A Theory of Social Entrepreneurship

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Dominic Craig
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1 Filipe Santos Assistant Professor of Entrepreneurship Academic Director for Social Entrepreneurship 12 th ICTPI Porto 2009 A Theory of Social Entrepreneurship

It will take 500 years at the current rate of work to get rid of them 2 Landmines maim or kill

2 Neglected Societal Problems A Problem The Outcome There are about 70 million landmines in the ground in one-third of the world's nations. It will take 500 years at the current rate of work to get rid of them 2 Landmines maim or kill 15,000 to 20,000 civilians every year. They cost as little as $3 to produce, but as much as $1000 to locate and remove using current detection systems. A Solution?

3 Bart Weetjens & Christophe Cox: Apopo (Tanzania) Giant East African Rats Trained to Save Lives 3

4 Business Model innovation Rats trained and deployed to locate mines with more speed and lower cost than foreign experts using advanced metal detection techniques Business model provides local employment and source of income for impoverished farmers 4

5 Social entrepreneurship plays an increasingly important role in Economy By addressing Neglected Societal Problems through Innovative Business Models delivering Sustainable Solutions with Multiplier Impact 5 I aim to address the following research questions: What is the distinctive domain of social entrepreneurship? What is unique about the social entrepreneurship approach? (and implications for business strategy and innovation policy)

6 The Growing Field of Social Entrepreneurship A long history... with recent developments... Global Organizations Prof. Muhammad Yunnus (founder of Grameen Bank, pioneer of Microfinance) Country-Level Organizations 6

Social Entrepreneurs portrayed as heroic individuals Mohammed Yunus

ideaas.org.br Govindappa Venkataswamy India http://www.aravind.

org/ Moses Zulu Zambia http://www.dappzambia.org www.youtube.com/watch?

7 Social Entrepreneurs portrayed as heroic individuals Mohammed Yunus Bangladesh Fabio Rosa Brazil Govindappa Venkataswamy India Caroline Casey Ireland Celso Grecco Brazil portuguese/detail/8058.html Moses Zulu Zambia Natalie Killassy South Africa Bart Weetjens Belgium Mozambique, Tanzania 7

Beyond the fad and the hero: Social entrepreneurship is increasingly important for the Economy and Society GEM UK 2005: Social Entrepreneurship Monitor - 3.2% of UK working age population (1.

8 Beyond the fad and the hero: Social entrepreneurship is increasingly important for the Economy and Society GEM UK 2005: Social Entrepreneurship Monitor - 3.2% of UK working age population (1.2M adults) involved in launching or managing social ventures (<42 months old) - Social entrepreneurship more prevalent among women, well-educated, young people - Social enterprises constitute 5% of UK business organizations & turnover 27B pounds Theoretical puzzle - Increasing evidence of a category of economic actors that do not behave in a self-interested way and, yet, seem to have an important role in allocation of resources and provision of services 8

9 Cyndi Rhodes: Worn Again (UK) Ethical fashion: Rubbish to Rags 9

10 Academia increasingly focused on Social Entrepreneurship...but... definitions often not satisfactory Social entrepreneurs are entrepreneurs with a social mission (Dees, 2001; GEM UK 2005). They create positive social change (Dees, 1998) But, traditional entrepreneurs do not? Why is change good? Social entrepreneurs are individuals who develop economically sustainable solutions to social problems (Tracey and Phillips, AMLE 2007) What is a social problem? (in contrast to an economic problem?) Note: Can we try to define social entrepreneurship without using the words social and entrepreneurship? Social entrepreneurship creates new models for the provision of products and services that cater directly to basic human needs that remain unsatisfied by current economic or social institutions (Seelos and Mair, 2005) What are basic needs? Is education a basic need? And Internet access? And mobile communications? Can we develop an approach that is positive not normative? 10

11 What is distinctive domain of social entrepreneurship? Why, according to economic theory, do we need social entrepreneurs when we already have so many types of institutional actors: Corporations, Entrepreneurs, Governments, Social Activists, Charities We have economic system based on market-based capitalism - central role for corporations and entrepreneurs guided by self-interest businesses allocate resources in a decentralized way to the most productive economic activities (the invisible hand) Governments need to establish market infrastructure ensure property rights, the rule of law, regulate competition, prevent harmful behaviours, ensure basic coverage for services Charities/Philanthropy have important role in redistributing resources and helping disadvantaged populations 11

