A Realistic Theory of Social Entrepreneurship: A Life Cycle Analysis of Micro-Finance [1st ed. 2020] 978-3-030-32141-3, 978-3-030-32142-0

Table of contents :
Front Matter ....Pages i-xxix
Introduction: The Need for a Dynamic Theory on Social Entrepreneurship (Arvind Ashta)....Pages 1-20
Social Entrepreneurship Theoretical Work Has Been Static (Arvind Ashta)....Pages 21-46
Dynamics of a Life Cycle Theory Based on Developed Country Histories (Arvind Ashta)....Pages 47-64
Evolution of Developing Country Microfinance and Financial Inclusion (Arvind Ashta)....Pages 65-92
Extending the Realistic Theory to a Dynamic Life Cycle Theory of Social Enterprise (Arvind Ashta)....Pages 93-114
Concluding Remarks on Social Entrepreneurship Theory Development, Teaching and Future Research (Arvind Ashta)....Pages 115-131
Back Matter ....Pages 133-138

Citation preview

A Realistic Theory of Social Entrepreneurship A Life Cycle Analysis of Micro-Finance

Foreword by Muhammad Yunus

A Realistic Theory of Social Entrepreneurship

Arvind Ashta

A Realistic Theory of Social Entrepreneurship A Life Cycle Analysis of Micro-Finance Foreword by Muhammad Yunus

Arvind Ashta CEREN Burgundy School of Business Dijon, France

ISBN 978-3-030-32141-3 ISBN 978-3-030-32142-0  (eBook) https://doi.org/10.1007/978-3-030-32142-0 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2020 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Cover illustration: © Melisa Hasan This Palgrave Pivot imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

To my mother, my family, my school, and their patience.

Foreword

I welcome this book by Dr. Arvind Ashta. He focuses on storytelling and goes from microfinance theory to social entrepreneurship theory. After about forty years of microfinance, the range of interest has broadened to define social business microfinance and the much broader concept of social business. Social business is a very pure form of social entrepreneurship where none of the stakeholders takes any profit other than recouping the investment. The businesses run for a purpose. Finance, just like in any other business, plays a very important role in social business. Finance is important for initiating a social business and to grow. The easier it is to access finance by the social business entrepreneurs, the more will be social business start-ups and growth of existing social businesses. Dr. Ashta rightly argues that social business entrepreneurship becomes highly efficient and effective because of fast-changing technology. Technology is a big help in finding solutions to social problems if used appropriately. For example, social business may induce and use advanced research in medical sciences to combat rare diseases and addressing universal primary health care which the profit-seeking businesses would not have gone into. vii

viii      Foreword

The door opened by microfinance in the banking sector will continue to transform the financial sector in a fundamental way. It will become the most effective tool in turning unemployed young people into entrepreneurs. Entrepreneurship will become the primary starting point for most of the young people. Microfinance will expand into insurance, micro-equity, social business venture capital and many more directions. Social businesses will play the most critical role in ending wealth concentration, bringing an end to global warming, ending unemployment, bringing health care to all, ending modern-day slavery, human trafficking, migration and all other directions of human misery that exist today. The key to the future will be in the role of the emerging new generation who will be equipped with the concepts of new economics to achieve their life purposes. Life for them will no longer be limited to jobs and retirement, but a life of creativity and action to create a world they imagine. Life for them will not be a boring routine of repetitive daily life duties-attending offices, shops and factories, but a journey of each person discovering the ultimate boundary of his/her creative power. Social business will be the tool to make it happen. I would encourage all young people to read this book of Dr. Ashta to get introduced to social business entrepreneurship. Dhaka, Bangladesh Summer 2019

Professor Muhammad Yunus Nobel Peace Laureate

Preface

This book is a purely theoretical work. A theory explains why or how a phenomenon occurs and the interrelationship between the variables that affect or are affected by the phenomenon under study. Theory building adds to earlier theories or supplants them. Often, researchers add to their own theories, as they go along their own learning curve. This work first develops a life cycletheory of microfinance. The perspective gleaned from this development adds to my initial approach to a realistic theory of social entrepreneurship that I outlined earlier, elsewhere. People often ask me why I called it a realistic theory rather than a grounded theory. The answer is simple: My father was a pilot, and, in airline jargon, being grounded means that an airplane is not fit to fly. So, I have preferred to call it a realistic theory. As I researched microfinance, I noticed that not-for-profits transformed into for-profits in this sector. As I broadened my research interests to social entrepreneurship, social enterprises and social innovation, I found that this transformation, with which microfinance researchers are very familiar, was not well researched in other sectors. Most academic research focuses on specific stages rather than explain evolution between stages. So, I decided to delve into the dynamics of this change. This led ix

x      Preface

me to consider the life cycle concept, since it deals with stages. A growing interest in history of business and economics helped me see the patterns of the lives of institutions. There is a wide range of theoretical work. At one extreme, a group of people who indulge in this exercise spend a good amount of time clarifying what they are not saying. In between all the exclusions, they slip in a sentence on what they are saying. Searching for this sentence is often tough. As a result, one does not know what they have added. At the other extreme are people who go for it directly. They leave their readers incredulous. Their theory, if it were to be believed, would be applicable everywhere. Hopefully, the reader finds that this book has avoided these extremes, both in applying the life cycle concept to microfinance and in using this for developing the realistic theory of social entrepreneurship. Theory building often emanates from lateral thinking. Such thinking applies knowledge from one domain to another. It is creative and can be revelatory by changing the perspective and paradigm. However, in addition to lateral thinking, theory building needs to be logical and this requires a dose of vertical thinking. This mixing of creativity and rigorous logic is another characteristic of theory building. Trying to use a purely logical approach to existing theory may be scientifically rigorous but is unlikely to be innovative unless new assumptions or new variables are introduced. These additions allow incremental originality. Trying to use a purely lateral approach may lack rigor and may even be absurd, but it may also provide a fresh perspective. Therefore, most work requires some combination of the two. In this book, the lateral thinking is applied by looking at microfinance from a life cycle lens. This provides an original perspective to microfinance. These insights are integrated into the realistic theory of social entrepreneurship to make it more dynamic since most theory in social entrepreneurship has been static. Theory building could be inductive or deductive or some mix of these. Those in favor of logical thinking prefer deduction. Often, this translates into checking up hypothesis based on existing theory. Therefore, the theoretical innovations from a deductive approach are usually incremental. Those who prefer to ground their work on some

Preface     xi

reality are more inductive. This inductive approach is useful when observing new phenomena, and it may lead to more significant theoretical contributions. The logical deductive derivations are considered only as strong as the initial limiting assumptions. These limiting assumptions are necessary because the writer and the reader both suffer from bounded rationality and can handle only a limited number of variables. However, minor tinkering with the assumption means that the contribution to theory is often not strong enough. The inductive theorizing usually suffers for the sample not covering the population or because of other limitations of using the case study approach. This book, inductive in nature, focuses on one sector of social entrepreneurship: microfinance. Microfinance is considered as an exemplar of social entrepreneurship by both academics and investors. This book looks at the academic literature on microfinance to see how it can be integrated into the larger social entrepreneurship theory, leading to broad propositions. Certainly, the next researcher is free to see if these insights work for other entrepreneurship sectors such as education or health. If so, the theory becomes general; if not, the theory building would add caveats. Theory building should be useful, not only for researchers but also for practitioners, because the latter can benefit from new interpretations of professional practices. This book has been written in a style that can be understood by practitioners. It is hoped that the perspective provided by this work will help them understand where they are going, how they can get their faster and how they could anticipate the different stages of their venture. An alternative perspective in an under-studied field may increase the probability of success of social entrepreneurs by making them prescient. Dijon, France Summer 2019

Arvind Ashta

Acknowledgements

First, my special thanks to Liz Barlow of Palgrave Macmillan for suggesting that I lengthen an essay to a short book rather than try to make it more concise and unclear. She also helped me with the quest for a shorter title. I also want to thank the two anonymous ­reviewers of the book proposal who emphasized that clarity of narrative was of utmost importance. They also kept on pushing me to be more specific. My thanks for feedback and guidance to Dr. T. R. Kundu, chair at the “International Conference on a Culture of Learning and Experimentations for Fostering Well-Being: Some Lessons,” at the India International Centre, New Delhi, on December 17, 2018, where I presented the first essay in the standard 15 minutes. Thanks to participants at the International Conference on “Business Models and Social Entrepreneurship” on January 16–18, 2019, at the Tata Institute of Social Sciences, Mumbai, who listened to the second draft for over an hour, and notably to the many practitioner presentations that motivated me to continue by their example and storytelling. Thanks to the participants at the “L’actualité de la Finance: Acte II ” in Nancy on May 9–10, 2019, for listening to development of a part of the chapter on life cycles of developed country microfinance. Thanks to Celine Sorres xiii

xiv      Acknowledgements

and the participants at the European Microfinance Research conference on June 3–5, 2019, in Paris for listening to a condensed version of Chapters 3–5. Thanks to Mark Hannam, Christelle Havard and Radha Radhakrishna for providing precise remarks on sections of the draft version. Michaël Coulon and Anais Camus helped me see that the theory is applicable to their sector of work-integrated social enterprises. Thanks to the economic and business historians, microfinance and social entrepreneurship researchers, who were the giants on whose shoulders this work is standing. Above all, my thanks to Carlo Milana for his strong encouragement of my work over the last decade. Of course, without support from my school and my family, this book would never have been possible. Finally, thanks to Liz Barlow, Lucy Kidwell, Kayalvizhi Saravanakumar and the other back-office team at Palgrave Macmillan and Springer for their help to bring this out. Funding: No specific funding has been attributed to this work. My school’s research center, CEREN, has been funded by Banque Populaire and the Regional Council of Bourgogne-Franche Comté. This center, in turn, financed the first of the above-mentioned conferences and partially financed others.

Praise for A Realistic Theory of Social Entrepreneurship

“Social Entrepreneurship is very relevant to the work we are doing at the local municipal level in trying to solve social problems and we are partnering with charities, social entrepreneurs as well as commercial players all the time. Arvind Ashta captures the essence of human ambition to improve our lot within our personal context by applying available resources to a productive and innovative learning process that evolves over time, sometimes succeeding beyond our expectations, and in doing so, leading to significantly different outcomes than ever imagined. With that success, others replicate the model in order to better their own lives, but not necessarily in the same way or with the same motives as originally intended by the initiator.” —Paul Sharman, Councillor, City Hall, Burlington, Canada “Combining properly social and economic logics within organizations is beyond any doubt a motivating challenge for the future. Based on his deep knowledge of the way microfinance has evolved over time, Arvind Ashta contributes to the renewal of our understanding of social entrepreneurship thanks to the use of life cycle analysis. By doing so, he gives the reader a chance to adopt a broader and more open-minded vision xv

xvi      Praise for A Realistic Theory of Social Entrepreneurship

on those topics. Those who wish to think the future of social action within for profit organizations will certainly appreciate this ‘road opening’ book.” —Marc Labie, Centre for European Research in Microfinance (UMONS & ULB) “A Realistic Theory of Social Entrepreneurship, is a timely and needed text grounded in a quantified, historical analysis of the development and consequences of social enterprises and the social entrepreneurs themselves. Providing an extensive literature review, it helps to clarify assumptions and highlight misunderstandings associated with the phenomena of a social enterprise and its life cycle. Dr. Ashta demystifies the social entrepreneurs themselves by framing their entrepreneurial experience with the practicality of day-to-day business in a competitive global economy. The book draws on the example of microfinance though, as the author notes, the lessons here are applicable across industries. This is a useful book I would recommend for any current social entrepreneur or those wishing to enter into the realm of social entrepreneurship.” —Dr. Tamara Stenn, Assistant Professor of Professional Studies, Landmark College, author of, Social Entrepreneurship as Sustainable Development “Prof. Arvind Ashta’s innovative and pioneering work is the first formal attempt to use the industry life cycle concept for microfinance and project it to social entrepreneurship.” —Professor Pritam Singh, Visiting Scholar, Wolfson College, University of Oxford, and Emeritus Professor Oxford Brookes Business School, Oxford “In this short book, Prof. Ashta weaves together an engaging tale of two diverging theories, microfinance and social entrepreneurship, to give readers an interesting and original historical perspective.” —Saleh Khan, Programme Manager, Financial Inclusion, Universal Postal Union (UPU)

Praise for A Realistic Theory of Social Entrepreneurship     xvii

“Arvind Ashta provides a useful framework to overcome the stagnation in social entrepreneurship research. Using the organizational life cycle concept combined with lessons learned from more than 30 years in microfinance is a clever way to better understand the growing field of social entrepreneurship. This book will be a great addition to the literature and a practical guide to young people who want to work in developing and implementing social innovations for marginalized populations.” —Dr. Martin Burt, Social Entrepreneur, CEO, Fundación Paraguaya, Poverty Stoplight, Teach A Man To Fish “Arvind has been a close observer & friend of microfinance over the years. Applying the life cycle theory to this sector is very incisive perspective. We at Ujjivan started in 2005 as a for profit institution and not as an NGO to avoid the traditional starting point & the moral hazard it posed to the earlier microfinance institutions. We went through the other stages of the life cycle described in the book. We converted to a ‘Small Finance Bank’ in February 2017 and changed the business paradigm to serve a larger segment of the Indian population— the mass market which is financially unserved or underserved. Though the two earlier microfinance institutions—Compartomas (Mexico) & SKS (India) were criticized for their IPO, we went through the IPO process to broaden our ownership domestically and reduce foreign ownership, as required by Indian regulations. We believe this was helpful and did not dilute our original mission of providing comprehensive financial inclusion. Indian society & economic strata is seen traditionally in triangular pyramid structure. Through various poverty alleviation interventions including microfinance & technology changes over the last two decades, this pyramid is changing into a diamond shape of the cards, as people from the bottom layers move up largely to middle class. We as a bank are facilitating & accelerating that process. This could be a scope of future academic studies as has been initiated by Arvind in this book.” —Samit Ghosh, Social Entrepreneur, Founder & Chief Executive of Ujjivan Small Finance Bank

xviii      Praise for A Realistic Theory of Social Entrepreneurship

“This engaging book provides a useful bridging of the microfinance and social enterprise literatures. It contributes thoughtfully to conceptualizing both as dynamic theory by applying life cycle models.” —James E. Austin, Professor Emeritus and Co-Founder of Harvard Business School Social Enterprise Initiative “Making use of an outstanding and thorough review of social entrepreneurship literature, Arvind Ashta’s book offers a refreshing and fruitful study of microfinance and social entrepreneurship from a dynamic perspective which is both deep and easy to read.” —Glòria Estapé-Dubreuil, Professor, Business Department, Universitat Autónoma de Barcelona

Contents

1 Introduction: The Need for a Dynamic Theory on Social Entrepreneurship 1 1.1 The Importance of SE Research 2 1.2 The Limitations of SE Research 4 1.3 Introducing the Life Cycle Concept 9 1.4 Microfinance: A Leading Sector of SE, Underrepresented in SE Theory 10 References 16 2 Social Entrepreneurship Theoretical Work Has Been Static 21 2.1 Level of the Social Entrepreneur 23 32 2.2 Level of the Social Enterprise 2.3 An Application of the Static Version of the Realistic Theory of SE 35 References 38

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3 Dynamics of a Life Cycle Theory Based on Developed Country Histories 47 3.1 A Brief Review of the Evolution of the Life Cycle Theory 49 3.2 Application of the Life Cycle Theory to Historical Financial Innovations 52 3.3 Application of the Life Cycle Theory to Ongoing Financial Institutions 56 References 61 4 Evolution of Developing Country Microfinance and Financial Inclusion 65 4.1 The Creation of MFIs: The Embryonic Stage 67 4.2 The Development and Diffusion of MFIs 71 4.3 Transformation of MFIs and the Quest for Social Performance 75 4.4 A Shift in Perspective to Financial Inclusion 79 References 85 5 Extending the Realistic Theory to a Dynamic Life Cycle Theory of Social Enterprise 93 5.1 The Embryonic Stage 95 5.2 Growth or Transformation from NGO to For-Profits 102 5.3 Shakeout 107 5.4 Maturity 109 5.5 Decline 109 References 110 6 Concluding Remarks on Social Entrepreneurship Theory Development, Teaching and Future Research 115 6.1 Development of the Realistic Theory of SE 116 6.2 Practical Considerations for SE Training and Education 119

Contents     xxi

6.3 Limitations 124 6.4 Future Research Directions 127 References 130 Index 133

About the Author

Arvind Ashta  is a Senior Professor at the Burgundy School of Business, France. He has taught Microfinance as visiting faculty in Brussels, Chicago, New Delhi, Pforzheim and Winterthur, and provided student seminars in Barcelona, Hertfordshire, Kathmandu, Mysore and Nancy. He is a member of research associations (CERMi, RRI) and professional associations (European Microfinance Platform). He has over sixty publications in international journals. He has edited Advanced Technologies for Microfinance, co-edited MIS in Microfinance and Slow Management and authored Microfinance: Battling a Wicked Problem. He is a member of a club of micro-investors. He is on the editorial boards of Strategic Change, Cost Management and FIIB Business Review.

xxiii

Abbreviations

ADIE Association pour le Droit à l’Initiative Économique (Association for the Right to Economic Initiative) AJG Academic Journal Guide ASA Association for Social Advancement BRAC Building Resources Across Communities CNRS Centre National de Recherche Scientifique CSR Corporate Social Responsibility IPO Initial Public Offering MFI Microfinance Institution NGO Non-Governmental Organization OTELO Open Technology Labs (in Austria) RITA Retrouver l’Initiative, le Travail et l’Autonomie SE Social Entrepreneurship SKS Swayam Krishi Sangam (now Bharat Financial Inclusion Limited [BFIL]) SME Small and Medium Enterprise SPTF Social Performance Task Force SRT Static Realistic Theory

xxv

List of Figures

Fig. 1.1 Frequency distribution of scholarly papers in EBSCO on November 23, 2018 Fig. 1.2 Depiction of the life cycle theory of the industry Fig. 1.3 Microfinance research boom precedes social entrepreneurship research boom Fig. 1.4 A graphical depiction of the conceptual framework Fig. 2.1 A value-based perspective to social entrepreneurship research Fig. 2.2 Trade-offs between compassion and self-interest in organizational types Fig. 3.1 The life cycle of the Irish loan funds Fig. 3.2 The life cycle of the Spanish Montes de Piedad Fig. 3.3 The life cycle of trustee based mutual funds in the US Fig. 3.4 The life cycle of German savings banks Fig. 3.5 The life cycle of German cooperative banks Fig. 4.1 The link between dreams, stories and values Fig. 4.2 Financial inclusion of the poor: extent versus growth Fig. 4.3 Example of different stages of growth applicable to different countries Fig. 4.4 Borrowing from financial institutions for poorest 40% in different countries: extent versus growth

