There are four things that at root explain the persistent poverty that social enterprises seek to address: (1) loss aversion (2) credit constraints (3) what I refer to as contigent profitability and (4) high transactions costs. Poverty is both the cause and a consquences of each one of these.
Consider first loss aversion. However much a gain in earnings might mean to a poor family, the fact of the matter is that if potential losses are substantial this family, because of its poverty, cannot afford to gamble. Loss aversion means that even if such a family were able to experiment (or even if the family concerned were otherwise quite comfortable with the notion of gambling) they would still sit back and wait, “leaving well enough alone”. Of course, the poverty of poor families also sharply limits their ability to act. By definition, one’s own resources are limited if one is poor and credit is not easily had as the fears of the poor are compounded by creditor's lack of faith in their ability to honor obligations.
Contigent profitability is simply a term I have created that is meant to capture the fact that the expected payoffs of any undertaking are often dependent on a number of significant factors outside the invididual family’s control. For example, the less faith poor families have in job opportunities appearing after investing in education or the less confident they might be that a reliable supply of inputs would be available to continue to operate one's own business the less beneficial activity will take place. Even if the poor had no real reason to be particularly loss averse and even if credit were readily available on reasonable terms this would be true. Paul Polak in his book
Out of Poverty discusses his organization IDE's (International Development Enterprises) first project. This project involved helping refugee blacksmiths in Somalia build and sell donkey carts to other Somali refugees. Absent Polak’s realizing that tires would frequently be in need of repair and his efforts to bring tire patch kits and lug wrenches (inexpensive lower quality ones) all the way from Nairobi back to Somalia , the initial efforts of blacksmiths would have been far less successful. (Polak, p. 65) In essence the complementary investment and activity of others, as it limits the size of potential losses and raises the potential payoff of any investment, tips the scales in favor of action rather than inaction.
There is finally a myriad of things that together combine to create the fourth factor contributing to persistent poverty: high transaction costs. To begin with, individual transactions the poor carry out are small . This means that if, for some reason, a given trade is unsatisfactory there is a high chance that the costs to an injured party of making a legal case against the offender will often far outweigh the benefits. Also the very contingent nature of economic activity just discussed and the large number of individuals involved means that not only is the enforcment of contracts costly but so too would be writing-up such contracts . Add to all of this low levels of education and poor infrastructure and it should be easy to understand that high trasanction costs serve as barriers to the identification as well as the pursuit of opportunities.
In essence social entrepreneurs are involved in trying to break the vicious circle that the preceding four factors create. This of course begs the question as to how social entrepreneurs addressing such questions differ from other non-profits or government agencies devoted to attacking the same problems. Some see the key difference as being due to better organization and the sharper focus on results that social entrepreneurs have. Some equate social entrepreneurship with being for-benefit organizations that are completely self-sufficient. What is curious about the field of social entrepreneurship is how wide the range of definitions in use is. This then means that what might pass muster as a social enterprise to some may not at all qualify if an alternative definition were to be employed. What one might consider social enterprise is to another a nonprofit or what is labelled by one person a for-profit with a charitable bent becomes in the eyes of another a social entrepreneur.
An attempt at a definition:
The word entrepreneur comes from the French entrependre meaning to undertake (as in to undertake a challenging task). A social entrepreneur then is an individual willing and able to undertake challenges (either the challenge of pursuing advantages of opportunities as they appear or warding off threats such as finding and continuing to attract resources and funding) with her principal goal being not her own gain but rather the benefits her efforts generate for others.
In turn, broadly what seems to distinguish social enterprises from other non-profits are two things: While many other non-profits are focused on helping others they rely heavily on charitable donations and grants and operate in a very nonbusiness-like manner social enterprises are run more professionally and to some degree have the ability to generate earnings that defray operating expenses, help pay suppliers and help attract and retain qualified staff. Discussing an obviously important part of the social enterprise movement, microfinance institutions (MFIs), Jonathan Murdoch notes that while a substantial proportion of MFIs are self-sufficient in this sense (what he refers to as operationally sustainable) far fewer are financially sustainable. While operationally sustainable MFIs generate enough to revenues to cover their operating expenses they fail to generate enough revenue to act entirely independently. It is only the much rarer financially sustainable MFIs that could survive if they had to "...obtain all inputs (especially capital) at market, rather than concessional, rates (Murdoch, 1999, p. 1588) While the goal of financial sustainability is laudible as Wei-Skillern et al point out while in commerical capital markets "...the key motivation for all players involved is most often to build a profitable company and to earn an attractive return on investment" the motivation is varied in the case of those funding social enterprises (Wei-Skillern et al, p. 13) They go on to note social enterprises "...rarely, if ever, atain breakeven without some form of donor support" (p. 13) It is enough to be business-like in managing operations and to be, if possible, concerned with operational sustainablity. It is often nothing short of impossible to pay staff competitive salaries and benefits and at the same time pay investors an adequate return on their investment and remain at the same time true to the social enterprise's orginal mission.
