms for tradable value. As the social enterprise sector emerges as a discernible asset class, riskier and more flexible social investment will be a crucial source of capital.’


  • 5.

    T. Ellis (2012), The New Pioneers, Sustainable Business Success Through Social Innovation and Social Entrepreneurship, Published by Wiley.


  • 6.

    For this dossier, The Broker conducted a small survey of 38 social entrepreneurs in Europe and Asia to better understand their challenges and the opportunities.


  • 7.

    Explaining best practices is now the topic of several studies on social entrepreneurship. However, most studies focus only on the organization and microeconomic level, and less on how social impact could be increased to significantly deliver social and economic change, e.g. Community Wealth Ventures, Social Enterprise: A Portrait of the Field, Washington, DC and Durham, NC: Community Wealth Ventures, The Social Enterprise Alliance, and The Center for the Advancement of Social Entrepreneurship, August 2010; Jerr Boschee, Social Enterprise Alliance Book: Succeeding at Social Enterprise, Washington, DC: Social Enterprise Alliance, April 7, 2010. One exception is the study by Sarah H. Alvord, L. David Brown, and Christine W. Letts, 2004, Social entrepreneurship and social transformation: an exploratory study, Journal of Applied Behavioral Science, 40, 260.


  • 8.

    Sarah H. Alvord, L. David Brown, and Christine W. Letts, 2004, Social entrepreneurship and social transformation: an exploratory study, Journal of Applied Behavioral Science, 40, 260.


  • 9.

    Jon McPhedran Waitzer and Roshan Paul, 2011, Scaling Social Impact. When Everybody Contributes, Everybody Wins, in Innovations, Volume 6, number 2.


  • 10.

    Jon McPhedran Waitzer and Roshan Paul, 2011, Scaling Social Impact. When Everybody Contributes, Everybody Wins, in Innovations, Volume 6, number 2.


  • 11.

    See also: Fons van der Velden (2011), Social Business: a novel approach to socio-political change?, Chapter 5 in New approaches to development cooperation, Utrecht Context, international cooperation.


  • 12.

    Sarah H. Alvord, L. David Brown, and Christine W. Letts, 2004, Social entrepreneurship and social transformation: an exploratory study, Journal of Applied Behavioral Science, 40, 260.


  • 13.

    Isaac Lyne, 2008, How can social enterprise really tackle social exclusion? A comparative study of children’s welfare in the United Kingdom and Cambodia, Education, Knowledge & Economy, Vol. 2, No. 3, November 2008, 175–190.


  • 14.

    L3C refers to the Low-profit Limited Liability Company (read more here) and CIOs to Charitable Incorporated Organisation (read more here).


  • 15.

    Vince Heaney, (2010) Investing in social enterprise: the role of tax incentives, Centre of the Study of Financial Innovation (CSFI), No. 93 (May).


  • 16.

    e.g. European Commission, 2013, Social economy and social entrepreneurship, Social Europe guide, Volume 4, Directorate-General for Employment, Social Affairs and Inclusion, March 2013; EMES and UNDP, 2008, Social Enterprise: A new model for poverty reduction and employment generation. An examination of the concept and practice in Europe and the Commonwealth of Independent States.


  • 17.

    Jeff Trexler (2008), Social Entrepreneurship as an Algorithm: Is Social Enterprise Sustainable? E:CO Issue Vol. 10 No. 3 2008 pp. 65-85. Jeff Trexler of the Pace University in the United States reminds us that social en­terprise is an adaptive response to the loss of coherence in corporate identity. Its hybrid form makes it difficult to define. The fluidity of the concept makes it difficult to see social entrepreneurship as having an own identity, even to serve in niche markets. The obsession to separate social entrepreneurship as a new, innovative model that is here to stay is not evident, according to Trexler,. The core question facing social en­terprise in all its complexity is not so much whether it will last but how best to exhibit what corporate life should be.


  • 18.