3 9 14 15 24 27 53 54 55 58 59 73 81 82 83 xxvii

xxviii      List of Figures

Fig. 5.1 The process of the creation of social enterprise (embryonic stage) 95 Fig. 5.2 The industry life cycle of the social enterprise 107 Fig. 6.1 The dynamics of transformation: reasons why not-for-profit may play a smaller part in any specific sector over time 117 Fig. 6.2 Values and stories configured within a triangle of social entrepreneurship 118

List of Tables

Table 1.1 Top twelve journals publishing research on social entrepreneurship according to EBSCO 4 Table 1.2 Frequency distribution of most used keywords in social entrepreneurship research 11 Table 1.3 Frequency distribution of interaction between microfinance and social entrepreneurship research 13 Table 6.1 Comparative table to show the evolution of propositions of the realistic theory 120

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1 Introduction: The Need for a Dynamic Theory on Social Entrepreneurship

Abstract Ashta argues that a combination of high-speed technological change and inequalities is leading to an increase in social entrepreneurship, which in turn drives research in social entrepreneurship. However, research in this disciplinary field of social entrepreneurship is young, definitional, largely case-based and static. To make social entrepreneurship research more dynamic, Ashta proposes using the life cycle concept. He demonstrates that the overlap between research on microfinance sector and social entrepreneurship theory is surprisingly small, indicating that researchers have been treating these as distinct fields although there should be considerable overlaps. This book takes elements of the research in social entrepreneurship discipline, microfinance industry and the life cycle concept to extend Ashta’s previous work on building a realistic theory of social entrepreneurship. Keywords Social entrepreneur · Social enterprise Not-for-profit · Microfinance · Life cycle

© The Author(s) 2020 A. Ashta, A Realistic Theory of Social Entrepreneurship, https://doi.org/10.1007/978-3-030-32142-0_1

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For-profit

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1.1

The Importance of SE Research

There is growing evidence of increasing inequalities in the developed world (Piketty 2014). Indeed, it has long been felt by some that economic development would worsen inequality in poor countries (Ranis 1977; Stewart 1978). An increase in inequalities may reduce aggregate consumption, and this stops growth. Some established economists have started wondering if free-market capitalism can continue to deliver economic prosperity without a reduction in inequality of opportunity (Stiglitz 2013). Many researchers feel that this is exacerbated by rapid changes in technology and associated increases in productivity, that may mean that commercial enterprises will employ fewer workers and that wage inequalities will increase (Aghion et al. 2002; Moutos 2006; Rifkin 1995; Spencer 2017), leading to many social problems. These inequalities are found to be bad not just sociologically, but also for the environment (Vona and Patriarca 2011). One attempt at solving these social problems is through Social Entrepreneurship (SE). Indeed, using global entrepreneurship monitor data, it has been found that SE at the individual level is higher in countries with high-income inequality, especially if income mobility is low (Pathak and Muralidharan 2018). Therefore, as inequalities increase, we should expect that more social entrepreneurs are going to be required to address these social and environmental problems. Indeed, it is difficult to solve problems by action at the macro-level alone. Governments have failed to usher in economic development in many parts of the world. First, it was felt that to escape the vicious circle of poverty, financial capital and technical know-how needs to be transferred (Nurkse 1952). Yet neither economic growth nor a broader development was forthcoming from aid and subsidized capital transfers (Erixon 2003; Calderisi 2006; Easterly 2006; Moyo 2009) and gradually emphasis returned to freeing markets and providing appropriate macroinstitutions such as property rights, rules and regulations (De Soto 2000). Second, governments produced formal plans based on complex input-output analysis (Leontief 1986). However, formal macro-planning did not produce any significant results, and it was considered that participatory development was required at the micro-level (Chambers 1986; Mohan 2002). Third, it was felt that human capital in the form of education and health was

1 Introduction: The Need for a Dynamic Theory …

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a prerequisite for development (Becker and Tomes 1986; Schultz 1961). However, in large parts of the world, the government was unable to provide these social goods, and they were often unprofitable to provide by the private sector. Therefore, charities and social entrepreneurs came in to provide what government and private enterprise could not. While people may disagree on their usefulness and their impact is indeed difficult to prove, clearly work by social entrepreneurs is appreciated by many, notably those who would like the State to leave the welfare field free to private initiative (Perren 2018). Yet it could be criticized as “unreason” in the sense of Foucault (2003 [1961]), and these critics would therefore want to confine social entrepreneurs to areas where rational, and therefore profit-seeking, entrepreneurs would not seek to go. Although social enterprises are an increasing part of the formal economy, they are not always successful. Academics, students and professionals need to be trained on how these social entrepreneurs work, how they create social enterprises, how they develop them and how they exit (Pache and Chowdhury 2012; Smith et al. 2012; Yunxia et al. 2016; Zietsma and Tuck 2012) as well on how to deal with failure and stress. Having a clear conceptual vision of SE helps people to understand where they are going with their social endeavor. Indeed, there are many scholarly papers on SE. In EBSCO alone, on November 23, 2018, there were 777 papers with social entrepreneur or SE in the title or abstract, and their frequency distribution is charted in Fig. 1.1. The 2018 figures are incomplete but Frequency 120 100 80 60 40 20 0 1991 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Fig. 1.1 Frequency distribution of scholarly papers in EBSCO on November 23, 2018 (Source Author)

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Table 1.1 Top twelve journals publishing research on social entrepreneurship according to EBSCO Journal name

Frequency

AJG 2018, 4*−1

CNRS 2018, 1*−4

Entrepreneurship and Regional Development Journal of Business Ethics Entrepreneurship: Theory and Practice Journal of Business Venturing Academy of Management Learning and Education International Small Business Journal Emergence: Complexity and Organization Journal of Enterprising Culture Nonprofit Management and Leadership Journal of Developmental Entrepreneurship Journal of Management Studies

31

3

3

29 18

3 4

2 1

16

4

1

15

4

2

14

3

2

12 11 11

1

10 10

4

1

Source Author, based on 777 scholarly papers in EBSCO on November 23, 2018, and the JQL compilation of journal rankings

are indicative that the subject is generating a lot of interest. These 777 papers are published in over 330 different journals, indicating a wide interest in the subject. However, most of the papers have been published in a few journals. Table 1.1 provides the leading journals from the EBSCO database, interested in publishing this research, indicating that many of them are highly ranked, for example, by AJG in the UK and CNRS in France. This indicates the importance of the field.

1.2

The Limitations of SE Research

Unfortunately, many of the concepts in SE research are static, examined in isolation, and overlapping. Even when they are combined, they may

1 Introduction: The Need for a Dynamic Theory …

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be relevant for only one stage of an enterprise. For example, the interesting work of Wry and York (2017) considers that commercial enterprises, not-for-profits and social enterprises are formed by entrepreneurs with different role and personal identities. However, they focus their work to the pre-creation stage of entrepreneurs. They neither attempt to explain why the personalities of their entrepreneurs may change before they convert the enterprise from not-for-profit to social enterprise nor why these personalities change further at the stage of transitioning to commercial enterprise. This focus on static research is normal since SE is still a relatively new field of study starting with a first paper in 1991 (Waddock and Post 1991), and then a silence till 1998 when publication on SE seems to have become a regular feature. Indeed, it is only for the last ten years that there are more than twenty papers a year, rising to about hundred papers in recent years (in EBSCO alone). Indeed, the domain is now undergoing critical reflection as academics try to understand the extent of the underlying phenomena, its representations, ideology, performance enactments, place in society and its potential that may explain its interest to policy makers, funders and researchers (Dey and Steyaert 2018). This book adopts this critical approach to research in the sense of a fresh dynamic perspective to a field where most papers are static. Some papers acknowledge their contribution is static: For example, Ramus and Vaccaro (2017) explicitly indicate that they are looking only at how stakeholders relate to a social enterprise at a time of mission drift. For this study, the working definition of a social entrepreneur that is used is one who seeks to solve a social problem affecting a segment of a population that the market on its own has left unsolved. Researchers usually distinguish between social entrepreneurs and social enterprises, the former being at the individual level and the latter being at the organizational level. Often, SE research is limited to the early stages of the enterprise, and it is presumed that thereafter, the entrepreneur role shifts to that of a manager. A basic difficulty in SE research is expressed by the blended value proposition which indicates that all enterprises offer a mix of financial and social values (Costanzo et al. 2014; Emerson 2003; Nicholls 2009). Therefore, separating social enterprises from commercial enterprises is not easy, and

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changing definitions leads to faulty statistics leading to faulty interpretations (Teasdale et al. 2018). The next chapter will show that many authors have focused on definitions to distinguish social enterprises from commercial enterprises. This difficulty is compounded by the fact that the legal status of such enterprises has not been determined and is a veritable zoo (Young and Longhofer 2016). For example, Yunus and Weber (2010) describe three general forms: for-profits, not-for-profits and the not-for-profit linked to a for-profit and three specific emerging forms in some countries: community interest company in the UK; B-Corp in the USA; and a low-profit limited liability company (L3C), also in the USA. However, there are many subdivisions possible of the general category. In France, the social economy includes associations, cooperatives, mutual organizations and foundations and, more recently, other companies certified to be of social utility (Fraisse et al. 2016). In India, not-for-profits could be charitable trusts or societies or a Section 8 company. In the USA, the pure not-for-profits are often called 501c(3) companies because of a federal tax exemption offered to qualifying companies. However, there are also nonprofits who get exemption under 501c(4), the chief difference being that these organizations can lobby to a greater extent. A detailed examination of legal forms in USA and Europe is provided by Defourny and Nyssens (2010). The success of social enterprises seems to be independent of business form since we find outstanding enterprises in each business form (Brewer 2016). What may complicate things further is that vocabulary may be confusing. For example, it may be difficult to understand the difference between a foundation and a corporation: Skoll Foundation (the “Foundation”) is a private foundation established by Jeffrey Skoll in 2002. The Foundation’s mission is to drive large-scale change by investing in, connecting, and celebrating social entrepreneurs and the innovators who help them solve the world’s most pressing problems. The Foundation is organized as a non-profit charitable corporation and operates from an office in Palo Alto, California. (Note 1 to the Consolidated Financial Statements of the Skoll Foundation, 2017, italics added)

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To meet their objectives, social entrepreneurs use social and technological innovations. Since market conditions do not allow their idea to be implemented, subsidization is an essential part of the early stages of most social enterprises, though subsidies may come from the founders themselves. These may be initial subsidies, partial subsidies or cross-subsidies. For example, Martin Hollinetz has created the OTELO network, which links individual associations. These associations create a community space for rural people in Austria who are isolated. OTELO encourages them to get together to work in hubs on common projects in areas such as media, agriculture or robotics. These spaces are called Open Technology Labs. In these labs, people are encouraged to think, experiment and implement projects together. The hub or room where they meet is usually an unused room provided free by the municipality, thus serving as an effective subsidy. Moreover, the hubs are managed by volunteers, who are again subsidizing the venture. It is clarified at the outset that this study is not limited to enterprises which start as subsidized enterprises, specifically those that start as notfor-profits. Indeed, the earlier realist theory which was static was forced to focus only on the not-for-profit segment because in a cross-sectional static approach, there were many different forms of enterprises present in a sector which was already fairly mature (Ashta 2019). However, since we contend that in the early embryonic stage of an industry or sector, all enterprises are not-for-profits, the realistic theory of not-for-profit social enterprises is a good place to start. The not-for-profit institutions are (i) organized; (ii) private and do not distribute dividends to those who control; (iii) self-governing; (iv) voluntary; and (v) transparent and accountable (Bátiz-Lazo and Billings 2012). A large majority of social enterprises are not-for-profits (Ingham and Assadi 2016). There may be some parallels with hybrids such as Bcorporations to the extent that they often start with donations and charities (Battilana and Dorado 2010; Battilana et al. 2012) and do not preclude a social dividend (to members rather than to owners). The reason we are starting with subsidized not-for-profits is that, by definition, social entrepreneurs start by entering fields where commercial entrepreneurs and the State are not satisfying a market need. Later, as the industry develops, we may see the emergence of for-profit hybrid social enterprises

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or of commercial enterprises, where the term “hybrid” may be a spectrum between pure charities and pure commercial enterprises including all kinds of social enterprise: social business hybrids primarily use commercial means to achieve a social or environmental mission and adopt different legal forms depending on their regulatory context (e.g., associations, cooperatives, community interest companies in the UK, benefit corporations in the U.S., for-profit companies owned by nonprofits in France, and charitable limited companies in Germany). (Santos et al. 2015, p. 38)

This amalgam of different kinds of social enterprises is confusing, and various schools of thought have emerged on what constitutes a for-profit social enterprise. Based on a review of different schools of thought, Serres and Hudon (2019) propose classifying for-profit social enterprises based on their profit distribution, governance and social mission and conclude that their common characteristics are that they are for-profit organizations with inclusive governance that focus on a social mission in their by-laws and reinvest most of their profits. They recognize that in addition to forprofit social companies, there may be cooperatives as well as not-for-profit social enterprises. All three forms are found in microfinance industry. This study is not covering the increased social responsibilities of large commercial enterprises nor their attempts to serve the bottom of the pyramid in a commercial way discussed by Prahalad (2006). For example, it is not looking at the efforts of shampoo manufacturers who start packaging their shampoo in one-shot sachets to be affordable for the poor once a month. Rather, it does look at why the not-for-profits may later become for-profit enterprises. For example, Blue Cross and Blue Shield started as not-for-profits and remained as not-for-profits when they merged in 1982. Yet is 1994, they started permitting their licensees to become forprofits. Blue Cross California was the first to switch from not-for-profit to for-profit and changed its name to WellPoint Networks. As another example, World Centric started in 2004 as a not-for-profit with the goal of informing the world about environmental issues. It started selling fair trade products to become less dependent on donations. By 2009, it switched to a for-profit model and became a certified B corporation. This study

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is focusing on such enterprises that start with not-for-profit and transition to for-profit. It provides reasons for such transformation by social entrepreneurs, notably on the problems of stakeholder management that keep social entrepreneurs from growing.

1.3

Introducing the Life Cycle Concept

To situate the transition, the study invokes the life cycle theory of the industry. The life cycle theory is a dynamic construct at the industry or organizational level, indicating that an industry or a firm passes through embryonic, growth, shakeout, maturity and decline stages (Mueller 1972; Smith and Miner 1983; Audretsch and Woolf 1986; Wright and Thompson 1986; Dibrell et al. 2011; Fujimoto 2014; Arikan and Stulz 2016; Arnett et al. 2018; Hasan and Cheung 2018; Manzardo et al. 2018). Figure 1.2 depicts this graphically. Some authors do not distinguish between industry life cycle and firm life cycle, and the concepts overlap. In the embryonic stage, there are high investments, growth is slow, risk is high, and prices tend to be high. In the growth stage, the firm scales up rapidly, risk is low, prices fall, competition is low for the early innovators or those who enter under-served regions, profits are high, but working capital investments may create cash flow difficulties. In the shakeout stage, competitors enter, A life cycle approach

Outreach indicator

Maturity Shake-out Decline

Growth

Embryonic

Time

Fig. 1.2 Depiction of the life cycle theory of the industry (Source A standardized representation, based on works of the authors cited)

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growth slows down, and profit margins shrink. In the maturity stage, there is little or no growth for the few large surviving firms, and the size creates a barrier to entry. In the decline stage, there is negative growth, excess capacity and high competition especially from rival products (Pinto et al. 2015). In general, private firms tend to be in the earlier stages of the industry life cycle while public companies tend to be in later stages, but some private companies can also be large and go into liquidation (Pinto et al. 2015). This study adapts this approach to the evolution of social enterprises. Since it adopts the industry life cycle approach, in the embryonic stage, only NGOs are likely to enter the field. Later, they may transform from not-for-profit to for-profit hybrid and later to commercial and be joined in their industry by competitors who are directly formed as hybrid social enterprise or even commercial enterprises. The examples of different forms of microfinance in different periods of history will use this graphical form to bring out how these social organizations transitioned to different stages.

