Social businesses

A social business is a financially auto-sustainable type of social entrepreneurship.

In other words, a social business tackles a social problem and enlarges the capabil-ities and well-being of individuals, but runs (at least after an initial financial push) without the help and finance of external actors. A new NGO that provides lifelong learning courses to elderly people with the help of private donations is a social entrepreneurship, not a social business. A social business could be, for instance, a financially auto-sustainable microcredit institution or a project of an MNE to provide high-quality clothing and food to the poor at low prices. Or a social busi-ness could be a consultancy company run by and for elderly people, drawing upon the skills and experiences of elderly people and helping other people.

The term ‘social business’ implies the existence of types of policies, financial resources and incentives other than mere donation-driven social ventures.

The combination and importance of the cooperation partners from the public and private spaces can also be quite different. Social business may provide more options for civil-private ventures and win-win situations for private companies and society in general, for example through the sustainable production of products and services that match the needs, demands and acquisitive power of the poor. While an NGO and a social business both address societal problems, their functioning and daily business activities can be quite different. A key business activity of most NGOs throughout their lifetime is to raise funds to keep it running. In con-trast, a social business thinks about how to advance processes, technologies or organization – in summary, how to innovate – to provide more services to the peo-ple who need them. Accordingly social businesses can contribute to social change and welfare in a financially auto-sustainable manner.

This idea finds many supporters in science, politics, and the civic and private sector. For example, the microcredits revolution show that this type of contribution is possible, but several multinational companies do as well. It is worth mentioning that making market forces work for human development is in line with Amartya Sen’s thinking, which first follows the basic ideas of Adam Smith (and John Stuart Mill) that markets and the division of labour are crucial for the economic wealth of nations (Smith 1776), but so too are the moral implications of eco-nomic development and the well-being of people (Smith 1759, 1776). Naturally, many politicians (finance ministers in particular) like the idea that social problems can be addressed by markets which do not require money from the government

budget. And arguably most people working in enterprises would like the idea that they are not just expanding the turnover and profits of the company, but are simul-taneously doing something useful for society as a whole. Of course, in many cases enterprises may act in this way because they are obliged to, or to foster their long-term economic profit; however, many people within the company would probably like to work in social corporate responsibility, or in social business and not just for economic profit. Indeed, enterprises are increasingly engaging in corporate social responsibility and social business and trying to explore the potential fortune at the base of the income pyramid. Prahalad (2004), Yunus (2007), Hart (2010) and others show that companies, especially multinational companies, can indeed work with and have positive effects for the two-thirds of the world’s population living at the base of the income pyramid. Both sides can profit from proper integration.

MNEs can enter into a trillion dollar market, expanding their turnover and profits as well as benefitting from reverse and frugal innovation (Immelt et al. 2009). On the other hand, the poor can gain access to markets, improve their standard of liv-ing and well-beliv-ing and become active agents of economic development. For some this may sound utopian, while others may despise the idea of capitalist enterprises penetrating into social sectors and addressing social needs. However, it is happen-ing and it often has a positive influence on standards of livhappen-ing, job creation and human agency. Maybe it is better to focus less on the ‘if’ and more on the ‘how’, because most simply state-driven development models have turned out to be eco-nomically inefficient and have in many cases negatively affected people’s levels of freedom and self-determination.

It is crucial to address how people can be empowered to be able to create positive social changes through market forces. Continued polarization and polemic-driven discussions about state against market, capitalist companies against human wel-fare, and knowledge and innovation in industrialized countries against poverty and backwardness in developing countries all miss the opportunities that exist between these extreme positions. Demonizing the enterprises and blind belief in market forces both seem to oversimplify or else miss the complexity involved in these issues. Market forces and private companies can indeed help the poor, in the same way that the poor can also contribute to economic development and innova-tion. In this vein, Prahalad and Hart (2002) make a plea for the exploitation of the major opportunities for new markets and social welfare through MNEs focusing on the bottom of the pyramid:

It is tragic that as Western capitalists we have implicitly assumed that the rich will be served by the corporate sector, while governments and NGOs will protect the poor and the environment. This implicit divide is stronger than most realize. Managers in MNCs, public policy makers, and NGO activists all suffer from this historical division of roles. A huge opportunity lies in breaking this code – linking the poor and the rich across the world in a seam-less market organized around the concept of sustainable growth and develop-ment. Collectively, we have only begun to scratch the surface of what is the biggest potential market opportunity in the history of commerce. Those in

the private sector who commit their companies to a more inclusive capitalism have the opportunity to prosper and share their prosperity with those who are less fortunate. In a very real sense, the fortune at the bottom of the pyramid represents the loftiest of our goals!