    In an interview on social entrepreneurship and the transformation of capitalism, Harvard economist Michael Porter calls for a radical transformation in which business school curricula teach on the deeper human needs and the way social enterprises can lay the basis for an economic transition. He points out that the same error should not be made as with corporate social responsibility, which has been taught as a specialization on the sidelines. Instead Porter asks business educators to take responsibility for moving social entrepreneurship forward as a core discipline within a new understanding of what modern capitalism and business are all about. Source: Michaela Driver, 2012, An Interview With Michael Porter: Social Entrepreneurship and the transformation of Capitalism, Academy of Management Learning & Education, 2012, Vol. 11, No. 3, 421–431.


  • 19.

    Michaela Driver, 2012, An Interview With Michael Porter: Social Entrepreneurship and the transformation of Capitalism, Academy of Management Learning & Education, 2012, Vol. 11, No. 3, 421–431.


  • 20.

    Take for example the headline findings, insights and recommendations for policy makers, business and stakeholders, published in September 2013, a European Union funded four years Impact research programme on CSR. 


  • 21.

    e.g. in the UK, the 2006 Companies Act establishes the principle of ‘maximizing enlightened shareholder value’.


  • 22.

    The shareholder value movement has been influential in promoting the idea that cashflow to shareholders should be the focus of senior management in quoted companies. The movement has led to some beneficial changes in business practice, but has also led many leaders to become overly obsessed with their share prices. As a British economist John Kay has pointed out: ‘Managers who focus closely on the stock price, whether by inclination or because they have incentives to do so, will often fail to serve the best interests even of their stockholders.’ Or see James Collins and Jerry Porras’s book ‘Built to Last: the most profitable companies were not the most profit-oriented’. Cornell University law professor Lynn Stout has been looking for a corporate charter that mentions maximizing profits or share price. In law, there is no obligation. However, since the 1980s, corporations have increasingly been acting as though they have to seek profit maximization through corporation law; many have changed their mission into ‘increasing shareholder value’ but this was more a common belief of the time that this was the right thing to do, motivated by mainstream economic models rather than an obligation instigated by law.


  • 23.

    Within the mainstream, economists say the causes of the crisis are purely related to high-risk, complex financial products and the failure of regulators. Another analysis, different from the mainstream explanation, is that the financial crisis is merely a symptom of a systemic crisis of the economic system itself. See for example: Bogle, John (2005). The Battle for the Soul of Capitalism. Yale University Press; John Bellamy Foster (2008), The Financialization of Capital and the Crisis, Monthly Review, Volume 59, Issue 11 (April); Robert B. Reich, professor of public policy at the Richard and Rhoda Goldman School of Public Policy at the University of California at Berkeley and Secretary of Labor in the Clinton administration his blog post from July 25 2008 The Heart of the Economic Mess. Also read the columns by Paul Krugman in the New York Times. The critics can be summarized as the emergence of a gap between the real economy (productive sector and wages) and the financialization of economies (capital markets becoming the most important sector in economies) that make economies inherently unstable and increases inequalities. Stagnation of wages has forced people to borrow to pay for the cost of living, which the financial sector thought it could fulfil endlessly.


  • 24.

    Policy briefs from the European Commission, for example, are full of the idea of investing in small and medium enterprises (SMEs) to achieve economic growth and generate employment. E.g. The Social Agenda 31: The inclusive way out of the crisis, European Commission, October 2012. The core of the debate about the post-2015 development goals is about inclusive growth. See for example this think piece by the UN. International organizations like the International Labour Organization (ILO) are exerting influence on governments to come up with policies that create jobs with proper wages and which pursue economic growth based on more productivity instead of speculation. E.g. http://www.ilo.org/global/about-the-ilo/media-centre/statements-and-speeches/WCMS_178913/lang--en/index.htm


  • 25.

    E.g. http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/0,,contentMDK:22495115~menuPK:158937~pagePK:2865106~piPK:2865128~theSitePK:223547,00.html


  • 26.

    Isaac Lyne, 2008, How can social enterprise really tackle social exclusion? A comparative study of children’s welfare in the United Kingdom and Cambodia, Education, Knowledge & Economy, Vol. 2, No. 3, November 2008, 175–190.