1.4

Microfinance: A Leading Sector of SE, Underrepresented in SE Theory

More than half of all investments in SE are in microfinance. Thus, it is an exemplar of SE, and, indeed, a microfinance organization the Grameen Bank is often considered as the prototype of a social enterprise (Schneider 2017). Moreover, the Nobel Laureate of microfinance, Muhammad Yunus, is himself advocating a kind of social enterprise that he calls social business that evolved out of his microfinance experience (Yunus and Weber 2007, 2010). Therefore, the microfinance sector is very relevant to SE, and research in microfinance should be informing SE theory. Yet we find the financial sector, microfinance in particular, ignored by social enterprise researchers (see, e.g., Kerlin et al. 2016, p. 85, Fig. 4.2). In the 777 papers in EBSCO, there were 7051 occurrences of 2970 keywords. However, 2272 of the keywords occurred only once and can be ignored as being too specific. Table 1.2 provides examples of some of the most used keywords that have been studied, occurring in at least 15 papers. It is surprising, therefore, that “microfinance” is found as a keyword in only 15

75 63 62 60 59 58 49 41 40 38 38 35 30 28 26 25 23 23 23

96

644 238 191

28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46

27

24 25 26

Rank

Social capital Nonprofit sector Technological innovations Nonfiction Venture capital Non-governmental organizations Business education India Organizational structure Business partnerships Decision-making Social responsibility Business development Empirical research Microfinance Organizational behavior Organizational change Poverty reduction Social impact

New business enterprises

Industrial management Innovation Management

Row labels

21 20 20 19 19 18 17 17 17 16 16 16 15 15 15 15 15 15 15

22

22 22 22

Frequency

Source Author, based on scientometric analysis of keywords in 777 scholarly papers in EBSCO using “social entrepreneur” or “social entrepreneurship” in abstract or title

5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

4

Social entrepreneurship Social enterprise(s) Entrepreneurship (including social aspects) Corporate social responsibility (of business) Social innovation Businesspeople Nonprofit organizations Industries and society Social change Sustainability Business models Sustainable development Social problems Business enterprises Economic development Social values Leadership Poverty Social services Business ethics Business planning Social entrepreneur(s) Stakeholders

1 2 3

Frequency

Frequency distribution of most used keywords in social entrepreneurship research

Row labels

Rank

Table 1.2

1 Introduction: The Need for a Dynamic Theory …

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references (2%), as is “social impact,” both of which are used to develop theory in this paper. At the same time, there may be a limitation in the use of keywords, since authors may not represent their paper correctly, limited by where they want to position their paper or the background they are coming from. For example, in the table, “value” does not appear alone and “social value” appears in the 16th place with 35 mentions (less than 5% of sample size). Yet a recent literature review indicates that “value” is the most frequent theme addressed by SE researchers (Hlady-Rispal and Servantie 2018). The low overlap or 2% between keywords of microfinance and SE is surprising and requires a double check. This was done by not only using keywords, but also title, abstract and selection of all field, as well as all text. Although the methodology used is slightly different, the results, shown in Table 1.3, remained the same if we see keywords of microfinance with papers using title or abstract of SE. If we look at a larger sample of all papers where microfinance is used anywhere in the text and SE is used anywhere in the text, the results were slightly better. In general microfinance, scholars mention SE about 3% in some field that EBSCO uses (e.g., title is a field) and about 7% somewhere in the text. SE scholars seem to be more generous and mention microfinance between 10 and 13% in some filed and about 14% of the text. The intersection of the two (combined use of the terms at least once in the paper) is still less than 5% of the total number of papers that mentions each term at least once [496/(7545 + 3669−496)]. The curiosity is partly explained by the fact that there are more papers mentioning microfinance than SE (more than double), and therefore, even if the numerator is the same, the denominator is double. Moreover, although research in both fields started at the same time, the boom in microfinance industry and the later boom in microfinance research preceded the boom in research in SE, as shown in Fig. 1.3. It is possible that the success of the microfinance industry may have had a great path to play in donors and policy makers wondering if other industries in the social sector (such as health, education) could not witness a similar boom. This then has led to experimentation in these sectors. SE researchers should therefore be more inclined to mention the work of the microfinance researchers

5 8 6 12 52 525 10%

18 29 15 48 179 1519 12%

47 61 29 87 496 3669 14%

Source Author, based on EBSCO, Limitator “Scholarly papers,” Date June 6, 2019

All papers on SE

All papers on microfinance

1566 2173 962 2776 7545

Abstract Keyword Any field All text All text

Title 3 7 Abstract 6 16 Keyword 2 6 Any field 8 17 All text 59 97 All text 463 778 Microfinance as 13% 12% a proportion or all SE

Title

“Social entrepreneurship” or “Social entrepreneur”

3% 3% 3% 3% 7%

Social entrepreneurship as % of microfinance

Frequency distribution of interaction between microfinance and social entrepreneurship research

Microfinance or microlending or microcredit or microfinance

Table 1.3

1 Introduction: The Need for a Dynamic Theory …

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Number of Research papers in EBSCO database 2500

2000

1500

1000

500

0

1995-99

2000-04

2005-09

2010-14 2015-19 (Ɵll June7) Total

Social Entrepreneur or Social Entrepenruship microfinance or microlending or microcredit or micro-finance

Fig. 1.3 Microfinance research boom precedes social entrepreneurship research boom

and should better recognize that microfinance may be an important social sector. Nevertheless, no matter how you look at it, one gets the impression that most researchers consider these two separate and distinct fields, while microfinance is a field in the sense of industry (like health or education) while SE is a field in the sense of a discipline (like management or economics or entrepreneurship). This book therefore tries to connect the two fields by looking at research on microfinance industry from the perspective of SE discipline. Based on the last three centuries of experience with microfinance and three decades of research in microfinance, this study makes theoretical propositions on how a social entrepreneur creates a social enterprise and how this social enterprise evolves. As depicted in Fig. 1.4, the research purpose of this paper is to use microfinance research to contribute to SE theory. Specifically, this book builds on the existing work on the realistic theory of SE (Ashta 2016, 2018, 2019) that explains how not-for-profits sell dreams through storytelling in order to obtain subsidies. The dotted arrows indicate the preliminary theory as it exists today. In this book, we look

1 Introduction: The Need for a Dynamic Theory …

15

SE Theories

RealisƟc Theory of SE Extended realisƟc theory of SE

Microfinance Research

Life Cycle Analysis of Microfinance Life Cycle Concept

Fig. 1.4 A graphical depiction of the conceptual framework (Source Author)

at how this theory is extended by the life cycle analysis of microfinance, which itself is developed here. Updates to the extended theory are also provided by more recent SE research as well as microfinance research. The formulation of this extended theory therefore opens a vast agenda for future research. We build this over the next few chapters. Chapter 2 looks at SE theory and why it can be considered as static. Then, Chapter 3 presents a dynamic theory, the life cycle theory, and shows that it can be applied to historical microfinance developments in developed countries and lays the foundation for a life cycle theory of microfinance. Chapter 4 focuses on modern microfinance in developing countries to see if these recent developments can provide further lessons on the transition from one stage to the next stage in the microfinance industry’s life cycle. Chapter 5 then applies this life cycle analysis of microfinance and updates my previous reflections on SE theory, which had been termed a “realistic theory of SE.” Chapter 6 provides a conclusion as well as future research directions.

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2 Social Entrepreneurship Theoretical Work Has Been Static

Abstract In this chapter, Ashta introduces the reader to basic elements of social entrepreneurship research. He distinguishes the concept of social entrepreneurship from that of social enterprise and finds that there is a large overlap in research between the two. He introduces the concepts of both fields that would later be used as building blocks. Ashta’s primary contribution in this chapter is to show that research on both social entrepreneurship and social enterprise has been static. He also introduces his initial approach to the realistic theory of social entrepreneurship, which was based only on not-for-profits and was also static. Therefore, he shows there is room for research using a dynamic concept such as the life cycle theory to extend the realistic theory. Keywords Social entrepreneur · Social enterprise · Stakeholder · Value · Entrepreneurship · Social problem

© The Author(s) 2020 A. Ashta, A Realistic Theory of Social Entrepreneurship, https://doi.org/10.1007/978-3-030-32142-0_2

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The previous chapter had introduced the concept of SE and stressed on its importance. It had also indicated that there is considerable research in this field. When Table 1.2 was presented in the previous chapter, it was pointed out that the areas of research of any paper can be grasped by looking at the keywords indicated by the authors. The table is quite interesting because it shows that the abstract concept of SE (644 times) is more important to scholars than the human subject, i.e., social entrepreneurs (only 23 times). It also shows, evidently, that almost a third of the papers (238) studying SE also consider that social enterprise theory is important and at least a quarter (191) consider that there is some link to entrepreneurship theory. The table therefore seems reliable as an approximation. This chapter focuses on a few elements of the extant research in this field and indicates why it is considered as static. Where appropriate, the different propositions of the initial work on realistic theory (Ashta 2019), which we can now term as the static realistic theory (SRT), will be added. There were nine propositions in the SRT, on which eight are being retained here. The purpose of the later chapters of this book is to evolve these initial propositions to make the realistic theory more dynamic. The term “social entrepreneurship” was coined by Bill Drayton of Ashoka in the 1980s (Warnecke 2018). Research on SE started a decade later in the 1990s (Waddock and Post 1991; Dean and Dean 1998; Wallace 1999; Dees 1998; Prabhu 1999). It grew slowly, yet by 2010, some researchers felt there had been too much theoretical work done on definitional issues and it was time to move forward (Dacin et al. 2010). Most of these definitions focused on purpose, organizational form, the entrepreneur and the need for innovation; very few focused on creation, the problem or the target segment (Ashta 2016). Researchers continued their theory development work (Praszkier and Nowak 2011; Pless 2012; Santos 2012; de Bruin and Shaw 2011), sometimes applying existing theories to SE (Swanson and Zhang 2011; Bendickson et al. 2016; Han and McKelvey 2016) or the experience of specific sectors to building SE theory (Klimczuk 2016; Hemme et al. 2017). This book is of the latter kind, using research in microfinance sector to inform SE theory. Since the research on SE has focused both at the level of the entrepreneur and at the level of the enterprise, we will develop this chapter along these lines.

2 Social Entrepreneurship Theoretical …

2.1

23

Level of the Social Entrepreneur

Many papers in SE concern definitions, motivations and personality traits, creation and innovation, developmental work and resources of the social entrepreneur. However, the existing state of research does not see how these evolve as the social enterprise transforms. Definitions, scopes and boundaries: The root field of “social entrepreneurship” is “entrepreneurship,” with the word “social” qualifying it (Nicolopoulou 2014). Entrepreneurship brings together the different factors of production and manages them optimally. These factors are the different resources: traditionally, land, labor and capital. However, other stakeholders such as government and the media are admitted as important players supplying resources and need to be managed or harnessed, especially by the social entrepreneur. In the management literature, there is a distinction between entrepreneurs and managers where the former’s role is important in the early stages of an enterprise. Following this division, SE literature could be distinguished from social enterprise literature according to the stage of the focus. There have been comparisons of SE with other types of entrepreneurship. For example, Dacin et al. (2010) define a social entrepreneur as an actor who applies business principles to solve social problems. Social problems are diverse problems which spillover from the family or individual domain and affect society because they have social repercussions and social costs (Carrell and Hoekstra 2012). Examples of social problems include population distribution, unemployment, strikes, school dropout, domestic violence, mugging, skin color bias and unequal access to computers (Attewell et al. 2003; Berry 1975; Carrell and Hoekstra 2012; Chermesh 1985; Dagger and MacDonald 1982; Hall 1998; Wolfe 1925; Ioana et al. 2015). Dacin et al. (2010) distinguish social entrepreneurs from conventional entrepreneurs, institutional entrepreneurs and cultural entrepreneurs, based on wealth distribution, predominant organizational form, primary goal (or motives), product and tensions. Notably, they highlight the tension between financial sustainability and social ends in SE versus the tension between growth and survival in commercial entrepreneurship. However, their comparison is a static view. Otherwise, on transformation from

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a social enterprise to a commercial enterprise, the former tension should end and be replaced by the second tension. This study contends that when enterprises transform from social to commercial, the former tensions may not disappear, and any dynamic theory must take into consideration the persistence of the earlier tensions. A large number of papers consider that SE is best understood from a business model approach of seeing where value is generated, where value is captured and how value is shared (Hlady-Rispal and Servantie 2018). Schneider (2017) considers that classifications should be continuous but that they must allow each enterprise to be identified as somewhere along a three-dimensional continuum of value creation, value allocation and value distribution, each of which is divided into a social or entrepreneurial endpoint. In this, he distinguishes SE from pure entrepreneurship, public social service, collectivism, public benefit corporation and codetermination. He considers that SE is entrepreneurial in value creation and in value allocation, but social in value distribution. Figure 2.1 depicts these concepts graphically, and this graphic form will be used to capture the discussion at different stages of this paper. While the majority of SE research is focused on value creation (54%), only 16% focuses on value capture, a theme which has been hotly debated

A focus on Value Value Capture or Value AllocaƟon

Value CreaƟon or Value GeneraƟon

Vision/Value ProposiƟon

Value Sharing or Value DistribuƟon

Fig. 2.1 A value-based perspective to social entrepreneurship research (Source Author, with elements from Hlady-Rispal and Servantie [2018] and Schneider [2017])

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in microfinance. Therefore, we can expect that reviewing the research in microfinance could enrich SE theory in this aspect. Motivation: Entrepreneurs believe in their ability to perform the functions of marketing, innovation, management, risk-taking and financial control (Chen et al. 1998). Why would somebody with entrepreneurial capabilities spend time on solving other people’s problems rather than make money? Certainly, such a person lacks reason (Foucault 2003 [1961]) or rationality (Smith 1776). This curiosity has led many researchers to study the motivation of social entrepreneurs.They focus on different motivations for social entrepreneurs such as others’ regard and self-esteem, compassion/altruism and the need for problem-solving (Arend 2013; Grimes et al. 2013; Lawrence and Maitlis 2012; Miller et al. 2012; Santos 2012). The self-esteem partially results from the feedback, which keeps the social entrepreneur motivated. However, if enterprises are being converted from not-for-profit to forprofit hybrid, how and why does motivation evolve? Do unreasonable or irrational people become reasonable or rational? Wry and York (2017) consider that the kind of entrepreneurship created by entrepreneurs depend on their role identity and personal identity which are linked to different logics. In their theory, not-for-profits would be created by entrepreneurs who are single-minded with both personal and social identities linked to social logics. The examples they provide of role identities with a social logic includes clergy, parent, nonprofit manager, social worker, teacher and social activist. The examples they provide of personal identities with a social logic are social justice, benevolence, equality and care for the environment. These identities push entrepreneurs to recognize opportunities that are in affinity with their identity and create appropriate organizations (Wry and York 2017). Once again, a dynamic theory would explain how and why identities change with transformation of enterprises. A search for financial profits results in efficiency, performance, innovation and growth while a search for social utility results in passion, motivation and commitment (Smith et al. 2012). One viewpoint indicates that passion comes from the charitable part of SE (Dees 2012). A second view (Thorgren and Omorede 2018) considers that a social entrepreneur’s passion comes from self-identity salience (i.e., organizational success, affecting

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others’ lives, understanding of one own importance) that are reinforced by organizational power and social value creation (i.e., passion leads to success leads to passion). A third view considers SE as providing passion that is transferred to a social problem (Plaskoff 2012), sometimes because of visceral experience of a social problem (Dempsey and Sanders 2010) and sometimes by a concordance of opportunity (Parris and McInnisBowers 2014). This transfer of passion could be the compassion that is suggested as a prime motivator for SE (Grimes et al. 2013; Dees 1998). More specifically, this compassion may provide the emotions to compel action and use integrative thinking, pro-social cost-benefit analysis and a life-changing commitment to alleviating others’ suffering (Miller et al. 2012; Dempsey and Sanders 2010). However, it is not clear why compassion would not lead to the creation of charities rather than social enterprises (Arend 2013; Dees 2012). Perhaps, the depth or the mix of intrinsic and pro-social motivations is different for the two. It is also the perspective that charity keeps people dependent (Easterly 2006; Moyo 2009) that may retard more entrepreneurial solutions to social problems (Yunus and Weber 2007, 2010). At the same time, charity has been used by entrepreneurial philanthropists like Andrew Carnegie or Bill Gates to augment their social, cultural and symbolic capital, which in turn may positively impact their own economic capital (Harvey et al. 2011; Anheier et al. 1995; Bourdieu 1986 [2011]). The social entrepreneur is perhaps trying to mobilize these different capitals to interplay with each other within the same enterprise. Figure 2.2 depicts this interplay between passion, compassion and self-interest graphically. The SRT considers that entrepreneurs are motivated by a mix of their need for esteem, feelings of passion and compassion, and their bent for problem-solving and creativity to make their dreams come true (Ashta 2019). Proposition 2 of SRT Social entrepreneurs are motivated by a mix of their need for esteem, feelings of passion and compassion, and their bent for problem-solving and creativity to make their dreams come true. The transformation of not-for-profits to for-profit hybrid social enterprise and to commercial enterprise therefore needs to look at how the passion for compassion is transformed to self-interest.

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The transfer of Passion: from Compassion to Self-interest Compassion ChariƟes Entrepren eurial philanthro pists

Not for profit social enterprise For-profit Social Enterprises (hybrids)

Commerci al Entreprise

Self-interest

Fig. 2.2 Trade-offs between compassion and self-interest in organizational types

Creativity, Dreams and Innovation: Lowe (1995) suggests that creativity in making one’s dreams come true is driving the passion of social entrepreneurs. It may also be the need to create solutions to solve wicked social problems. This creative compulsion and the desire for usefulness may be so strong in some individuals that they have to create social enterprises. Thus, social entrepreneurs need a dream (or a “mad dream” or fantasy as suggested by Kenny et al. 2019). This dream is more than a vision of a future state of events and goes beyond mission and values (Secretan 2006). It includes the process of getting there: An innovation of technology or of a process that permits doing what the market mechanism does not allow. For example, Gandhi’s vision of independence or Martin Luther King’s dream of equality included a non-violent process of demonstrations to get there. The dream, therefore, includes an innovative way of achieving the vision. This innovation could come from an outright invention or from adopting someone else’s novelty (Peredo and McLean 2006). Indeed, the social value proposition, central to SE, refers to a convincing promise and a distinct offer (Hlady-Rispal and Servantie 2018). The SRT summarized this as a proposition (Ashta 2019). Proposition 1 of SRT Social entrepreneurs have a dream to solve a social problem faced by a segment of society.