12 When do both markets and governments fail? Efficient market outcomes often do not occur because of externalities Externalities happen when economic activity creates an impact, positive or negative, that lies beyond the objective function of the economic agents developing the activity. Without accounting for costs and benefits of externalities, the behavior of self-interested actors will not lead to efficient economic outcomes. - Negative Externalities may lead to over production or consumption (ex: pollution, road congestion) - Positive Externalities may lead to underproduction and consumption (ex: education, vaccination, R&D) How are Externalities dealt with in our economic system? 12

13 Correcting Negative Externalities 1- Self-Regulation by Corporations: Corporate Social Responsbility 2- Government has an important role: Legal imposition (recycling directives, labor laws) Incentives for lower production/consumption (licenses, taxes) Development of Market-based mechanisms to price externalities (carbon-emission trading system): However, Governments have multiple roles and scarce attention and resources. In addition, self-interested actors may not have an incentive for self-regulation... What is the decentralized mechanism ensuring that negative externalities are accounted for? Enter social activists - organizations that have the function of raising awareness of Society about negative externalities that their members perceive to be important and then act to force other societal actors to account for them (Greenpeace, Civil Rights Movement, Consumer Protection Organizations) 13

14 Correcting Positive Externalities The problem of activities with positive externalities is that the value created by these activities will be much higher than the value that can be appropriated. So a market based on self-interested actors will not lead to sufficient provision of these activities The Government has key role in correcting this situation: Creating regulations that enable Internalization of benefits (intellectual property protection) Government provision of public goods (police force, primary education) Public subsidies to encourage private provision/consumption (education vouchers, business creation subsidies, renewable energy subsidies) However, Government have multiple roles and scarce attention and resources... What is the decentralized mechanism that ensures positive externalities are systematically identified and addressd? Social entrepreneurs because they are focused on value creation not value appropriation. They deploy a solution to a problem related to neglected positive externalities and raise society s awareness about it 14

15 Which Positive Externalities Get Neglected? When positive externalities benefit whole society, they are more visible and governments have more incentives intervene (national defense, national highway system). Extreme case is public goods (non-rival, non excludable) However, some externalities are localized in the sense that they benefit disproportionally a segment of the population. In these situations governments have a weaker mandate to intervene When these localized externalities benefit a powerful segment of the population the government has an incentive to act and will be pressured to do so by selfinterested actors (e.g., farm subsidies). When these localized externalities benefit disadvantaged populations (small in size, low status, low resources, low ability for collective action) governments may not be aware of externality and may not have motivation to address it. These are areas of severe under-provision, representing a system failure, generating opportunities for value creation by social entrepreneurs. 15

16 16 A Positive Theory of Social Entrepreneurship Proposition 1: Addressing problems involving neglected positive externalities is the distinctive domain of action of social entrepreneurs Social Entrepreneurship is 2 nd Invisible Hand of Adam Smith (driven by otherinterest not self-interest) that leads markets to efficient and fair outcomes based on individuals pursuing their others-interest in decentralized way Proposition 2: Social entrepreneurs more likely to operate in areas with localized positive externalities benefiting disadvantaged populations (because these often remain neglected) we can have social entrepreneurship for advantaged populations as long as there are neglected positive externalities (ex. Wikipedia) helping disadvantaged populations in areas without positive externalities is closer to charity than to social entrepreneurship reducing behaviors that cause negative externalities using political pressure is social activism not social entrepreneurship

17 What is unique about the social entrepreneurship approach? And what can governments, corporations and commercial entrepreneurs learn from it? 17

18 Principle of Solution Sustainability Commercial businesses concerned with value appropriation: capturing profits and entrenching situations in which their advantage is maintained In contrast social entrepreneurs concerned with value creation - correcting perceived market and government failures by providing long-term fixes to these failures - their focus is on sustainable solutions (make problem disappear) instead of sustainable advantage (make long-term profits) Sustainable solutions are approaches that can either permanently address the root causes of the problem or institutionalize a system that continuously addresses the problem Attacking the root causes of the problem involves developing an innovative solution that makes the problem disappear definitely (disease eradication new vaccine, change in practices or customs kanchi.org) Institutionalizing a system can either involve the development of a new market mechanism (microfinance) or the establishment of public provision (free vaccines) or combination of the two mechanisms (public sponsoring of youth volunteer work) Sustainable solutions as a goal of action of social entrepreneurs (not sustainable advantage) 18