Nonetheless, Boschee and McClurg define social enterprises and social entrepreneurship in terms of self-sufficiency. As they put it self-sufficiency "...can be achieved only by relying completely on earned income, and is the ultimate goal of the most ambitious social entrepreneurs" (Boschee and McClurg, 2003, p. 3, emphasis added) As Murdoch suggests however by such a definition it is well nigh impossible to find real world examples of social enterprises. It sets a standard that few social enterprises will ever be able to attain.
On its website the Social Enterprise Alliance notes that in 2002 commercial revenue ("service fees, registratrions, dues and subscriptions, and other program fees, as well as income from special events and sales of products") has risen from 48.1% of nonprofit revenue overall in 1982 to 57.6% in 2002. These figures are not adjusted for inflation where inflation eats away over half of the seemingly impressive 219% growth in nonprofit revenues. And when adjusted for inflation the figures represent at most decent growth in earned income. This growth has taken place alongside relatively weak growth in the total earnings of nonprofits. While the U.S. economy grew at an average annual rate of 3.36% in real terms between 1982 and 2002 the total revenue of nonprofits grew only 2.75% a year in real terms while earned income (if commercial revenue and earned income are synonmous which is not entirely clear from the SEA's website) grew at an average annual rate of 3.68%. In short, as overall funding for nonprofits lagged behind the general growth of the U.S. economy a few additional scraps were thrown in the direction of nonprofits in general to make up for the significantly lower growth in government support for nonprofits (1.72% a year in real terms or put another way a little over half the growth in real incomes overall between 1982 and 2002).
A key catalyst to growth of social enterprises and the increased focus on earned income has therefore been the fact that tighter government budgets have forced many social organizations to become far more self-sufficient than they might otherwise be. It also reflects the sad fact is that more than being a desirable goal for social enterprises the complete self-sufficiency that McClurg and Boschee call for reflects the outsourcing of public service to private sector. Part of the rise of social enterprise is then borne of necessity converting some non-profits into social enterprises simply because of a lack of funding.
All the while the mountain of poverty grows in absolute terms. The many social enterprises that have sprung up are to be admired and applauded for their accomplishments. However what many of these enterprises have been able to accomplish is tantomount to moving small sections of earth from this ever growing mountain of poverty. Looked at from the ground level those who have given so much of their time and effort are justifiably proud. This in no way however means that such undertakings represent a key solution to the dilemma of world poverty. As Jonathan Murdoch in his work on MFIs has suggested in fact the more operationally sustainable MFIs -taken here as a subspecies of social enterprises- have succeeded by addressing not the needs of the poorest of the poor but small merchants and shop keepers who are relatively speaking better off. It is indeed striking to see the Mexican MFI Compartamos frankly admit this and to draw the connection between its move from nonprofit to profit status as in no small degree due to this and that it's mission does not nor can it include addressing the needs of the poorest of Mexico's poor (see the following).
There are, of course, social enterprises that as
Alan Folwer notes he would prefer to refer to as integrated complementary organizations. In these the business generates a suplus that then is not plowed back into the original venture nor turned over to shareholders but rather it directed toward a social program of some sort. Staff is hired, funding is raised through bank loans and bonds, advertising is carried out and after all the bills are paid the net revenue goes toward supporting some social program or perhaps a variety of social programs. BRAC through a variety of enterprises such as its retail outlet
Aarong provides employment opportunities to the poor, an outlet for their products, and provides revenue that helps fund BRAC's other activities.
Newman's Own "shameless exploitation in pursuit of the common good" would be another example of a business that operates at least in a sense at a financially sustainable level and uses the profits earned for social programs rather than to provide a return to shareholders. To their credit the fact that this presents practical difficulties in equity markets is something the
Grameen Foundation recognizes.