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If social entrepreneurs need to solve wicked problems, one would not expect them to change to commercial entrepreneurship till the problem is solved. Yet social enterprise researchers have “observed the drift from social enterprise as ‘daring new problem solving model to improve mission fulfillment’ to social enterprise as ‘hybrid quasi-commercial structure and operations’” (Dart 2018, p 67). This may be an anecdotal remark, but as will be shown in the chapter on microfinance, many do drift. Explaining this drift should therefore be part of the development of our theory on SE. Development work of the social entrepreneur: Some social entrepreneurs are content to create a small organization and help a few people in their locality while others like to reach out to millions. One interesting research proposes that moral intensity leads to scaling through open organizations while the desire for control by the social entrepreneurs keeps the organization small using closed organization models (Smith et al. 2016). Moral intensity includes the magnitude of consequences; social consensus; the probability of the effect; temporal immediacy; proximity; and concentration of effects. If success is measured by scale, then development of the social enterprise seems to require that a social entrepreneur use efficient management and marketing techniques (Dempsey and Sanders 2010) such as stewardship to build capabilities to engage stakeholders, attract government support and generate earned income (Bacq and Eddleston 2018). For every change, there is resistance and successful SE needs to not only create temporary empowerment but to change social norms to accommodate the increased empowerment of the weaker sections (Haugh and Talwar 2016). The dream of social entrepreneurs may be in conflict or rivalry with those of other stakeholders who may have different objectives or different processes of getting to the same objective. For example, political actors of different inclinations may have different beliefs on how to usher in development. Similarly, heads of business who want to donate corporate funds for social development may want to support causes aligned to their businesses or their religious belief, and their ability to donate may depend on norms of good governance that could differ with time and place (Marinetto 1999). This means that values and beliefs need to be

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negotiated or renegotiated. Moreover, collaboration between stakeholders requires trust and there may be a dance of a narrative of trust with a counter-narrative of mistrust as stakeholders attempt to control the social entrepreneur (Seanor 2018). Thus, institutional entrepreneurship may require bricolage to modify institutions or fill up institutional voids such as lack of appropriate regulation as well as normative and cognitive institutions (Desa 2012). The question arises whether the institutional norms that are created by social entrepreneurs in the sense of beliefs and expectations of stakeholders are in tune with the transformation to a commercial enterprise. Resources: Developing outreach requires obtaining resources through successful marketing and institutional work. The social entrepreneur needs to cater to stakeholders who are interested in the enterprise, including governments, corporate partners, media as well as employees and customers. All these stakeholders provide resources which the social entrepreneurs have to acquire and manage through their political skill (Cong et al. 2017) and stewardship attitude (Bacq and Eddleston 2018). These resources are the different kinds of capital which the stakeholders possess including (a) political; (b) human; (c) economic; and (d) social capital (Mair et al. 2012) as well as (e) health; (f ) cultural; (g) aesthetic; and (h) intellectual capital (Nicolopoulou 2014) and even spiritual capital (Lybbert 2008; Malloch 2014). The SRT (Ashta 2019) had the following proposition related to the capturing of these resources. Proposition 3 of SRT Social entrepreneurs are able to obtain subsidized resources from society. An interesting study indicates that some social entrepreneurs may be effectual in the sense of making use of existing resources available with actors known to them in order to solve a social problem, while others use rational economic visions and optimal resources (Corner and Ho 2010; Sarasvathy 2001). Stakeholders who want to participate in development suffer from an asymmetric information problem: They do not know which of the potential social entrepreneurs will attempt to deliver. This means that the social entrepreneurs who can extract capital and subsidies from the other factors are those that are able to sell their dream to society and show that what

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they are doing or proposing deserves charity from the other factors of production. For example, in Muhammad Yunus’s concept of social business (Yunus and Weber 2007, 2010) investors do not take dividends nor do they make capital gains because they can redeem their shares only at the initial par value: They are effectively subsidizing their social venture because they share a dream of solving a social problem and at the same time running the business in a way that is friendly to workers and to the environment. Thus, the SRT had added the following proposition (Ashta 2019). Proposition 4 of SRT Social entrepreneurs obtain subsidized resources by selling their dreams as effective ways to solve a social problem. Since social entrepreneurs believe in their own dream, they may pay themselves at below market rates and thus subsidize their own social enterprise, and this provides a signal to the stakeholders that they are serious. For example, John Woods, a director from Microsoft left his high paying job to start a Non-governmental organization (NGO) to create libraries for school children in Nepal and was able to get his friends and acquaintances to donate books, later leading to bigger donations from foundations (Topper 2008; Dempsey and Sanders 2010). Therefore, just as government subsidies may crowd in private donations up to a certain point (Brooks 2000), the social entrepreneur’s sacrifice may be necessary to crowd in subsidies (including donations) from other factors of production. A similar example is provided by Vineet, the founder of Aavishkar, one of the biggest impact investment funds in India: I had no money, no entrepreneurial experience and had never worked in the VC industry. I was also not well connected and being a young graduate, I faced major challenges. I struggled for five years without any salary…. I guess my persistence made people start believing in me. (Bhatt and Ahmad 2017, p. 402)

The selling of this dream may be done by a professional network of social entrepreneurs, once these networks are convinced of a saleable vision. This means transforming the dream or vision into a narrative that can be staged in a way that enchants the audience, often enrobing it in religious

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or messianic terms of seduction (Mauksch 2017). SRT had considered that this is done through storytelling (Ashta 2019). Proposition 5 of SRT Social entrepreneurs obtain subsidized resources by selling their dreams through storytelling. Why does the story telling create a need for the stakeholders to buy into the story? This compulsion to act comes from the emotions that are transferred in the storytelling arousing the compassion of the audience (Berglund 2018). This therefore required a separate proposition in the SRT (Ashta 2019). Proposition 6 of SRT The storytelling used by social entrepreneurs compels action on the part of stakeholders. Research indicates that it is easier for hybrid enterprises to get funding if they stress the social over the financial rather than focusing on their hybridity (Moss et al. 2018). Therefore, the storytelling of social entrepreneurs stresses the social impact and lack of private profit in order to get subsidies. Having provided these subsidies, some stakeholders may be attached to the nonprofit status of the venture. Converting to a for-profit then raises complicated questions on how to repay them. Similarly, if the firm makes a successful IPO or is bought out, the original stakeholders may feel deceived. For example, Oculus Rift obtained nearly $2.5 million in funding through Kickstarter for creating virtual reality goggles and was later bought by Facebook for $2 billion, creating disappointment for hundreds of small financers (Chaboud 2016). Therefore, thinking through the life cycle of an innovation may be of interest to entrepreneurs who do not wish to disappoint. The provision of subsidized resources indicates that the SE is not purely entrepreneurial in value creation, but that society is participating in the value creation. As we mentioned earlier, Schneider (2017) considers that SE is entrepreneurial in terms of value creation as well as value allocation and social only in terms of value distribution. However, our finding is that even for the value creation dimension, SE should move toward the middle of the dimension (between social and entrepreneurship) rather than at the entrepreneurship end. The fact that the State could force Yunus to retire

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from Grameen Bank, also shows that the value creation function was being supervised by the State and it chose when it would interfere.

2.2

Level of the Social Enterprise

For a not-for-profit, once the resources have been obtained, the social entrepreneur has to show that there is a social return, in addition to financial efficiency, emanating from the social enterprise. The social aspect focuses on the need for increased outreach and scaling (the social top line), and the difficult measurement of impact (the social bottom line). The double bottom-line tension: The tension between financial sustainability and social mission in social enterprise is the subject of many papers (Austin et al. 2006; Santos 2012; Smith et al. 2012; Stevens et al. 2015; Wry and York 2017). Some of these have focused on the difficulties of managing a double bottom line. As it is, managing a single bottom line (financial profitability) by traditional entrepreneurs requires managing agency problems and balancing stakeholder interests linked to financial goals (Whysall 2000; Jensen and Meckling 1976; Freeman and Reed 1983). Therefore, managing a double bottom line requires managing a second set of agency problem and stakeholder balancing linked to social goals, including the problem that the bottom of the organization (junior executives and field agents) may not make the same balance between the financial and social objectives as the social entrepreneurs. A whole new literature on hybrid enterprises is focused on such issues (Battilana and Dorado 2010; Pache and Chowdhury 2012; Jay 2013; McMullen and Warnick 2016; Moss et al. 2018; Wry and York 2017). For example, aligning the values of venture capital funders with that of the social entrepreneurs may be a process requiring regular interaction and open communication to discover shared values, easier to achieve if the social entrepreneurs and the financers are embedded in the same socialcultural milieu (Bhatt and Ahmad 2017). The role of stakeholder engagement becomes paramount to realign values in case of mission drift (Ramus and Vaccaro 2017). Commercial entrepreneurs often engage in activities that are profitable for themselves and yet destructive for the collective welfare (Urbig et al. 2012). Yet, they may be limited by the reaction of

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stakeholders, especially consumers and workers, to working with a nonethical enterprise (Lindenmeier et al. 2012; Kahneman et al. 1986). Social entrepreneurs may be even more vulnerable to stakeholder outrage. This study starts within the not-for-profit domain, bridging the motivation and creative work of the social entrepreneur interested in social change; the formation and development of the social enterprise; and the need for impact measurement to sustain charity. Not-for-profits cause a balance in capitalism and with growing inequalities, the work of the social entrepreneur of this kind will become more important. Capitalism permits rich entrepreneurs to take the dividend from commercial enterprises (Friedman 1970) and provide philanthropy which may have significant interactions to enhance their economic, social and cultural capital (Marinetto 1999; Bourdieu 1986 [2011]). Therefore, not-for-profits will continue to remain in the landscape. Nevertheless, the theory developed in later chapters would show the converting of a not-for-profit social enterprise into a commercial one may involve a passage through this for-profit hybrid zone. However, this zone itself is only one phase in the dynamic life cycle theory being developed here. Impact measurement: A part of the agency problem resulting from asymmetric information is that stakeholders would like to monitor if the social enterprise that they are subsidizing is doing any good or any harm. All social innovations disrupt social relations. SE, in the management literature, requires transformation. Unfortunately, this change is not likely to affect all social categories in the same manner. Baumol (1996) indicates that entrepreneurship may be productive, unproductive or even destructive and Hall et al. (2012) consider that in developing countries, this classification is especially important. It is essential for the social entrepreneur to show that the impact is positive. This was proposed in the SRT (Ashta 2019). Proposition 7 of SRT Social entrepreneurs use impact assessments to reinforce their story to continue reception of subsidized resources. Even if all gain absolutely (Pareto optimality), the relative gains of the target audience may be more than those of others, ushering in resistance. The measurement of impact and the communication of this measure are therefore important, but difficult to do. Without proof of impact, the

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stakeholder motivation may not continue, their subsidies may stop, and this may push enterprises to transform into commercial logics (Abela 2014; Dees and Anderson 2006; Kerlin 2006) and SE would end (Ashta 2019). Proposition 8 of SRT The dream ends when the social entrepreneur shows visible evidence that he has made enormous economic profits without being able to visibly demonstrate that social impact has also been enormous. Since social performance is an ambiguous and malleable concept, SE firms are interested in knowing how their stakeholders perceive the social performance and whether it is considered positive or negative (Nason et al. 2018). Social enterprises are expected to have a symbolic response to positive feedback from their stakeholders, but a substantive technical response to a negative feedback (Nason et al. 2018). In any case, stakeholder involvement seems to be essential to get a social enterprise back from mission drift and social accounting (including impact measurement) may be key to continued stakeholder engagement (Ramus and Vaccaro 2017). In some countries, such as Italy, social enterprises are required to publish their impact as part of their social reporting requirement. However, such social reporting does not correlate with their financial performance (Pozzoli and Romolini 2013). Moreover, impact measurement and reporting on its own (without stakeholder engagement) lead only to impression management (Ramus and Vaccaro 2017). Therefore, stakeholders are important not only during the creation stage of a social enterprise, but also as control agents in later stages. Internal dynamics and contradiction: Similar to commercial enterprises, significant work has been done on whether internal group dynamics at the board level, with a variety of stakeholders, has an impact on the performance of the not-for-profit (Schoenberg et al. 2016). Intra-group dynamics includes the Board-CEO relationship, cohesion, boardroom climate, power struggles and conflict. An example of such a conflict would be that board members have shared values and are often co-opted because they are friends, but they may be uncomfortable signing off lavish expenses of some directors or managers (Golden-Biddle and Rao 1997). As another example, a study on Korean universities looked at agency problems and found that excessive control by founding family over a university, that is, in excess of their proportion of donations, leads to lower outsider donations

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and lower performance in measures of quality since the family extracts benefits at the expense of students, faculty and other stakeholders (Bae et al. 2012). However, the review of this literature does not seem to include the transformation of for-profits to social enterprises or to commercial enterprises because of internal dynamics. The working of a social enterprise leads to self-sacrifice both by the entrepreneur and its employees, to maintain unearned subsidies. It often means long hours of work and a lack of life-work balance, as well as the use of unpaid volunteer work (Dempsey and Sanders 2010; Mauksch 2017). One day, the life style of the social entrepreneur leads to a breakdown and leads to the questioning of the passion of the social entrepreneur (Huffington 2016). These financial pressures therefore add to the mission drift that may cause a not-for-profit to move to commercial objectives, unless a rebalancing is found (Ramus and Vaccaro 2017). This internal contradiction may therefore be the instrument of transformation of social enterprises.

2.3

An Application of the Static Version of the Realistic Theory of SE

So far, it has been seen that social entrepreneurship theory is largely static. The initial approach to the realistic theory of SE was itself based on the microfinance sector (Ashta 2019). Before trying to evolve this SRT to a dynamic one, in the next few chapters, perhaps it is worth exploring whether the static version of the theory is really applicable at all beyond microfinance. Since the practical application is not the purpose of this book, a quick secondary source case study on one social problem is presented here. Water, water everywhere and not a drop to drink: Located on the edge of the ocean, Chennai is suffering from a water problem. So is Karachi and so is Cape Town. Global warming and climate change are responsible. These problems affect society in a big way, causing fights on water rights and ultimately on who can live and who must emigrate in an area. Can social entrepreneurs do anything about it? After all, these are people who solve

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social problems. They have an idea or a dream of doing things differently to resolve a problem. But they cannot do it alone. To resume some of the tenets of the realistic theory of SE, based on the microfinance experience, one should find that social entrepreneurs: • • • • •

Have a dream of solving a social problem Sell this dream to stakeholders through storytelling Receive subsidies from those who buy into this dream Promise these subsidizing stakeholders that there will be social impact Who profit without showing impact may lose stakeholder support.

Let us look at each of these tenets one by one and see if the hypothesis of the Realistic Theory based on the microfinance sector applies to the drinking water problem. These dreams or solutions do not need to be economically workable. Had they been economically workable, the commercial entrepreneurs would have entered the market. So, the solution often imagines an innovative way of doing things. For example, a South African entrepreneur has thought of towing an iceberg to Cape Town (Winter 2019). However, the solution will lead to water costing three times more than at present. This kind of out-of-the box thinking is essential. In India, rainwater harvesting has often been touted as a solution. But who will finance the social entrepreneur’s project and why? For this, the social entrepreneur must tell a remarkable story and must tell it in an enthralling manner. Storytelling is becoming rampant across all spheres of society, creating links. These stories need not be long. Often they are a paragraph or a short video. They could also be one-liners to attract people to the main story. For example, take this one liner “Buy the Lady a Drink” used by Stella Artois, a beer brewery, who partners with a social enterprise water.org who wants to solve the water problem (Artois 2015). Their story focuses on the problems of women who must walk miles to get water to their homes. Water.org is co-founded by famous actor Matt Damon and Garry White. The two also started a for-profit social enterprise Watercredit: Here is a typical one-paragraph story straight out of microcredit:

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She took out a WaterCredit loan and got a water connection right in her home… and her monthly payments …was 1,200 rupees. … she could afford those few rupees every day, but she could never dream of saving $200 to make that happen… and got both of those. (Song 2017 on CBS News)

These stories amount to a promise, and stakeholders join into subsidize the venture. The philanthropy water.org managed to raise $30 million in 2018 (https://water.org/about-us/financials/), while the impact investment fund of Watercredit raised $50 million in March 2019 (Water Equity 2019). Since impact investors do not expect commercial market returns, they are happy to subsidize the social entrepreneurs. Both donors and impact investors wait to reap the promise of impact. This impact is difficult to prove. Yet, both the Web sites devote considerable space to highlight impact through anecdotes or stories. They supply figures of outreach of homes having connections and toilets. However, if there is no water coming out of the tap, have they really solved the problem? Maybe a solution is to bring water from other areas, but solving the water problem of rich cities like Bangalore means laying pipes, destroying the environment and reducing the supply of water to the catchment area (The Hindu 2019). So, impact is not only difficult to prove, it is difficult to measure because doing good somewhere is causing harm elsewhere. Indeed, solving the water problem is a wicked problem just like solving poverty or any other social issue. Finally, we come to the question of profiteering. Often people who have given, want to check it their money was well-used. In microfinance, we saw that NGOs became for-profits and were accused of loan sharking (Lewis 2008), leading to a clampdown by legislators in some countries. But can this part of theory apply to the drinking water segment? So far, prices of bottled water have doubled (The Wire 2019), clearly indicating profits are being made by somebody. A decade ago, there were a bunch of NGOs advocating rainwater harvesting and working with Multinationals (The Economic Times 2007). Certainly, people are bound to ask them questions on their impact.

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In the meantime, obviously, it will be the poorest who will not have a drop to drink, and the need for a new solution will become clear to people with new dreams and new stories to tell and new promises of impact to keep. This review of the literature on SE and social enterprise has shown that the work on theory building has been rich and interesting but it has largely been static in nature, especially at the entrepreneur level. Next, Chapter 3 introduces a dynamic concept using the life cycle theory and takes some historical cases of social finance to indicate that such a theory is applicable to different social innovations. Thereafter, Chapter 4 will focus on modern-day microfinance and see if it can add further to SE research and to the transition from one stage of the life cycle to another. Chapter 5 will update the propositions of my previous reflections on SE theory, based on the discussion in Chapters 3 and 4. Chapter 6 concludes and provides future research directions.

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3 Dynamics of a Life Cycle Theory Based on Developed Country Histories

Abstract How can we apply the life cycle concept to social entrepreneurship? Ashta first explains the evolution of the industry life cycle concept. He then applies it to a few microfinance cases which lasted for more than a century so that the reader can see the concept in its entirety. These cases are from different developed countries that also experienced the problem of poverty and exclusion. He follows this with microfinance cases that are still booming but they have gone through the initial stages. His major contribution in this chapter is to explain how transformation (growth and demise) is a politico-legal process where political legitimacy, private interests and social compassion create a dance between the State, the for-profit banks and the social enterprise. Keywords Business history · Life cycle · Montes de Piedad · Loan funds · Mutual funds · Banking

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The introduction has shown that SE is important for reducing societal problems and that SE theory has developed over the last few years. However, Chapter 2 showed that SE theory, including my own initial approach to a realistic theory (Ashta 2016b, 2019a), is static. The reason for introducing dynamics into theory is to recognize that what is important to social entrepreneurs may not be how they are different, but how to make a difference and what pitfalls to avoid on their way. These dynamics are difficult to understand in organizations owing to their complexity. One way to understand complexities in organizations is to use naturological theories, that is, to make parallels with nature since both are energytransforming operations (Frederick 1998). Examples of how these parallels help us understand organizations include the need for CEOs to demonstrate power-aggrandizing values, thus aping the performance of alpha males who are leaders of the pack (Frederick 1998). Moreover, the use of such theories is directly relevant for the understanding of business in society. For example, researchers show the need for a bio-diverse environment, like bees requiring flowers, to understand that business needs diversity in society (Frederick 1998); the need for organizational diversity and corporate social responsibility similar to that of a species to ensure its survival and that of the society it is entrenched in (Hill and Cassill 2004); the development of different types of social finance initiatives is different in developed countries and less developing countries, mirroring the different strategies of K-selection (large body) and R-selection (small body) organisms responding to different environments (Jayashankar et al. 2018). Some researchers have tried to look at the social enterprise phenomenon as animals in a zoo (Young et al. 2016) while recognizing organizational ecology as an important lens to understand what is happening in the social enterprise field (Searing et al. 2016). The essence of this naturological stream of research is to show that organizations evolve using innovations that help them adapt to the fitness landscape. At the same time, organizations develop the fitness landscape, to better compete and to survive. This stream of thinking with nature leads naturally to thinking of life and death and everything in between. How are organizations created, how do they grow, mature, and why do they decline and finally die? For this, researchers have used the life cycle concept and adapted it to understand organizations.