(Prahalad and Hart 2002, p. 14) Addressing the bottom of the pyramid and creating win-win situations between MNEs and the poor offers large opportunities for economic development and social welfare; however, several challenges have to be tackled first. Prahalad and Hart (2002), Prahalad (2004) and Hart (2010) show that assumptions imped-ing the focus of MNEs at the base of the pyramid (BoP) are wrong, for various reasons. First, the BoP is indeed an enormous market; second, it is possible to produce goods and services that the BoP can afford; third, the poor are interested in technologies and novelties; fourth, managers can be very excited by businesses with humanitarian dimensions and fifth, the BoP can contribute to innovation and business development. However, to reach the BoP, MNEs have to introduce new business models and invest in the commercial infrastructure of the BoP.

Many Indian and Chinese enterprises (as well as some MNEs from income rich industrialized countries) have impressively shown that the BoP can indeed be a source of innovation and a market which facilitates firm growth, turnover and profits (Prahalad 2004; Immelt et al. 2009). For example, Lenovo would never have grown so fast without adapting its products and services to the local needs and demands in China (Lu 2000). India is the springboard for several reverse innovations and frugal innovations and large MNEs such as General Electric are changing their business models and winning through attending to and learning from the BoP (Immelt et al. 2009; The Economist 2010). Reverse innovation refers to innovations (e.g. new products, designs, services and business models) that are developed or first used in developing countries and then are spread to the industrialized countries, such as for instance a battery-driven, portable electrocar-diograph machine that was first developed for doctors in India and China. Frugal innovation refers to reducing the complexity of a good or service and deleting non-essential features, thereby lowering the costs of production, as well as reduc-ing the complexity of usage for the clients – and although these frugal goods and services are often originally designed for clients in development countries, con-sumers in the industrialized world also desire more simplicity and easy handling.

These factors show that the markets at the BoP can actively contribute to the innovation and introduction of new products and services by MNEs. The BoP should not just be considered as made up of passive clients for whom companies try to provide lower quality and price products, but rather as a source for new ideas and innovation. To facilitate economic win-win situations between the MNEs and the BoP, investment in local areas is necessary. MNEs have the resources to contribute to sustainable economic development in less developed and rural regions of developing countries. However, enabling the poor to become clients, business partners and innovators requires the creation of institutions and a com-mercial infrastructure that can foster human agency and development. According

to Prahalad and Hart (2002), focus on the following particular measures is neces-sary to accomplish this goal.

1 The creation of buying power through access to credit, and income genera-tion through jobs.

2 Shaping aspirations, for example through consumer education.

3 Tailoring local solutions, through bottom-up development and targeted prod-uct innovations.

4 Improving access through communication links and distribution systems.

There are many practical examples that show these measures can help to make the attendance of the markets at the BoP viable and profitable for MNEs, while at the same time opening up new economic opportunities for the local population. For example, Tata, Nestle, Novartis, Starbucks, Hewlett-Packard, Unilever, Citigroup, Johnson and Johnson, Lenovo, Avon and the Grameen Bank all engage success-fully with the BoP and often create win-win situations. Serving the bottom of the pyramid requires new business and distribution models as well as new finance and cost structures that can contribute to local and human development and lead to a wave of new technological, organizational and institutional innovations. This in turn requires business strategies ranging from frugal innovation, cost reduction and a focus on the core characteristics of the products, to localization of the pro-duction and distribution to the integration of the BoP as an innovator and business partner. Each approach leads to different challenges, but also enormous opportu-nities for innovation and business competitiveness. It is noteworthy that top-down frugal innovation is not enough; localization and zero-based innovation are also required for prolific access to the local knowledge basis, client binding and busi-ness competitivebusi-ness. This requires companies to deal with structural changes to their routines and power structures. Companies that succeed in this venture can open up new markets and opportunities for their corporate innovation system.

The government, however, must also in turn ensure that multinational companies do not abuse modern words such as frugal and reverse innovation merely to gain market power. To address several potential issues and problems proper regulation and control by the state is necessary to:

• impede the exploitation of the labour force, money and ideas of the poor by MNEs; prevent rent-seeking by MNEs;

• create incentives for MNEs to empower the poor;

• invest in local business development; and

• impede the crowding out of local nascent industries.

A regulatory framework can help to prevent the exploitation of the poor and con-tribute to the sustained economic development of poor regions and enhance the human capabilities of the BoP. In this way social businesses (as well as socially responsible economic businesses in poor regions) can be significant contributors to human agency and development, providing new innovative ideas, services, goods

and organization models that empower the poor and contribute to human welfare.

But social entrepreneurship should not be abused by companies to legitimize economic exploitation and crowd out local economies. Nor does it free govern-ment from its responsibility to address market failures and social problems. Social entrepreneurship is an important concept and has contributed to the improvement of human agency and welfare, but sometimes provision within an institutionalised framework, for example of high quality public education provided by the state, arguably is the final goal. Social entrepreneurs can be important actors who intro-duce new ideas and solutions. They often address problems that result from other shortcomings, such as the lack of public goods, technology, competitive compa-nies and well-paid jobs, or institutions that do not empower the people and do not provide minimum acceptable standards of human rights and access to social services. So far this chapter has discussed entrepreneurship that has a positive or productive aim, but some entrepreneurial actions are deliberately destructive.