19 Principle of Empowerment Commercial businesses need to ensure they control enough of the value chain to appropriate a substantial part of the value created (the 5 forces framework is an illustration of that approach). Their key concern is thus the focal organization as the main unit of rent appropriation Given that social entrepreneurs face: - severe resource constraints (due to lack of societal awareness to the importance of the problem and lack of value appropriation potential) - Potentially large scale problems for which they seek sustainable solutions The most effective way to achieve desired outcomes is empower others to become integral part of the solution, making it more sustainable (ex. open-source provision models such as Wikipedia) Empowerment is the process of increasing the assets and capabilities of individuals or groups to make purposive choices and to transform those choices into desired actions and outcomes (World Bank) 19 Empowerment (instead of control) as logic of action

20 Example: Gram Vikas: Joe Madiath (India) Healthy communities on clean water & sanitation 20

21 Strategy and Policy Implications: social entrepreneurship involves a non-dogmatic approach to problem resolution and takes advantage of the varied institutional mechanisms afforded by society (markets, governments and self-help) social entrepreneurs favour solutions that leverage local under-utilized resources often using low-cost, mature (but effective) technologies the central unit of analysis for social entrepreneurs is the solution and its underlying business model, not the enterprise/organization. when social entrepreneurs think about scaling up, they may deem more effective to scale up the innovative solution rather than the organization Governments should promote social entrepreneurship as it unleashes decentralized mechanisms that increase economy s dynamic efficiency 21 Creating legal / institutional framework for social enterprises Supporting the scaling up of high-impact solutions for society Business can learn from the innovative solutions developed by social entrepreneurs (use of empowerment, leverage under-utilized resources)

22 What makes markets and business powerful? Self-interest is powerful motivator for distributed economic action Large amounts of investment capital Private Equity / VC industry supports organizational growth and competition Organizations effective to scale commercial innovations globally Business creation supported by angels incubators and entrepreneur networks corporate alliances effective at pooling capabilities and creating value Use of monetary value as comparable measurement system M&A important mechanism to achieve economies of scale and scope Others-interest is powerful motivator for social entrepreneurship activities Socially responsible investment growing Social venture capital / venture philanthropy emerging as new industry Empowerment driven models in soc. ent. can be scalable and disseminate globaly Social entrepreneurship supported by individuals, global organ. and networks Successful cases of alliances between multinationals & social enterprises Social impact assessment methdologies being developed but not there yet M&A in social sectors is still rare which leads to fragmented industries 22

23 My message today Social Entrepreneurship is important & growing field with dedicated institutions a new breed of social oriented entrepreneurs that operate in unique ways and are present in every country (developed and developing) generation of socially conscious people (employees, advisors) willing to help a growing set of venture philanthropy firms willing to invest and support a growing number of social incubators and accelerator organizations established firms developing partnerships for scaling up innovative solutions - Telenor, Danone, Unilever, P&G, Elli Lilly) Maybe the beginning of a new paradigm for business? 23

INSEAD Social Entrepreneurship Research Developing knowledge that addresses key challenges for social entrepreneurs: A conceptual framework for

24 INSEAD Social Entrepreneurship Research Developing knowledge that addresses key challenges for social entrepreneurs: A conceptual framework for social entrepreneurship Business model innovation Scaling up social innovations The challenges of managing social businesses 24

25 We have the power within to build the world anew - Thomas Paine 25

27 A Theory of Social Entrepreneurship: Assumptions 1 Methodological Assumption: No dicothomy between economic and social outcomes In contrast to: Social value has little to do with profits but instead involves the fulfillment of basic and long standing needs such as providing food, water, shelter, education and medical services to those members of society who are in need (Certo and Miller, 2008) Since social value is not easily measurable and since economic value is also social in nature (to the extent that it leads to the welfare of society), establishing a dicothomy between economic and social outcomes will make it difficult to develop a rigorous, testable theory So, we will instead speak about Value refering to the utility of society s members. Value creation is an increase in the utility of society s members Value appropriation is the ability of economic actors to capture the increase in utility caused by their actions This distinction allow us to develop a theory that does not include the word social and is rooted in the established paradigm of value creation & value appropriation 27