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This chapter now introduces this dynamic theory, the life cycle theory, and applies it to microfinance experiences over the last three centuries. Understanding life cycle is important. Had innovators taken a life cycle view of technology, they may not have adopted nuclear technology before understanding how they would deal with radioactive waste and contaminated plants (Costanza et al. 1997). Social entrepreneurs too are dealing with wicked problems, one peculiarity of which is that the solutions may create outcomes that are worse than the initial problem (Churchman 1967; Ashta 2016a). Such problems need to be taken seriously (Whyte and Thompson 2012) and their complexity understood through alternative perspectives (Bugg-Levine et al. 2012; Drury 2014; Houghton 2015). One perspective of a life cycle theory of microfinance was presented at a conference (Ashta 2019b). This chapter builds on that initial formulation and extends the number of cases studied.

3.1

A Brief Review of the Evolution of the Life Cycle Theory

The Introduction had indicated that the life cycle theory is usually depicted as having five stages: embryonic, growth, shakeout, maturity and decline. In this part, the key contributions to this theory’s development are brought out. To some extent the life cycle concept is vague. First, the life cycle concept itself does not indicate the exact number of years in any stage. Second, there are a number of related life cycle concepts, including product life cycle, firm life cycle and industry life cycle. Indeed, the life cycle concept seems to have started with a product life cycle, in the 1960s, with marketing scholars focusing on the importance of life cycle management and determining the profit cycle of products and competitive strategies that would be profitable in different stages of the product life cycle (Clifford 1965; Kotler 1965). These stages were introduction, growth, maturity, saturation and decline. The concept was adopted by economists to indicate how the location of the production would move from the region it was implanted in and that this shift would depend on the stage of the product life cycle (Vernon 1966). Recent research on the concept shows that the strength of patent laws may attract

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international investments if the product life cycle is likely to be long, but not if the product will soon be obsolete (Bilir 2014). In the meantime, the first reference to a life cycle theory of the firm was in the 1970s: Mueller (1972) indicates that in the high growth phase, the firm will want to maximize growth; this objective will shift to profit maximization as the firm matures. Dividend payouts also increase once the firm matures and goes into decline. The main advantage of larger, growing firms is that managers do not need to inform markets of new innovations if they do not require market finance: They can use internal profits to innovate. However, as the firm grows larger, the hierarchy becomes longer and there is an information loss in transmission from lower levels to the top. This creates bad decision-making and finally leads to losses by implementing wrong innovation decisions. This internal information management problem and competition from outside leads the firm to decline. Thus, the initial theory of the firm life cycle had four stages (creation, growth, maturity and decline) and it sought to explain the transition. However, firm life cycle researchers have used two to ten stages (Phelps et al. 2007). As the firm life cycle theory developed, it incorporated the notion that in the early stage, the entrepreneur looks at opportunities, but as the firm grows, the entrepreneur needs to be replaced by a more bureaucratic manager. However, while this may be true of some kinds of entrepreneurs (such as craftsmen entrepreneurs), it was considered that more educated opportunity-seeking entrepreneurs could be very successful managers in the growth phase (Smith and Miner 1983). Recently, the firm life cycle concept is being invoked again. It has been found that firms in the early stages are more open to pro-environment policies, leading to competitiveness through innovation (Dibrell et al. 2011). Similarly, younger firms seem to be more acquisitive of private firms while mature firms seem to acquire pubic firms (Arikan and Stulz 2016). A recent study of social enterprise uses five stages of the firm life cycle: nascent, newborn, adolescent, young adult and mature (Lecy and Searing 2016). Since it does not look at distant history, it ignores the decline stage, although it gives examples of firms winding down. Moreover, while that study distinguishes life cycles of not-for-profits from that of for-profits, it does not explain why some not-for-profits would become for-profits, perhaps because the microfinance experience was ignored.

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The third concept is that of an industry life cycle. Often, this concept is portrayed as having a fifth stage, shakeout, between the growth and maturity stage. In this shakeout stage, growth for the industry slows down and the most competitive firms survive (Pinto et al. 2015). However, there is a little confusion on this concept since some authors link it to product life cycle while others link it to firm life cycle. For example, the product life cycle stages were adapted to look at industrial concentration and this hybrid was termed an industry life cycle with four stages: introduction, growth, maturity and decline (Audretsch and Woolf 1986). It was found that in the growth stage, there was no correlation between industrial concentration and profit margins; but profit margins reduce as industrial concentration increases in the mature stage. Similarly, the use of the firm life cycle concept was also transformed to an industry life cycle (Wright and Thompson 1986), but it may be difficult to distinguish between the two. For example, the shakeout stage is mentioned by authors describing the firm life cycle also but these authors consider that shakeout comes after maturity (Hasan and Cheung 2018). We can also interpret the firm life cycle as how the firm reacts while the industry is going through a shakeout (or other stages). An interesting start on an industry life cycle approach to social enterprises using a three-stage model (Emergence, Expansion, Maturity) grounded on the experience of microfinance and voucher schools has been made (Searing et al. 2016). However, first, it is based on the recent microfinance experience and therefore ignores the decline phase which we will treat in this chapter. Second, it does not mention the transformation of NGOs to for-profits that we will treat in the next chapter. This book uses an industry life cycle approach with five stages. The next section relates the historical research of different microfinance experiences to these stages. As will be noted, the difference between shakeout and maturity is not always evident. The dates are approximative because the original researchers, from whose work we draw our information, were not trying to look at history from a life cycle approach.

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Application of the Life Cycle Theory to Historical Financial Innovations

Developed countries have already been confronted with problems of including the poor, for savings as well as credit. The works on the Irish loan funds (Hollis and Sweetman 2001), American Savings Trusts (Wadhwani 2011) and Spanish Montes de Piedad in Barcelona (Carbonell-Esteller 2012) are all very informative. These can provide rich lessons on the reasons for financial exclusion and how banks partner with social enterprises to include the poor and, if the experiment works, how banks absorb the social enterprises. The most interesting work, and perhaps the most complete, in this life cycle area is that of Hollis and Sweetman (2001) who trace the history of Irish loan funds over two centuries (from the 1720s to 1961), with the optimum reached in the 1840s. Similar to the Irish loan funds, there were other initiatives such as Dutch loan funds that started in the 1850s and lasted till the 1960s, their markets partially being taken over by the banks and the need for their services having diminished, among other things, owing to the growth of the Welfare State (de Vicq and Van Bochove 2019), but there is less information on these. The story of the Irish loan funds is captured in Fig. 3.1. These loan funds were started by the wealthy in response to the needs of the poor to whom the banks would not lend owing to lack of collateral. These funds used guarantors to get over this asymmetric information problem. They also sued borrowers and guarantors if they were defaulting in repayment. Thereafter, legislative support (increasing usury limits, stamp duty exemption, permitting deposits, courts allowing enforcement, a government body for monitoring) permitted the growth till the 1840s. Then, this growth was limited by legislation that required reducing their interest rates and giving half their profits to charity. Moreover, an extended famine showed that these funds were fragile and that if depositors’ money was not diversified, they would close down. Therefore, the decline set in owing to legislative preference for banks as well as the fragility of the funds during extended famines. This fragility was reinforced by the legislator having reduced the margin (spread between interest rates for deposits and loans). Moreover, the lack of

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Irish loan funds (1720s to 1961) Performance funds, indicator The started by

LegislaƟve constraints

LegislaƟve support

wealthy people

Usury caps

Impact of crisis, lack of reported impact on poor

LegislaƟve support shifsto banks

Maturity Shake-out Decline

Growth

Interest income and number of funds stagnates

Amount lent, Income and number of funds all decline

Increase in number of funds and size

Embryonic

1720

Number of loan funds goes down, but total deposits goes on increasing

1778

1840

1850

1900

1961

Time

Fig. 3.1 The life cycle of the Irish loan funds (Source Author, based on Hollis and Sweetman [2001])

demonstrated impact made the wealthy lose interest, the increased urbanization meant that banks were easily available, and the spread of banks to rural areas, all led to reduced needs for the funds. Finally, the private capture of the social benefits, in terms of high salaries of managers, also created a socio-ethical problem, since the funds were conceived to help the poor. This socio-ethical problem re-emerges today as microfinance institutions (MFIs) make high profits: The similarities are striking (Hollis and Sweetman 1998). Similar to the loan funds, there have been other not-for-profit financing initiatives in Europe, such as the pawnshops or Montes de Piedad, that provided funds to those at the periphery of more formal financial institutions (Carbonell-Esteller 2012). Figure 3.2 illustrates their history in Barcelona. These institutions, founded in the 1750s, were able to provide credit at lower rates than moneylenders because they were subsidized by donations and bequeaths by the wealthy, and they grew well. However, as formal financial institutions developed, the Montes de Piedad were able to take financing from Spanish savings banks (started in the 1820s in Spain) for lending to the poor and the excluded. Indeed, banks learnt that they could not take the risk of lending directly to the poor and risky segments of the population, but the success of the Montes de Piedad showed that lending to a diversified pool was not risky. In cases where the existing

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Montes de Piedad in Barcelona (1750s to 1900s) Performance indicator Financed by bequeths and donaƟons

Savings banks interested in providing refinancing (in addiƟon to charity finance)

Savings banks created their own Montes de Piedad for lending to poor.

Usury ceiling abolished.

Maturity

Shake-out

Growth

Number of loans and value increasing

Montes Piedad merged into banks

Decline Number of loans increasing, value steady or declining

Embryonic

Time 1750s

1820

1840

1850

1907

Fig. 3.2 The life cycle of the Spanish Montes de Piedad (Source Author, based on Carbonell-Esteller [2012])

Montes de Piedad refused to take refinancing from savings banks for ideological reasons, the savings banks started their own Montes de Piedad in the 1840s for lending to the public, creating competitive pressure toward a shakeout. Eventually, the Montes de Piedad merged into the savings banks in the latter part of the nineteenth century but some branches continued into the twentieth century (Carbonell-Esteller 2012). Thus, the history of microcredit (Irish loan funds and Montes de Piedad ), as well as current affairs in microfinance in India, indicates that innovative financial institutions catering to the poor eventually become banks or agencies of banks, often with legislative support. In short, formal financial institutions running to market mechanisms and conforming to legislative controls are found to be more convenient than social enterprises requiring subsidies. However, this may not be limited to microcredit, and a similar path may be found in microsavings. An interesting parallel can be drawn by trusteebased mutual savings banks that were started as nonprofits in the USA in 1816 to promote savings to cover illnesses, unemployment and old age, since commercial banks did not offer interest on small savings. Mutual savings funds lower costs since depositors know each other and therefore know who is risky, thus reducing information asymmetry and transaction costs. These mutual savings banks had a separation of ownership and

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control, where the savers had a right to profits but control and management was provided by individual legal trustees who were volunteers. Wadhwani (2011) contends that reduction of transaction costs alone would not have been enough to develop this market and that initial public pressure and regulatory incentives provided the thrust necessary to develop this social finance innovation. This public pressure came because the mobilization of savings was considered a public good. Legal constraints ensured that trustees were not compensated and could not engage in insider lending or gain from other means. Undoubtedly, the qualifications required and the lack of remuneration for the managers ensured that the funds could not be managed by the poor and the downtrodden since they would need money to survive, and therefore, these activities were confined to supervision by rational conservative actors (see Foucault 2003 [1961] especially Chapter 2 for a parallel with management of hospitals for confining unreasonable people). At the same time, the same reason (lack of remuneration) shielded the trustees-based funds from competition in the embryonic and growth phases. The life cycle of the trustee based mutual funds in the USA is illustrated in Fig. 3.3. Once it was shown that gathering small savings could be done at low cost, the “rational” conservative actors such as for-profit joint stock mutual Trustee based Mutual funds in the US (1810s to 1980s) Performance indicator Started by banks owing to poliƟcal pressure

“Rival” for-proŌiJointstock savings banks discouraged by legislaƟon

Stock savings banks and Commercial banks oīer savings possibiliƟes

Commercial banks eīecƟvely take-over savings funds

Maturity

DeregualƟon of banking meant commercial banks took them over, or they transformed into joint stock forms

Shake-out

Decline

Growth Growth in number of mutual and in depostors

Embryonic

1816

1870

Growth in depositors per saving bank

Time 1905

1930s

1950s

1980s

Fig. 3.3 The life cycle of trustee based mutual funds in the US (Source Author, based on Wadhwani [2011])

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savings banks and, later, commercial banks, entered the small savings market in the USA and their governance and political legitimacy enabled them to displace the nonprofits where volunteer trustees were subsidizing the management costs and taking risks in the form of their personal liability, creating a shakeout (Wadhwani 2011). This is similar to the Spanish case where the not-for-profit Montes de Piedad refused to take loans from savings banks, the latter started their own Montes de Piedad, thus squeezing the market of the former (Carbonell-Esteller 2012). Later, in the maturity phase, the commercial banks started forming alliances through interlocking directorships with the savings funds. Finally, deregulation came in the middle of the twentieth century when federal deposit insurance was extended to all public savings (and not just to mutual savings funds). This deregulation meant increased competition and decline of the savings funds. Eventually, they all merged into the savings bank. Initial thinking on the evolution of modern-day microcredit to microfinance also showed that it was a dialectical process (Ashta et al. 2014). The identification of a social problem leads to a social innovation. This social innovation is initially blocked by conservative forces but may be encouraged or controlled by public policy. However, if it is successful, at some point in time, it is taken over by the conservative forces. This may then create new problems and look at new solutions. We can see that in each of the three previous examples (of loan funds, Montes de Piedad, and mutual funds), that this theory is validated as banks compete with the social innovation, and later buy out the social innovation, often with public support.

3.3

Application of the Life Cycle Theory to Ongoing Financial Institutions

There are many other examples from the financial industry of developed countries that are interesting for observing the life cycle of institutions reaching out to low income people, such as savings and cooperative banks (credit unions). As opposed to the previous examples which include the decline stage, the long history of the cooperative banks has not yet ended,

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and they are mature and even growing. Some of the best known examples have been documented in Germany (Schmidt et al. 2016). However, their zone of influence is vast, and these examples have been the source of inspiration of savings and credit cooperatives in West Africa, for example. Savings banks continue to have success in Germany, but in other countries, their structure has changed as they entered the mainstream. Taken together, savings banks and credit cooperatives represent 75% of banking institutions in Germany, 54% of lending to households, 51% of lending to SMEs, 53% of household deposits, but only 25% of the banking assets (BNP Paribas 2016). Both kinds of institutions have a high proportion of income from lending, low operating costs and stable profitability compared to other financial institutions. Savings banks account for 30% or personal deposits, 21% of lending to non-financial corporations, and 29% of personal lending of the German financial system. Thus, they still occupy an important place in the German system. Interestingly, German savings banks (Sparkassen) evolved from the pawnshop models (Montes de Piedad) described earlier, in the late eighteenth century, 1778 onwards. German savings banks were financial institutions set up by a city or county authority or by a private foundation with a mandate to capture savings and finance local projects that were not being financed by the formal credit institutions. They offered interest even on small savings and provided loans within their city or district to individuals and SMEs and, often, to the city or district government for infrastructural projects. Usually, conventional bankers served as managers or auditors, on a voluntary basis. Like social enterprises, they had a double mandate of limited profitability as well as contributing to general welfare of their locality (Schmidt et al. 2016). The most interesting part of this model is the low margin. If savings were remunerated at 4%, loans were given at 5%. Often, small savers were provided higher interest rates and bonus payments. The success of these banks in some regions made other regions copy their legislation from 1838 onwards and the model spread all over Germany. The success of the diffusion process was owing to State and private support as well as the socioeconomic transformation and the social crisis induced by industrialization and urbanization. By 1913, almost every German household owned a savings bank passbook. Savings were collected door-to-door as well as through numerous public and private outlets, such

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as schools and shops. Resilience of the system comes from the low risk since local savings finance local projects and local development, thus building society harmoniously. Although the number of savings banks has come down considerably during the 1940s, their balance sheets continued to grow till 2010. The Spanish Cajas who did not follow the regional focus principle after 1988 had severe financial problems and almost collapsed, while German savings banks continue to be an important pillar of German banking. The German savings bank system is made up of a network that includes emergency rescue funds that can help any savings bank facing difficulties. As a result, the local savings banks were less impacted by the financial crisis of 2008 than large national banks. The loans from savings banks to SMEs did not fall, but their personal loans did go down (BNP Paribas 2016). Figure 3.4 graphs the life cycle of these savings banks. This resilience of the German savings bank systems is now being attacked by the private banks who consider that this regional and local structure reduces interest rate margins and thus lowers possibilities for competition (Read critically BNP Paribas 2016). It is also possible that their shareholding and loans to the national level players such as Landesbanks may bring in an element of fragility. More recently, the leading private banks in Germany are themselves in trouble. German Savings development banks (1770s to …) Mergers

Performance indicator Sponsored by local governmnts or private foundaƟons

Other counƟes replicate Prussian regulaƟon

Maturity

Shake-out

Growth

Possible aƩacks by commercial banks at the European Level to withdraw legislaƟve support, lack of lending opportuniƟes within the region.

