Increasing the impact of social enterprises in developing and emerging economies
Social enterprises are seen as a source of hope in solving social problems in developing and emerging economies. Innovative social business models are meant to help solve social ills in a sustainable way and build up organisations that can remain up and running without donations. A recent large-scale survey published by Zeppelin University and Siemens Stiftung generally support the idea that social enterprises can have a positive impact on poverty reduction. However, it also reveals some caveats, which have led us to derive concrete recommendations for action.
Among other findings, the study shows that social enterprises are dependent on bringing in a large portion of their income through the direct sale of products and services to end consumers. Revenues through sales to the public sector or to third sector organisations are much smaller. This is also in line with the fact that over half of the social enterprises indicated that they received no support from public institutions and at times were even hindered in achieving their goals. In light of this, social enterprises are limited in serving the lowest income classes and to operate in sectors that relate to meeting the basic needs of people (e.g. water and sanitation) as these offer less potential for profitability.
In the last decade, a shift has taken place regarding the role of private sector approaches to solving social problems in developing and emerging nations and market orientation have become widespread in development cooperation. Stakeholders from the public, private, and civil society sectors are increasingly providing funds to profitable companies rather than to public or non-profit organisations. The study reflects these dynamics clearly: while the share of non-profit organisations in the portfolios of social investors has sunk, a strong increase can be seen in for-profit social enterprises as well as organisations that combine non-profit and for-profit legal structures (known as hybrid structures).
In addition, we found that social entrepreneurs who received funding from social investors tend to be members of the educational elite in the countries examined. The vast majority has a higher educational degree, which doesn’t surprise given the complex challenges in the management of social enterprises. However, focusing on the educational elite leaves aside important opportunities to gain knowledge from low-income entrepreneurs whose educational background may be more limited, but who can contribute to building endogenous solutions for their communities.
Based on these and more findings, we have made a number of recommendations to enable social enterprises in developing and emerging countries to put their financially sustainable business models into practice while protecting their social goals at the same time.
- Alternative sources of income such as long-term supply contracts with social enterprises are necessary to give organisations the opportunity to also service people living in the lowest income tiers of the base of the pyramid.
- Stronger cooperation between supporters of the public, private, and third sectors are needed to optimally utilise the strengths of each sector and redefine outdated funding structures in development cooperation.
- To protect non-profit social enterprises, an action is required on the part of social investors in particular to provide more innovative financing instruments that meet the financing needs of non-profit social entrepreneurs. Many social problems do not initially lend themselves to a profitable solution or require several years of preparation to establish markets. Non-profit social enterprises play a key role here and therefore need to be strengthened.
- Finally, inclusive business models (e.g., social franchising) are a promising way to involve low-income entrepreneurs. Social investors should also rethink their selection criteria in order to become more accessible to a wider range of entrepreneurs.
In addition, umbrella organisations, as well as policymakers, are important actors in promoting training and mentoring programs that prepare entrepreneurs from all educational backgrounds to access funding.
The results of the study are based on a survey of 36 social investors and 286 social enterprises from Colombia, Mexico, Kenya, and South Africa. The study comes from the International Research Network on Social Economic Empowerment (IRENE | SEE), which was established in 2011 by ZU and Siemens Stiftung. The goal of the project is researching organisational approaches that contribute to social and economic empowerment – seen in this context as the process of economic self-empowerment through professional assistance. The main emphasis is on entrepreneurial solutions for social problems provided, for example, by social enterprises, which have been increasingly discussed in the last decades as a promising addition to traditional development cooperation.