A balancing act

Social entrepreneurship is on the rise throughout the world. In Germany, there are an estimated 70,000 social enterprises, which represent two percent of all businesses. In 2013, 6.5 % of all employments in the EU is linked to what the OECD (2013) calls “social economy”: the segment that is designed to improve social inclusion and reduce inequalities. Its companies include cooperatives, associations, foundations, charities and social enterprises. The number of social enterprises is also increasing in developing countries and emerging markets.

In line with this trend, social enterprises are becoming ever more important in the area of development aid. According to a study (Hanley et al., 2015), social enterprises rise to societal challenges in a financially sustainable way, without relying on charity of donor governments. International cooperation has been increasingly marked by market orientation in recent decades, with more and more actors investing in profit-driven businesses rather than non-profit and government agencies. Governmental and non-governmental donor agencies are running so-called incubator programmes to provide assistance to socially and ecologically oriented start-up companies. In some countries, the growth of social entrepreneurship reflects decisions made by foreign donors. In order to fund their activities, non-governmental organisations have been changing their legal status or starting companies. Vietnam is an example. In 2010, the country reached the status of a lower middle-income country (LMIC), so important international partners discontinued or reduced their official development assistance (ODA). Hien M.T. Nguyen, who works for Bread for the World, a Protestant charity, in Vietnam/Laos, says: “Many national-level NGOs face financing gaps due to the withdrawal of important partners. They are reinventing  themselves and many register as social enterprises, not least to benefit from governmental development programmes and tax incentives.”

Problems arise, however, as many other companies are also claiming the mantle of social enterprise. “There is a great mistrust of social enterprises. They say they are pursuing social goals, but they behave like businesses. Many are unfamiliar with social work and hardly know how to contribute to community development.” In Vietnam, the term social enterprise is usually associated with service providers in the fields of education and health as well as with job creation for disadvantaged people, according to Hien.

Providing social services to the poor and disadvantaged is hardly profitable however. Hanley et al., who surveyed 286 social enterprises in Colombia, Mexico, Kenya and South Africa, concluded that many social problems cannot be solved in a profitable way initially. Most of the organisations they studied still relied on external partners, with almost three quarters of them receiving grants and only half reporting sales as main source of funding. The authors argued that social enterprises have a limited ability to serve the lowest income strata.

Profit and competition

Sam Art Nut works as a consultant for PCG, a consultancy in Cambodia. He says: “In Cambodia, successful social enterprises are operating in the fields of microfinance and hospitality. The ACLEDA bank for example was founded as an NGO in 1993 and is today a large commercial bank with many branches.” (see D+C/E+Z 2013/02, p. 62) Cambodian law, however, does not have a special category for social enterprises; it only distinguishes NGOs from businesses. 

According to Nut, the success of a social business depends on the attitude of the people running it: “NGOs are focused on using their resources effectively on behalf of the target groups. At the end of the project, they want the resources to be used up to the benefit of the poor.” Things are different for social enterprises, which must not spend extra profits, but save the money for future investments. “Some of my NGO clients think it is fine when the balance is zero at the end of the year, because that is what they are used to. Many do not understand that they need a profit for the business to keep going.” Similarly, they are not used to competing with other enterprises either.

Clients are another challenge. Many actually prefer the products of commercial companies. When it comes to food safety and quality, Nut says, people simply don’t trust social enterprises as much. Moreover, social enterprises do not create the kind of jobs people want: “Those who want to have a career look for a job in the private sector. Social enterprises do not pay well.”  

This is true in Europe too, according to the OECD (2013). Contrary to the popular belief that social enterprises promote fair working conditions, employment in the social economy is often insecure and poorly paid. The same accusations are made against fair trade, mainly wherever small farmers are supported by co-ops and unions. The unskilled workers employed in those cases often receive wages that do not suffice for a livelihood. Wages may even be below the level paid by comparable non-certified companies, as revealed in a much-discussed study published by the University of London’s School of Oriental and African Studies (2014).

In response, Harriet Lamb, the manager of Fairtrade International, stated that her organisation never claimed to be able to fight all injustices that people living in poverty suffer. Indeed, the fact that fair trade benefits mainly the more influential farmers does not necessarily mean that it is useless for the landless and other poor people. After all, informal work as a day labourer results in an income, however small and insecure it may be.  

Unless fair-trade companies and social enterprises are able to generate profits above and beyond their own existential needs, they cannot pay equitable wages and provide decent jobs. The social goals can only be achieved if enough profit is generated. Everyone involved in social entrepreneurship thus faces a delicate balancing act between social and economic goals.

Bettina Meier is an adviser at Bread for the World – Protestant Development Service.
bettina.meier@brot-fuer-die-welt.de

Sources

OECD, 2013: Job creation through social economy and social entrepreneurship.
https://www.oecd.org/cfe/leed/130228_Job%20Creation%20throught%20the%20Social%20Economy%20and%20Social%20Entrepreneurship_RC_FINALBIS.pdf

Hanley, L. M. et al., 2015: Taking the pulse of the social enterprise landscape in developing and emerging economies. Insights from Colombia, Mexico, Kenya and South Africa.
https://www.siemens-stiftung.org/fileadmin/user_upload/Dokumente/publikationen/Study-Taking-the-Pulse.pdf

London School of Oriental and African Studies, 2014: Fairtrade, employment and poverty reduction in Ethiopia and Uganda.
http://ftepr.org/wp-content/uploads/FTEPR-Final-Report-19-May-2014-FINAL.pdf