Decline

reduced number of savings banks, but balance sheet sƟll increasing

Embryonic

Time 1770s

1830s

1940s

2010s

Fig. 3.4 The life cycle of German savings banks

Future

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The history of German credit cooperatives started in the 1840s with three different models (Raiffeisen, Schulze-Delitzsch and Haas). These cooperatives were started because savings banks were not really providing credit to the poorest since they took personal guarantees. As a result, the richer people were taking credit from the savings banks and then lending to the poor at high rates (Schmidt et al. 2016). There were many different experiments in cooperatives. In some cooperatives, small loans were interest free but required a small fee, and larger loans were made at 5% per annum; in others, interest rates were higher at 14%. Some lent only to members, others also to non-members. Some allowed profitsharing with members, others accepted this over time. Although there was initial resistance from the State, it finally realized that cooperatives brought political stability by catering to the financial needs of those at the margins of the society and created appropriate legislation in the 1870s. This then enabled an upsurge in the number of cooperatives, notably from 1890 to 1940 when there were over 22,000 cooperatives. Thereafter, mergers led to a shakeout and by 2010 there were only 1100 cooperatives. However, their asset base continues to rise. This is captured in Fig. 3.5. These are not the only institutions that are still surviving. There are more recent institutions from which we can also learn such as US Development German cooperaƟve banks (1840s to …) Performance indicator Experiments started by the middle classes to help the poorest

LegislaƟon of cooperaƟves; FederaƟons of cooperaƟve banks formed.

Legally became banks, oīered universal banking

Note: Decline in countries such as Spain which forgot the regional focus

Maturity

Shake-out

Growth

Embryonic

Number of cooperaƟves reduce drasƟcally but members, assets keeps increasing

Decline Number of cooperaƟves have come down, assets conƟnue to increase

Time 1840s

1870s

1940s

2000s

Fig. 3.5 The life cycle of German cooperative banks

Future

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Credit Corporations (Koistinen 2012). However, the broad lessons we need can be gleaned from the above examples. We can see that the birth of the social innovations was often conceived by conservative actors. The solution required mutual support and cooperation between the wealthy and the society. We are no longer talking about ants in a colony, but of bees pollinating flowers (Frederick 1998). This is the nature of corporate engagement in society. Social entrepreneurs therefore need to understand the importance of conservative stakeholder concerns and appeal to the conservative stakeholders to understand that their own interests require serving all elements of society. Second, we can see that legislative support is essential to the growth of the social finance sector. Therefore, social entrepreneurs need to collectively convince the public policy maker to subsidize the embryonic social enterprise sector and to protect it or stimulate it by injecting appropriate regulatory fertilizers. Third, we can see that as profits increase, legislative support is withdrawn. The child is considered old enough to walk without public support. This allows competing private organizations to enter and thrive once the playing field is levelled. Why did the first group of MFIs (the loan funds, the Montes de Piedad, the trustee-based mutual funds) finally die while the second live on? One of the reasons is clearly that the function of the first groups of institutions was taken over by the banks, while the second group of institutions were started directly as banks and therefore this need for decline did not occur. Second, as the experience of the Caixa in Spain shows, savings banks that detract from their mission and lend unwisely can decline for reasons common to any commercial enterprise. According to Frederick (1998), the most adaptive organization is one that is on the edge of chaos, just short of falling over the precipice. This course of stability within variety is maintained by the value systems of an organization which keep it from experimenting too far afield. Whether they will decline even while sticking to their mission and fiduciary responsibility is a different question and not treated in this book, but the advent of fintech may change the equation of the fitness landscape (Ashta and Biot-Paquerot 2018). For our purposes, we can see that the life cycle theory can thus be applied to describe the history of many social finance innovations. We have

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seen that awareness of reduced transaction costs and benefits generated by a social innovation reduced commercial risk perception, and shifting political legitimacy may have reinforced the success of the innovation. But political legitimacy may itself depend on economic possibilities that are available. This need for political legitimacy combined with economic possibilities leads to a dance between the three sectors (private, public and third sector) as issues of trust, control and efficiency surface. Seanor (2018) suggests such a dance between the public sector and the social enterprise, based on modern-day social enterprises. What we add from this life cycle analysis over the three centuries is that in this ménage à trois of the good, the bad and the ugly, the end may be tragic for the social enterprise as the public sector changes its dance partner in favor of private enterprise. This change of dancing partners, orchestrated by political actors, who use grand narratives to get public votes, may itself be a dance in an even larger time frame as social enterprises may need to be reborn to clear up the new problems that for-profit private enterprise creates. The question that is developed further in this book is what drives the transition from one stage to the next. More specifically, there is a need to see why social enterprises may transform from not-for-profits to for-profits. Therefore, to delve into this question, the specific case of modern microfinance is probed in Chapter 4. The lessons obtained from this chapter and Chapter 4 will then be used to develop reflections on a dynamic theory of SE in Chapter 5. Finally, a conclusion and future research directions will be indicated in Chapter 6.

References Arikan, A. M., & Stulz, R. M. (2016). Corporate Acquisitions, Diversification, and the Firm’s Life Cycle. Journal of Finance, 71(1), 139–194. https://doi.org/ 10.1111/jofi.12362. Ashta, A. (2016a). Microfinance: Battling a Wicked Problem. Brussels: P.I.E. Peter Lang. Ashta, A. (2016b). Towards a Realistic Theory of Social Entrepreneurship: Selling Dreams to Society. Burgundy School of Business. https://papers.ssrn.com/sol3/ papers.cfm?abstract_id=2861345.

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Drury, I. (2014). Performance Management for Wicked Problems. Administrative Theory & Praxis (ME Sharpe), 36, 398–411. https://doi.org/10.2753/ ATP1084-1806360307. Foucault, M. (2003 [1961]). Madness and Civilization: A History of Insanity in the Age of Reasons [Folie et déraison: Histoire de la folie à l’âge classique]. London and New York: Routledge. Frederick, W. C. (1998). Creatures, Corporations, Communities, Chaos, Complexity: A Naturological View of the Corporate Social Role. Business and Society, 37 (4), 358–389. Hasan, M. M., & Cheung, A. (2018). Organization Capital and Firm Life Cycle. Journal of Corporate Finance, 48, 556–578. https://doi.org/10.1016/ j.jcorpfin.2017.12.003. Hill, R. P., & Cassill, D. L. (2004). The Naturological View of the Corporation and Its Social Responsibility: An Extension of the Frederick Model of Corporation-Community Relationships. Business and Society Review, 109 (3), 281–296. Hollis, A., & Sweetman, A. (1998). Microcredit in Prefamine Ireland. Explorations in Economic History, 35 (4), 347–380. Hollis, A., & Sweetman, A. (2001). The Life-Cycle of a Microfinance Institution: The Irish Loan Funds. Journal of Economic Behavior & Organization, 46 (3), 291–311. Houghton, L. (2015). Engaging Alternative Cognitive Pathways for Taming Wicked Problems. Emergence: Complexity & Organization, 17 (1): 1–18. https://doi.org/10.emerg/10.17357.d0b1247bd6e0b9538e6caa70123f3626. Jayashankar, P., Ashta, A., & Rasmussen, M. (2018). What Are the Lessons from Nature for Doing Well and Doing Good in Different Environments? A Hybrid Perspective of Microfinance and Slow Money. Strategic Change: Briefings in Entrepreneurial Finance, 27 (6), 523–538. Koistinen, D. (2012). Development Credit Corporations: Not-for-profit Development Finance Institutions in the Postwar United States. Business History, 54 (3), 424–440. Kotler, P. (1965). Competitive Strategies for New Product Marketing Over the Life Cycle. Management Science, 12(4): B-104–B-119. Lecy, J. D., & Searing, E. A. (2016). Changes Over the Life Cycles of Social Enterprise Animals. In D. R. Young, E. A. Searing, & C. V. Brewer (Eds.), The Social Enterprise Zoo (pp. 113–140). Glos, UK and Northampton, MA: Edward Elgar Publishing. Mueller, D. C. (1972). A Life Cycle Theory of the Firm. Journal of Industrial Economics, 20 (3), 199.

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Phelps, R., Adams, R., & Bessant, J. (2007). Life Cycles of Growing Organizations: A Review with Implications for Knowledge and Learning. International Journal of Management Reviews, 9 (1), 1–30. Pinto, J. E., Henry, E., Robinson, T. R., & Stowe, J. D. (2015). Equity Asset Valuation. Hoboken, NJ: Wiley. Schmidt, R. H., Seibel, H. D., & Thomes, P. (2016). From Microfinance to Inclusive Finance: Why Local Banking Works. Weinheim, Germany: Wiley-VCH Verlag. Seanor, P. (2018). Of Course, Trust Is Not the Whole Story: Narratives of Dancing with a Critical Friend in Social Enterprise—Public Sector Collaborations. In P. Dey & C. Steyaert (Eds.), Social Entrepreneurship: An Affirmative Critique (pp. 159–181). Cheltenham, UK and Northampton, MA: Edward Elgar Publishing. Searing, E. A., Lecy, J. D., & Andersson, F. O. (2016). Ecologies Within the Habitats of the Zoo. In D. R. Young, E. A. Searing, & C. V. Brewer (Eds.), The Social Enterprise Zoo: A Guide for Perplexed Scholars, Entrepreneurs, Philanthropists, Leaders, Investors, and Policymakers (pp. 93–112). Glos, UK and Northampton, MA: Edward Elgar Publishing. Smith, N. R., & Miner, J. B. (1983). Type of Entrepreneur, Type of Firm, and Managerial Motivation: Implications for Organizational Life Cycle Theory. Strategic Management Journal, 4 (4), 325–340. Vernon, R. (1966). International Investment and International Trade in the Product Cycle. The Quarterly Journal of Economics, 80 (2), 190–207. https:// doi.org/10.2307/1880689. Wadhwani, R. D. (2011). Organisational Form and Industry Emergence: Nonprofit and Mutual Firms in the Development of the US Personal Finance Industry. Business History, 53(7), 1152–1177. Whyte, K., & Thompson, P. (2012). Ideas for How to Take Wicked Problems Seriously. Journal of Agricultural & Environmental Ethics, 8, 441–445. Wright, M., & Thompson, S. (1986). Vertical Disintegration and the Life-Cycle of Firms and Industries. Managerial and Decision Economics, 7 (2), 141–144. Young, D. R., Searing, E. A., & Brewer, C. V. (Eds.). (2016). The Social Enterprise Zoo: A Guide for Perplexed Scholars, Entrepreneurs, Philanthropists, Leaders, Investors, and Policymakers. Glos, UK and Northampton, MA: Edward Elgar Publishing.

4 Evolution of Developing Country Microfinance and Financial Inclusion

Abstract This chapter has two objectives: to link the social entrepreneurship concepts to what researchers observe in the modern-day microfinance industry in developing countries and to link the life cycle concept to the financial inclusion need and microfinance industry in developing countries. Ashta’s first contribution in this chapter is that he provides a story of how microfinance entrepreneurs start with a dream, how they persuade others to join in the dream through storytelling, how they start the industry with not-for-profits, why they may transform to for-profit and how they gradually converge into the larger formal banking industry. His second contribution in this chapter is to show that this life cycle may differ from country to country, with different countries being in different stages of their life cycle. Keywords Microfinance · Financial inclusion · Poverty · Dream · Storytelling · Impact

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So far, the reader has seen that SE is important and that SE theory had developed recently (Chapter 1) but is largely static (Chapter 2). One dynamic concept, the life cycle theory, is used to provide a perspective to historical experiences with microfinance in developed countries (Chapter 3). This chapter now focuses on modern-day microfinance in developing countries, which is the prime social innovation of modern times. The purpose of this chapter is to validate the initial formulation of the static realistic theory (SRT) as well as to see what can be added to dynamize this theory by looking at its evolution in a life cycle perspective. As mentioned in the previous chapter, there are a number of life cycle theories with applications in business management including product life cycle (Kotler 1965; Bilir 2014), industry life cycle (Fujimoto 2014; Audretsch and Woolf 1986) and firm life cycle (Mueller 1972; Arikan and Stulz 2016). In each of these theories, there were essentially four stages: introduction, growth, maturity and decline. However, specific authors may have more or less stages. Some include a fifth stage, as we have done by including the shakeout stage. This may just show that there are interactions between these concepts: For example, life cycle flexibility relates to an organization’s ability to rapidly adapt and redesign its market offerings in response to marketplace changes (Arnett et al. 2018). It was earlier clarified that this book is looking at the following stages that an industry may experience: introduction, growth, shakeout, maturity and decline. Recently, Massele and Fengju (2016) use the firm life cycle concept for MFIs but focus on three stages: start-up (0–4 years), growth (5–8 years) and maturity (9 and above), with some overlapping possible. Their main aim is to suggest relevant financial indicators of sustainability for these three stages which are not pertinent to our theory building. A similar three-phase model is proposed for all social enterprises by Searing et al. (2016) based on present-day microfinance and voucher school experience. What we can take away from these studies is that the modern microfinance industry is not yet in the decline phase. In the twentieth century, most MFIs were not-for-profits. It is only at the turn of the twenty-first century that most of these NGOs became for-profits and, more recently, many MFIs started directly as for-profits and even banks downscaled to provide microfinance (Campion and White 2001; Ashta and Assadi 2010). Microfinance is a social innovation that has

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received a lot of subsidies and/or support from impact investors. Certainly, what is true of microfinance may not be true of other SE sectors, but the study of this sector generates rich food for thought and future research. As was mentioned in the earlier chapters, the boom in microfinance research is considerably bigger than the boom in SE research. A recent scientometric study (Gutiérrez-Nieto and Serrano-Cinca 2019) indicates that the microfinance research can be divided into two main segments: the initial research focusing more on the client (welfarists) and more recent research focusing on the MFI (institutionalists). Throughout the 20-year period they study, “poverty” and “women” remain in the list of the most important three keywords, testifying the importance of the social problem to microfinance researchers. What changes is the third keyword: It is “rural” till 2007, then “impact” till 2012 and finally “performance” till 2017. The study also points at the emerging trend of “financial inclusion.” This chapter focuses on research concerning the organization life cycle in this industry developing countries, and in the story we weave, we will see why “impact” became important after 2007 but finally yielded its place to “performance” and the reasons for the gradual shift to “financial inclusion.”

4.1

The Creation of MFIs: The Embryonic Stage

In the embryonic stage, the MFIs focused on their dream which was their value proposition and shared this dream with stakeholders by formulating it as a story. The Value Proposition or the Social Innovation: Lending to small and micro-businesses has always posed a problem. Three major difficulties have been identified: high risk owing to asymmetric information, high transaction costs relative to the small loan size and lack of complementary capital available for the success of the business venture (Armendáriz and Morduch 2010). In the USA, one solution has been the growth of development credit corporations in many of the States, starting in 1949 in Maine. These are private not-for-profit initiatives financed by a syndicate

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of banks that serve as intermediaries to provide loans to micro- and smallbusinesses who have been refused credit by banks (Koistinen 2012). Although the cost of operations of MFIs is lower in poor countries, the transaction size of microloans in poor countries (loan size as low as $100 in some countries) defied the ability of the Western model to be applied to the Global South. Early microfinance research focused primarily on the group lending concept, its prime innovation. Group lending enabled a reduction in transaction costs, resolution of some asymmetric information problems and an increase of complementary capital as group members helped each other (Besley and Coate 1995; Sharma and Zeller 1997; Ghatak 1999; Morduch 1999). The value proposition of microcredit can be briefly explained through an example. An MFI creates a group of potential borrowers, say five. Loans are given to only two of them with an indication that another two could avail of the loan if the first two repay successfully and that the fifth would get a loan only if the first four repay. This places group pressure to repay on those who receive the loans, which lowers transaction costs since the group members monitor each other. It lowers asymmetric information risks since the information is available among borrowers who live in the same village and know each other. Moreover, since the success of each borrower conditions loans to others, all are interested in providing their knowledge and network to help each other succeed. Finally, since the loans are often given to women, especially in South Asia, it changes the role of women within the family and empowers them (Milana and Ashta 2012; Ashta et al. 2013). This creative solution has been replicated, with adaptions, in many parts of the world. This creativity continues, testified by the multiplicity of financial products being devised to suit poor people (e.g., credit, savings, insurance), multiple forms of MFIs (e.g., cooperatives, NGOs, non-bank financial institutions, banks) and even multiple forms of group lending (e.g., solidarity group lending, self-help groups, village banking) (Armendáriz and Morduch 2010). A large number of social enterprises in microfinance have been formed by people who visited poverty, either for the first time or after a lapse, leading to a visceral experience and a life-changing decision as suggested by Dempsey and Sanders (2010). For example, Muhammad Yunus started experimenting with development after returning to Bangladesh from the

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USA and seeing the plight of people (Yunus 2003). Similarly, Matt Flannery founded Kiva after a three-month stint in East Africa (O’Brien 2008). By and large, microfinance research confirms that compassion is an important motivator. Stakeholder Resources: In microfinance, the relevant stakeholders include governments, donors, NGOs, investors, managers, employees, communities and clients. Governments provide the institutional infrastructure, such as laws, that can stimulate or control the growth of microfinance (Attuel-Mendes and Ashta 2008; Allaire et al. 2009). A lack of useful legislation and lack of enforcement can reduce the growth of microfinance in a country (Ashta and Fall 2012). Research shows that when MFIs work with stakeholders to co-create the final product, they are able to ensure a more equitable distribution of benefits among stakeholders (Calton et al. 2013) and reduce interest rates to women (Sun and Im 2015). This may mean including women borrowers on the board of the MFI, getting managers and employees to work more efficiently or governments using laws to limit interest rates. Thus, the participation of stakeholders is important for SE. A few studies focus on the resource raising problem. It has been found that it is easier for MFIs, both for-profit and not-for-profit, to raise capital in market-based economies but that it becomes difficult for for-profits to raise commercial capital in countries with religious diversity (Zhao and Lounsbury 2016). The study notes that not-for-profit MFIs raise less capital (commercial and public) than for-profit MFIs. However, a stronger market logic permits more commercial and public capital for both NGOs and for-profits. In countries with religious diversity, not-for-profits raise more public capital. Subsidies help MFIs in permitting them to lower interest rates. Most MFIs rely on private donor subsidies rather than public subsidies (Becchetti and Pisani 2010). Research shows that the level of subsidies of MFIs may depend on the quality of management (Hudon 2010). Recent microfinance research shows that as compared to professional managers, CEOs who are founders of MFIs (the original social entrepreneurs) are better able to have a larger outreach, more financial sustainability and lower operating costs (Randøy et al. 2015). In short,

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social entrepreneurs are better able to share their dreams and passions to drive others to accompany them. Storytelling: Storytelling is a powerful tool used in strategy (Marzec 2007) and in marketing (Assadi 2009; Gerber et al. 2013) and may manipulate or seduce (Auvinen et al. 2013) by appealing to emotions (Merchant et al. 2010) and to the imagination (Abela 2014). Visionary stories are used by leaders to engage with employees and stakeholders (Marzec 2007) and by founders to raise capital from venture capitalists (O’Connor 2002) and from the public through IPOs (Martens et al. 2007). Similarly, the solution of the social entrepreneur is sold through storytelling, and dreams are aroused in the recipient by the storytelling (Plaskoff 2012). Those familiar with the microfinance sector would have heard a familiar rhetoric of storytelling. Mpunda had struggled for 10 years working at a hotel, a brewery, and a ruby mine. When he hit on the idea of selling clean water, a scarce commodity in Africa, he could barely afford the fees to power his tank. After three years of scraping by, he borrowed half a million Tanzanian shillings (or $360) from the Akiba Commercial Bank. The money helped him pay the municipal fees and buy three trucks to deliver water. His output shot up over 1,100% and his profits increased nearly six-fold. He is using the money to buy more nutritious food for his family and pay for his sons’ schooling.