28 A Theory of Social Entrepreneurship: Assumptions 2 Behavioral Assumption: Heterogeneity of interests: Economic actors have in their utility functions two distinct pulsions: egoism and altruism Egoism: individuals derive their utility from value appropriation (Self-interest) Altruism: Individuals derive their utility from value creation (Others-Interest) The strenght of each pulsion varies among actors, meaning that some are more self-interested in their behavior (focusing on value appropriation) while others are more other-interested in their behavior (focusing on value creation) Note: the intensity of each pulsion in individuals may change over time based on cognition (how we believe the world works), experience (how we see others behaving) and resource endowments (how much we already have) - but this does not affect the theory 28

29 The Architecture of the Economic System 1 Self-Interested Actors in Perfect Market Conditions Enter the Corporation: Economic theory suggests that economic actors pursuing their self-interests through organized behavior (Corporations) will lead (in perfect market conditions) to an efficient allocation of resources to the most productive and needed activities for society. Yet, economies are not static (new needs emerge, new technologies, new information). However existing corporations get locked in to certain customer segments, invested in certain capabilities, developed certain templates about the world and, despite competition, are unable to see the potential for new improvements Enter the entrepreneur: a self-interested economic actor that perceives the potential for improvements that will allow to appropriate value and act to change the organization of resources and market focus. Through their role they show new possibilities for value appropriation and release the forces of competition to return markets to the equilibrium that deliver social welfare 29

30 The Architecture of the Economic System 2 Public & Other-Interested Actors in Perfect Market Conditions Enter Government: for efficient market outcomes to be achieved there is the need for central agent to regulate markets and create the basic legal infrastructure (property rights, rule of law) and enforce it, thus creating the conditions of fair competition that allow efficient market outcomes. Yet, even in perfect market conditions, although the outcome of self-interested competition may be efficient it is often not fair because it creates inequality due to different resource endowments and capabilities Enter Charities: this other-interested organizations are focused on resources redistribution from the more affluent actors to the least affluent actors Yet, perfect market conditions do not exist... 30

31 When do both markets and governments fail? Self-interested behaviour is not efficient in the presence of positive externalities (when there are value spillovers) opportunities for value creation to society remain unexplored Government should intervene... and they often do, by providing public goods for which the benefit for society is well recognized However they often fail to provide goods that would benefit localized segments of the population who are disenfrachised Social Entrepreneurship is the pursuit of sustainable solutions to problems of neglected positive externalities (the role of social entrepreneurs is not to work with disadvantaged populations they often do because this is where the biggest opportunities for value creation to society lie) 31

32 Government s failure in addressing positive externalities In order to adress positive exernalities governments need the motivation and ability to intervene - Motivation: To the extent that citizens value public goods, they are likely to reward governments that deliver them and penalize through their votes governments that do not. Thus, democratic governments should have the motivation to provide activities that have positive externalities (or else they will be voted out of office). However, in non-democratic regimes, governments are not subject to voting scrutiny and will often try to perpetuate themselves through control mechanisms as opposed to the effective performance of their societal role. - Ability: even in democratic regimes, government may have the motivation but not the ability to pursue positive externalities due to the scarcity of resources and attention or lack of capabilities. But our theory of social entrepreneurship should not be based on an argument of bad governments and we see plenty of social entrepreneurship in countries where governments should have the motivation and ability to act (like the UK) In which situations do effective governments fail to address positive externalities? 32

SOCIAL ENTREPRENEURSHIP IN RURAL INDIA: A SMALL STEP APPROACH TOWARDS INSTITUTIONAL CHANGE

Occasional Paper OP-169-E May, 2009 SOCIAL ENTREPRENEURSHIP IN RURAL INDIA: A SMALL STEP APPROACH TOWARDS INSTITUTIONAL CHANGE Kate Ganly Johanna Mair IESE Occasional Papers seek to present topics of general