This and other such stories can be found on http://blog.nextbigwhat.com/ microfinance-success-stories-worldwide-297/. These narratives are found on so many Web sites of MFIs that it seems to be practically a ritual to start a social entrepreneur’s Web site with these. Many videos on YouTube also tell such stories. The similarity of these stories or narratives indicates that there is a shared vocabulary being formed between development-oriented stakeholders to facilitate communication and create shared realities. According to Rhodes and Brown (2005), narratives are useful for studying sensemaking, communication, learning/change, politics and power, and identity and identification. In the microfinance field, these stories embody sense-making through the order in which actions appear, implying causation, and are used to build identification among stakeholders and institute change. Thus, the organizational storytelling view (Boje 1991; Mantere

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et al. 2013; Steyaert 2007; Lawrence and Maitlis 2012; Wines and Hamilton 2009) is broadened beyond the organization per se to include all the stakeholders that are participating, and storytelling creates a set of expectations and a common culture with them (Schembri and Latimer 2016; Marzec 2007).

4.2

The Development and Diffusion of MFIs

Certainly, efforts to reduce poverty can impact billions of people. There is a large social consensus that absolute poverty needs to be alleviated and a growing number of people recognize that relative poverty and inequalities are a problem. Although social consensus on how to reduce poverty is difficult to find, the institutional work of Microcredit Summit Campaign, the CGAP and the Microcredit Information Exchange certainly promoted the gradual buildup to a positive consensus on the utility of microcredit. The awarding of the Nobel Prize to Grameen Bank and its founder, Muhammad Yunus, also added to this perceived consensus. Regarding proximity, while the microfinance solution was generated in poor countries, it is being tried out even in developed countries as a demonstration of reverse innovation. Indeed, organizations such as ADIE have been present in France since 1989. It is often observed that microfinance has been concentrated in urban areas. In Bangladesh, Grameen Bank focused on rural areas. However, elsewhere, the scaling up has been in urban areas. In most of South Asia, microfinance was focused on poor women, but in other regions of the world, this gender emphasis has not been maintained. The size of the MFI also varies. In Dijon, a French city with a population of about 200,000 people, there is a microfinance organization called RITA which aims to give four loans a year because the volunteer workers do not feel they can follow up more projects than these. At the other extreme, organizations like Grameen Bank and BRAC in Bangladesh or Ujjivan and Bandhan in India have reached out to millions of people. The microfinance literature suggests that efficient cost management and standardization along the line of McDonald’s and Starbucks may be a key to scaling as found in ASA, Bangladesh (Khan and Ashta 2012), and SKS,

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India (Akula 2010), thus reinforcing the observation of Dempsey and Sanders (2010) that marketization of SE is considered as a key for success. As the MFI grows, it has the usual problems of any enterprise facing the need to scale: funding, control systems and information systems (Ashta et al. 2015a; Ashta and Khan 2015). Nevertheless, the need for funding creates additional problems depending on the type of funding that is being searched: donor or market. For those who rely on donor funding (private or public), the need to provide regular information on social performance, especially impact, becomes an additional burden. To escape the costs of donor funding and in view to increase growth by focusing on financial performance, some MFIs transform to for-profits and they are then accused of mission drift. This observation of commercialization of SE had already been noted by microfinance researchers (Morduch 2000; Mosley and Hulme 1998) and SE researchers (Kerlin 2006; Dees and Anderson 2006) before the Compartamos IPO in 2007. Finally, we must repeat that the dialectics of social innovation imply that there are conservative forces blocking the innovation, and, if it is successful, they may take over the innovation, leading to its ultimate demise as an independent entity (Ashta et al. 2014). For example, in India, the biggest MFIs are now becoming banks, and the statistics are bound to show a decline in outreach of the microfinance industry (Parekh and Ashta 2018). Impact: The microfinance industry is the poster child of SE: Yet opinions vary on its usefulness. Some extol its virtues (Imai et al. 2010, 2012; Pitt et al. 2006), and others consider it as a useless perpetrator of overindebtedness (Bateman 2010; Guerin et al. 2006, 2009; Sinclair 2012). Some express serious doubt on the usefulness of microcredit to really poor people to get them out of poverty but maintain that the microsavings aspect is useful for development (Schmidt et al. 2016; Collins et al. 2010; Rutherford 1999). Other scholars who seek to use business to transform the bottom of the pyramid (Prahalad 2006) have also been met with skepticism (Karnani 2007). However, such initiatives could be useful if they increase the capabilities of the poor by increasing their social capital or other capabilities (Ansari et al. 2012; Putnam 1995; Granovetter 1973). Figure 4.1 capitulates the discussion on dreams, storytelling and impact of microfinance in the value-based framework. The dream or the solution proposed is the value proposition. The storytelling about this dream leads

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Value CreaƟon or Value GeneraƟon

Story enacƟng

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Value Capture or Value AllocaƟon

The Story Dream/Vision/ Value ProposiƟon

Story telling

Story tesƟng, Story enhancing Value Sharing or Value DistribuƟon

Fig. 4.1 The link between dreams, stories and values

to subsidized resources. If these resources are obtained, the social enterprise that is created enacts the dream or the story. However, the continuation of the subsidies requires impact measurement to test the story and to enhance it if there are unintended benefits. For example, microcredit was given for financial inclusion, but it also led to women empowerment. This led to an enhancement of the story. However, the probability of the ability of microfinance in solving the poverty problem is more difficult to establish, and anecdotal evidence is available. The few scientific studies conducted were inconclusive (Duvendack et al. 2011; Banerjee et al. 2015). For example, a recent study concludes that some women show improvement, some do not, and some get worse off due to harassment (Ganle et al. 2015). Even the studies that do show positive impact (Crépon et al. 2015) do not provide the same results when replicated (Bédécarrats et al. 2019). Part of the reason is that for any positive impact on poverty, a lot of conditions need to coexist: The loans have to be given to poor people with the proper human capital and risk-taking capacity and used for productive purposes, with a return higher than the interest rate, preferably with the whole transaction producing domestic linkages and earnings retained in the poor economy (Servet 2019). Another part of the reason for the elusiveness of impact is a faulty design of impact measurement studies. Researchers focused on the

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immediacy of the impact of the solution by engaging in experiments and measuring outcomes over a year or two whereas poverty will take decades to solve through a graduation approach (Hashemi and de Montesquiou 2011). In this graduation approach, the hardcore poor are first given charity till they can build up their physical strength. Then they are taught to save and provided skills and assets. Access to microcredit is provided only once they are out of extreme poverty. Thus, microfinance advocates find that there is a role for charities before self-sustaining micro enterprise can find its place, allowing the poor to be responsible actors in the marketplace (Yunus and Weber 2007, 2010). They, therefore, admit that charity has an impact, at least temporarily. Even if outreach is taken as a proxy of financial inclusion, the results seem to be disproportionately low as per the Findex report for 2017 (Demirgüç-Kunt et al. 2018). The world average of people greater than 15 years of age having an account is 69%, pulled down by the vast amount of people in developing countries where the population is high and where only an average of 67% have an account. As a benchmark, in rich countries, over 90% would have an account. A focus on microfinance requires zooming in on developing countries. Probing beyond the average of 67%, we find that 61% have an account with a financial institution including banks and MFIs. However, percentages of people having an account with a financial institution are lower in the poor countries of Africa and the Middle East (43%); unemployed people (52%); young adults (50%); those with primary education or less (53%); the poorest 40% (53%). Evidently, those who combine these characteristics have lower number of bank accounts: For example, only 23% the poorest 40% in sub-Saharan Africa have an account with a financial institution (Demirgüç-Kunt et al. 2018). Since the primary purpose of the interest in microfinance was to encourage entrepreneurship as a way out of poverty, it is interesting to note from the same Findex report that 48% of adults over 15 years in the world and 43% in developing countries save. However, in the world as well as in developing countries, the percentage of people who use savings to start their business is only 14%. This percentage is slightly lower (8%) among the poor countries of Europe and Central Asia, Middle East and North

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Africa, and only 6% for unemployed people (those out of the labor force) (Demirgüç-Kunt et al. 2018). Similarly, 47% of adults in the world and 43% in developing countries borrow money from various sources and for various reasons. But for entrepreneurial finance, the data shows that borrowing for starting a business or farm (or for expansion) is about 11% of adults over 15 for the world but only 8% in developing countries. In the poorer countries of Latin America and the Caribbean, Middle East and Africa, only 5% of adults took a loan to start a business. These percentages are extremely low for the unemployed (4%), young adults (4%), those with primary education or lower (6%) and the poorest 40% of the population (6%) (Demirgüç-Kunt et al. 2018). Therefore, the dent made by microfinance in encouraging entrepreneurship seems to be limited. Non-economic impact is inadequately studied. For example, in one visit to a group of microfinance borrowers, all twenty ladies were proud that they could sign their names while only four could do so before joining the group. On a different occasion, a lady recounted that she has placed her daughters back into school when she found that the daughter of another lady in her microfinance group had obtained a job in a school after finishing her tenth class (Ashta 2016b). These idiosyncratic anecdotes are not considered in impact measurement experiments, but they tell important stories of what happens when positive circumstances are created, enabling people to learn from each other.

4.3

Transformation of MFIs and the Quest for Social Performance

The Movement to For-Profits: Half of the top Indian MFIs started as not-for-profits and later converted to for-profits (Ashta and Assadi 2010). Elsewhere, many of the top MFIs had already transformed from NGOs to for-profit in the 1990s: The list includes BancoSol in Bolivia, Financiera Calpià in El Salvador, Caja Los Andes in Bolivia, CARD in Philippines, BancoADEMI in Dominican Republic, Mibanco in Peru and K-Rep in Kenya (Campion and White 2001). In many cases, the for-profit was continued to be controlled by an NGO but assets were transferred.

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Such a transformation creates its own problems which surfaced when one of the most profitable and fast-growing microfinance organizations, the Mexican Compartamos, did an IPO in 2007. Compartamos was started in 1995 as an NGO and converted to a for-profit in 2000. The over-subscription of this IPO by thirteen times came as a shock to development researchers. This was a perfectly executed private equity-backed company which catered to the ethical position that market success would lead to competition coming in and more people investing in microfinance and helping to raise profits. Yet, instead of being congratulated, it received criticism from Muhammad Yunus and others who considered them loan sharks (Lewis 2008). The ethical criticism pointed to the high interest rates of almost 100% being charged to the poor, this being the source of the high economic value creation and most of this value captured by private shareholders as evidenced by market prices of the shares. Yet the Rawlsian ethical argument of the founders of Compartamos was that these high interest rates permitted high profits which permitted growth and the ability to finance more poor borrowers, who were the weakest part of society, even poorer than the existing borrowers (Hudon and Ashta 2013). In line with the theoretical proposition of Nason et al. (2018), Compartamos made a substantive response to this negative feedback and reduced its interest rates to about 80% per year. However, it also made symbolic related responses such as communicating that it had received awards for the best place to work in Mexico. This debate resurfaced when SKS microfinance did an equally successful IPO in India in 2010. The backlash on value capture that followed affected SKS negatively. It made a symbolic unrelated response by changing its name to Bharat Financial Inclusion Ltd. Thus, a study of both symbolic response types can add to the social performance literature as possible strategic responses of social enterprises. By and large, the microfinance sector has witnessed the fast growth of the for-profits, some of who have converted to banks. We have already mentioned that as the industry grew, many started straight away as for-profits. Impact investors also invest seed capital in for-profits because they buy shares in companies which give at least some positive return. The possibility and expectations of future positive returns undoubtedly went up owing to technology (Ashta 2011), notably information technology (Annamraju

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2015; Ashta et al. 2015a; Ashta and Khan 2015), that reduced operating costs, mobile technology that reduced distribution costs (Morawczynski 2011; Shrivastava 2011) and crowdfunding that reduced financing costs (Assadi 2016). Nevertheless, there are striking examples of NGOs (BRAC in Bangladesh, SKDRDP in India) which continue to grow, perhaps at more reasonable and sustainable rates. After all, ASA in Bangladesh, a for-profit known for its fast growth model, has witnessed variability in outreach. The Drift of the Social Promise: In the microfinance sector, the social challenge was to solve the problem of poverty through encouraging microentrepreneurship through the use of microcredit (Morduch 1999; Yunus 2003). Financial sustainability, outreach and impact were considered the three cornerstones of the success of MFIs (Zeller and Meyer 2002). As institutions transformed, a significant number of studies on mission drift in microfinance brought out the tension in pursuing financial and social bottom lines (Serrano-Cinca et al. 2016; Morduch 2000; Hai and Daft 2016). Research in microfinance has looked into this problem of mission drift from different angles: are MFIs increasingly becoming for-profits and whether they are still targeting the poor, the women and rural clients or are they progressively targeting the non-poor, men and urban clients? As MFIs converted to for-profits, the researchers reported a schism indicating that some are remaining true to their social mission while others are becoming profit-oriented (Morduch 2000; Mosley and Hulme 1998). The relationship between profits and esteem is complicated in microcredit. MFIs tend to be proud that 78% of them are now making profits, with 20% having a Return of Assets of greater than 5%, and 3% have a return even greater than 15% (Ashta 2016b). Even though more and more MFIs seem to have achieved break-even, the average loan size as a percentage of GDP per capita has not increased (Ashta 2016b) nor has the percentage of loans being given to urban areas (Mersland and Strøm 2010). It is difficult to assess whether the double bottom-line mission is drifting toward economic profitability or if the performance is in variance owing to inadequate social performance measurement (Copestake 2007). In any case, for-profit and not-for-profit MFIs seem to be true to the mission expressed in their mission statements, which may mention diverse

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goals such as reaching poor clients, women or rural areas (Mersland et al. 2019). The Quest for Social Performance: Perhaps one of the most interesting developments that came out from the inability to measure impact was that people started wondering if the microfinance organizations were well governed! This pushed the impact debate toward social performance, that is, to measuring the process and the controllable outcomes of the MFI. A Social Performance Task Force was started, and it grew quickly. The Social Performance Task Force (SPTF) is a non-profit membership organization with more than 3,000 members from all over the world. Our members come from every stakeholder group in inclusive finance. SPTF engages with these stakeholders to develop and promote standards and good practices for social performance management (SPM), in an effort to make financial services safer and more beneficial for clients. (https://sptf.info/ about-us2 on June 12, 2019)

Although the task force was created in 2005, very little was done in the first few years and the work really started after the first controversial IPO. It was only in 2012 that the SPTF was able to achieve an agreement on best practices for microfinance called the Universal Standards for Social Performance Management. This was updated in 2016 (SPTF 2016). The work of the SPTF nevertheless focuses on the working of the MFI: defining goals, aligning management and employee incentives to goals, product design and delivery channels, responsible treatment of clients and employees, and balancing the social and financial performance of the organization. One critical reason for the development of interest in social performance was that MFIs were increasingly for-profit, and investors are interested in execution more than just ideas and stories. In microfinance, it has already been noted that a successful social entrepreneur needs to be an institutional entrepreneur too (Marti and Mair 2009; Mair et al. 2012). Such institutional work of sense giving needs to be done to prepare the stakeholders for the transformation of social enterprises from a predominantly social orientation to a more hybrid orientation. It was the insufficiency of institutions (regulation, in this case) that led to the uncontrolled growth of for-profit microfinance in Andhra Pradesh

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creating problems of stress and suggestions of possible links to suicides (Ashta et al. 2015b), which then resulted in stronger suffocating legislation destroying not only the wrongdoers but even the more socially minded entrepreneurs (Ashta 2016a). Had the social entrepreneurs worked to create rules and norms before the crisis, the microfinance industry would not have as bad a crisis in that State in India.

4.4

A Shift in Perspective to Financial Inclusion

We have seen so far that in the embryonic stage, modern-day microfinance started with a story of uplifting people out of poverty and that this dream was sold to stakeholders. We have also seen that although the industry grew, in the next stage, and made profits, impact on poverty alleviation was not proved. We also saw that there was a shakeout of some NGOs and the entry of more for-profits in this stage. This industry trend led to two different developments in policy as well as research: one on the supply side focusing on the MFIs and the other on the demand side focusing on the poor. We have just seen the supply-side focus shifted to the performance of the MFIs. Since there was a large database of MFIs supplying data to the Microfinance Information Exchange (MiX), researchers focused on this supply side and on “social performance.” However, the parallel movement of focusing on the demand side also developed: If microfinance could not alleviate poverty, global policy makers focused on financial inclusion to see if the poor could be provided the basic capabilities to tap financial resources. This led to the development of Findex database by the World Bank. The Findex data is available for 2011, 2014 and/or 2017 for 182 countries or regions (essentially, aggregation of countries). Of these, data for all three years is available for 123 countries, without aggregation. In the Findex report, the bottom 40% of the people are classified as poor. An examination of this financial inclusion data of the poorest 40% for the 123 countries shows that, depending on the country, the financial services industry is usually either in the growth, shakeout or maturity stage, but there are still examples of countries where less than 10% of the poor have an account with a financial institution (bank or MFI).

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These countries would be in the introduction stage. Some countries have reached market saturation, and, among these countries, some are in the decline stage. The percentage of these people who had a bank account can be taken as a measure of their financial inclusion. The six-year growth (Compound Annual Growth Rate or CAGR) of financial inclusion during the 2011–2017 period is plotted in Fig. 4.2, after removing the outliers who grew more than 40%, in the interest of legibility. These outliers were low financial inclusion countries such as Niger and Afghanistan as well as some moderate financial inclusion countries such as the Kyrgyz Republic and Tajikistan. As expected, it is found that growth rates come down as the market is saturated, which is the case of most of the OECD countries. Figure 4.2 shows some distinct clusters. Starting from the left, one can observe a handful of countries with less than 10% of the poor having an account. Then, moving toward the right of the graph, one can observe many high growth financial inclusion countries which seem to taper at about 50% of financial inclusion. Then, from 50% financial inclusion, we see a packet of low growth (in financial inclusion of the poor) countries till about 90% financial inclusion, and finally a dense cluster of mostly developed countries in the extreme right. The negative slope of a regression line is normal since growth rates are high when the base is small. To delve further, the first period CAGR (2011–2014) was separated from the second period CAGR (2014–2017). The embryonic stage was considered to last till 10% of poor people had an account.Thereafter, access was seen to grow at rates over 30% per year for many countries having a financial inclusion rate between 10 and 50%. For countries with 50–70% financial inclusion, there is a slowing down of growth, with second period CAGR positive but less than the first period CAGR, corresponding to the shakeout stage. The next cluster was countries which had 70–85% financial inclusion but with a very low CAGR. These countries were in maturity stage. Finally, those with over 85% were sometimes declining in the second period and have been listed them in the decline stage. Not all countries fit these neat categories. Figure 4.3 illustrates all this with five examples of countries in each stage, using this visual observation of clusters. South Sudan was included even if it had no data for the first two surveys because financial inclusion in 2017 was less than 4%.

Peru

Colombia Armenia Botswana

Bolivia Nepal

Uruguay

South Asia

India

Chad

Zimbabwe

Kenya

% of BoƩom 40% having a bank account

Chile Georgia Saudi Arabia ArgenƟna Venezuela, RB Vietnam Mauritania Dominican Republic Mexico Ghana Philippines Ukraine Nigeria Madagascar Bangladesh Russian FederaƟon Burkina Faso Malaysia Lebanon Costa Rica Cameroon Uzbekistan Kosovo South Africa United Arab Emirates Tanzania Algeria Brazil Belarus China West Bank and Gaza Italy Montenegro Ecuador Kazakhstan Bulgaria Iran, Islamic Rep. Poland Malawi Serbia Albania Mongolia MauriƟus Thailand Sri Lanka Romania Portugal Greece Turkey Luxembourg Lithuania Bosnia and Herzegovina Bahrain Austria United States Latvia Slovak Republic Hungary Israel CroaƟa Rwanda France 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0% Czech Republic Netherlands Macedonia, FYR Denmark Kuwait

Azerbaijan

Zambia Uganda Jordan

Indonesia

Honduras

Gabon Moldova

Egypt, Arab Rep. Togo

Congo, Rep. El Salvador Nicaragua

Mali

Senegal

Pakistan Iraq

Guinea

Financial Inclusion (extent versus growth) Benin

Fig. 4.2 Financial inclusion of the poor: extent versus growth

-10.0%

-5.0%

0.0% 0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Congo, Dem. Rep.

CAGR over six years

40.0%

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Financial inclusion of the poorest 40% in 2017 in terms of account with a financial insƟtuƟon Growth rate

2nd period CAGR less than 1st period CAGR

Maturity Low CAGR

CAGR > 30% 2nd period CAGR negaƟve

Shake-out

Decline

Growth Embryonic South Sudan Madagascar Chad Niger Congo, Dem. Rep.

0

Tajikistan Cambodia Afghanistan Benin Uruguay

10%

Ukraine Bulgaria Turkey Venezuela, RB South Africa

50%

Spain France United Kingdom Slovenia Estonia

Bahrain Slovak Republic Greece Cyprus

70%

85%

Based on a Sample of all 182 countries in Findex 2017 database

Financial inclusion %

Fig. 4.3 Example of different stages of growth applicable to different countries

Not every poor person who has an account from a financial institution takes a loan from a financial institution. The Findex database provides statistics for the poor 40% who borrow from financial institutions. The correlation remains high at 0.59: countries with more bank accounts for the poor also have more poor people taking loans. There are countries where loans to poor persons are growing. However, as one can see from Fig. 4.4, which removes a few outliers, the pattern is less clear than for bank accounts. First, on the right, there are countries which have a large percentage of poor borrowing from FIs but have modest growth rates. These are usually developed countries, with poor people from Israel and New Zealand being the most indebted. However, Armenia and Mongolia also have a high proportion of poor borrowers. Second, in most of world, growth rates of indebtedness of the poor vary from −10 to 30% and the pattern is not easily visualized. The growth rates are the average (CAGR) over the last six years. This means that many countries have seen microcredit to the poor decline, as witnessed by the negative growth rates in many countries. The percentage of people borrowing is more volatile than the percentage of people having a bank account. In a way, it is reassuring that not all the people who have a bank account (an indicator of access to credit) need to borrow.

South Africa Ghana Lithuania Latvia Honduras

Luxembourg Australia CroaƟa

United Arab Emirates Germany Czech Republic

5.0%

Georgia

France

Linear (Series1)

Poland

30.0%

Israel

35.0%

% adults borrowing from FI, poorest 40%

25.0% Iran, Islamic Rep.

Cambodia

Armenia New Zealand Mongolia

Slovak Republic United States Vietnam

Canada

Kazakhstan

United Kingdom Austria Lebanon

Uruguay

Romania

Indonesia

Chile

Nepal

Russian FederaƟon

Italy

Jordan

10.0% Bolivia 15.0% 20.0% Peru Spain Finland Korea, Rep. China Hungary Slovenia Sweden Malawi Denmark India Sri Lanka Mexico Botswana Bosnia and Herzegovina Bahrain Afghanistan Azerbaijan Thailand Kuwait Albania Uzbekistan MauriƟus Kyrgyz Republic

Senegal

Benin

Kenya Tajikistan

Nicaragua

Malaysia

Turkey Saudi Arabia

Kosovo Costa Rica Cameroon Ecuador Madagascar Japan Bulgaria Ukraine Tanzania Philippines Colombia Moldova

Nigeria

Pakistan Algeria Congo, Dem. Rep.

El Salvador

Brazil

Togo

Burkina Faso Zambia

Congo, Rep.

Mali

Guinea

Gabon

Borrowing from a financial insƟtuƟon Extent versus growth, boƩom 40%

Fig. 4.4 Borrowing from financial institutions for poorest 40% in different countries: extent versus growth

-10.00%

-5.00%

0.00% 0.0%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

CAGR over six years

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The diversity in these countries brings out the importance of examining each country specifically to understand its life cycle. And within the country, the financial inclusion analysis has used the perspective of the borrowers rather than the organizations supplying microcredit. Thus, any theory on SE life cycle needs to consider this transformation phenomenon as it may have repercussions on many aspects. This chapter has reviewed the research on microfinance and suggested the importance of storytelling to obtain subsidies. The continuation of these subsidies requires continuous reporting and demonstration of impact. In this chapter, we find that the main reasons for transformation of not-for-profits to for-profits in this sector seem to be that managing stakeholders, notably donors, has high transaction costs and that impact cannot be proved. Therefore, social entrepreneurs feel that they could have greater outreach and growth if they adopt a for-profit model. This also reduces the agency problems that multiply when pursuing a double bottom line. However, we have seen that along with the faster growth through transformation, the focus of the investors shifted from impact on the target to the social performance of the firm. Owing to legacy issues, the transformed organization in the sector may face public criticism. At the same time, eyeing this possible faster growth, banks may partner with NGOs and eventually take these over. However, we find that the life cycle of microfinance is different in each country, and therefore, while this transition may have taken place in many countries, it may not yet have occurred in other countries. The latter could therefore learn from the experience of the former. Chapter 5 will abstract the learning from the microfinance sector to develop a theory on SE. All grounded theories start with one case, or a few cases, but are falsifiable. What is interesting is that each case can provide an insight that could be useful for researchers and practitioners. Chapter 6 will conclude and provide future research directions.

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5 Extending the Realistic Theory to a Dynamic Life Cycle Theory of Social Enterprise

Abstract How can the development of microfinance in developed countries (Chapter 3) and in developing countries (Chapter 4) inform theory and make it evolve from a static theory to a more dynamic one? Ashta’s significant contribution in this chapter is to summarize in a theoretical framework, that of the industry life cycle, the different propositions for social entrepreneurship that emanate from a study of microfinance. His first eight propositions came from the static realistic theory, but even some of these are modified, once he includes the discussion of life cycles. The last four propositions are new and come largely by studying the evolution of financial inclusion initiatives in developed countries. Keywords Social entrepreneur · Social enterprise · Transformation · Subsidies · Microfinance · Stakeholders

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The introduction of this book showed that SE is important but that the theory-building process has only started recently (Chapter 1). Chapter 2 had focused on some key aspects of SE theory and highlighted its static nature as one weakness: its failure to explain transformation of notfor-profit SE to for-profit hybrids and to commercial entrepreneurship. Chapter 3 had invoked the life cycle theory as a dynamic theory that explains that industries move in phases and that this could be applied to the history of microfinance. Microfinance was chosen as an exemplar of a social entrepreneurship sector, and it is seen in Chapter 4 that in modern-day microfinance, firms do convert from NGOs to for-profits. This chapter now needs to abstract from this and see how it could impact SE theory and build on previous reflections forming the realistic theory. The initial, static approach to a realistic theory of social entrepreneurship had nine propositions (Ashta 2016b, 2019), eight of which were summarized in Chapter 2. In this chapter, the static realistic theory is modified and enhanced to a more dynamic theory. Some of its first eight erstwhile propositions have cosmetic changes. In many of these modified propositions, an alternative has been added since each proposition can be a basis for future research. The original ninth proposition is dropped since it was merely constraining the concept. Later, four more propositions are added to extend this theory into a dynamic realistic theory of social enterprise. A word of caution: The study has focused largely on the microfinance experience, both current and past, and this may need to be used with prudence when dealing with other sectors, especially non-financial ones. A picture can paint a thousand words: A visual model helps to clarify a theoretical model, indicating the causal links suggested by the theory, even if they are not verifiable (Whetten 1989; Cornelissen 2017). Accordingly, Fig. 5.1 provides a visual overview of the first eight propositions of this study. The first five of these propositions concern the social entrepreneurs in the embryonic stage of the industry when subsidies are really required. The sixth, seventh and eight are also relevant in the growth stage to question if subsidies are still required.

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Social Entrepreneur

P1

Dream

Society/ Benevolent Stakeholders

P3, P4

Story Telling to sell dream

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Dream eīecƟvely sold?

Shared Dream P6, P8

P2

Social Enterprise

Delivering social results?

Provide Subsidized Resources

Proof of Impact

Is there need to parƟcipate ?

Dream compelling acƟon? P8

P7

Is impact credible?

Society/ Beneficiaries

SƟll believe in dream?

Society/ Watchdogs

Fig. 5.1 The process of the creation of social enterprise (embryonic stage)

5.1

The Embryonic Stage

Creation and Motivation: In this theoretical formulation, the motivation of social entrepreneurs for leaving value on the table does not come only from “other’s regards,” but also from inherently believing in one’s own story. Others who are told the story also supply subsidized factors. A successful pilot project reinforces the belief that the dream may come true: When there is a positive impact, it increases self-esteem of the social entrepreneur. It also reinforces the motivation to continue the work, both for the entrepreneur and for their subsidizing stakeholders. As pointed out by Lowe (1995), “having clarity of vision or even an audacious dream is the essential prerequisite for creativity. Such a dream has an all-consuming drive to create something which will have an existence all of its own” (Lowe 1995, p. 66). Some social entrepreneurs are willing to abandon family life to create something that will benefit the poor (Venugopal and Abhi 2013). To compensate for this sacrifice, society is joining in the social entrepreneur’s endeavor. So, SE is not just about solving social problems, but about getting society to participate in solving

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them. However, social entrepreneurs may not be the only ones to initiate action by stakeholders. For example, the development credit corporations in the USA were started by syndicates of banks in 1949 in Maine to solve the problem of unavailability of micro- and small business finance. Here, the political actors in some States threatened to form a governmental agency, and in response to such a threat, banks got together to start development credit corporations to finance micro- and small businesses. To avoid direct competition with established banks, the loan applicants to development credit corporations were required to show that they had been refused financing by a bank (Koistinen 2012). This practice is followed by the largest microfinance NGO in France, ADIE, which has credit lines from several banks and offers microcredit only to recipients who can prove that they have been denied credit by banks. SE includes not only new innovations, but also replicators. Replicators too have a dream to solve a problem, but they are open-minded as to choosing a new or established model. For example, ADIE itself was started by Maria Novak who was impressed by the work of Yunus and wanted to replicate it in France. Whether an innovation or a replication, the dream includes the end results for the target population as well as the innovative process by which these would be achieved. While there may be social entrepreneurs who get into action without any clear course and work their way to improve their model, they all start with a basic dream. Proposition 1 Social entrepreneurs start with a dream to solve a social problem faced by a segment of society. The alternative to this would be that they find themselves heading a social enterprise without having a clear value proposition. The causal linkage is not explicit, but what can be inferred is that without a dream, which includes the vision of a solution to a social problem, the social entrepreneur does not start. Chapter 2 had summarized the different motivations of social entrepreneurs as found in SE theory. This was covered in Proposition 2 of SRT that is repeated now as Proposition 2A.

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Proposition 2A Social entrepreneurs are motivated by a mix of their need for esteem, feelings of passion and compassion, their bent for problem solving and creativity and the availability of resources to make their dreams come true. However, the study of life cycles of developed country microfinance showed that the motivation may be from a threat of governmental action to have the State provide loans. The private sector banking actors therefore may be spurred to take action to initiate cooperatives like mutual trust funds to cater to the niche sector of poor excluded borrowers (Wadhwani 2011). The 2B proposition therefore shows that the original proposition did not take account of the reasons why banks may start their own Montes de Piedad or their own savings organizations. Proposition 2B Social entrepreneurs may also initiate action to protect their markets from government action. We had also seen in Chapter 4 that the balancing of motivations is a delicate act in which the time in dealing with donors is compensated by time not spent in increasing outreach. As it becomes clear that the social enterprise can be sustainable, the priorities shift in moving to for-profit hybrid forms of social enterprise and, as the market develops, to pure commercial forms. The 2C proposition takes into account that global stakeholders such as CGAP may influence the entrepreneur to focus more on outreach, efficiency and market mechanisms. It is a clash of logics, external to the entrepreneur, that causes the agency for transformation (Friedland and Alford 1991; Thornton 2001; Battilana and Dorado 2010; Pache and Santos 2013; Parekh and Ashta 2018). The proposition also implies that if motivations do not evolve, some social entrepreneurs may not transform their enterprises. Therefore, we could find the co-existence of not-for-profits, for-profit hybrids and commercial enterprises. Proposition 2C These motivations evolve owing to stakeholder interaction and may lead to transformation of the enterprise. An Element of Subsidy in Resource Procurement: SEs also obtain subsidies for resources. For example, MFIs are able to get free funding from

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donors as well as subsidized financing from impact investors. Customers in their target segment are willing to pay more for their services than banks charge to richer customers. Business partners such as information system providers and rating agencies are willing to develop specific products for the niche microfinance market. Governments are not only willing to provide subsidized public infrastructure but also willing to delay regulation to see if the sector delivers. Media is interested in covering the work of social entrepreneurs and help to sell the story. Other NGOs are willing to partner and provide complementary services which would be too expensive if provided by commercial partners. Academics are willing to research and provide practical and policy recommendations to make the sector succeed. Even Grameen Bank, the MFI considered the prototype of SE, obtained subsidized financing in the initial stages. In short, the theory is incorporating a framework of motivated agents who need lower financial incentives (Besley and Ghatak 2005). Some social entrepreneurs may use their own savings for their social enterprise, but their return on these savings will be lower than what financial markets could provide. Similarly, for-profit hybrid enterprises may combine commercial and social ventures if their founders are convinced that internal transfer pricing or subsidy allocations from the commercial part of the enterprise are better than donations from external stakeholders or if, ideally, the commercial and social aspects can be complementary (Battilana et al. 2012). Based on this, we can maintain a third proposition. Proposition 3A Not-for-profit social entrepreneurs need to obtain subsidized resources. However, we have noted in both the microfinance literature (Hudon 2010; Becchetti and Pisani 2010; Cull et al. 2018) and the SE literature (Brooks 2000; Dees and Anderson 2006; Kerlin 2006) that there is a trade-off between subsidies and costs. This trade-off may be one of the reasons for transforming NGOs into for-profits because entrepreneurs feel they are spending too much energy on obtaining subsidized financing rather than reaching out to more people. The cost would include the transaction cost of having to modify the entrepreneur’s original value and beliefs to take into account the stakeholders’ values and beliefs. Therefore, Proposition 3B is added to incorporate this evolution that may later lead to a tipping

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point where the social entrepreneur-manager looks at for-profit hybrid or commercial models. Proposition 3B These subsidies create hidden costs which increase as the social enterprise grows. The Merchants of Dreams: SE research, as well as observations from microfinance, indicates that subsidized resources are obtained because the social entrepreneurs are able to dramatize a problem and indicate that their solution leads to an interesting vision. Often, a part of these dreams are displayed in the vision and mission statements of the social enterprise. What differentiates mission and vision of social enterprises from commercial enterprises is the focus on a deprived section of society (Ashta 2018). This vision resonates with a section of the population that is seeking a higher calling to do meaningful work and that is willing to work long hours at low pay, sacrificing personal health, family life and social life (Dempsey and Sanders 2010). If the social entrepreneurs are not able to convince others that their solution could be an effective way to solve the problem, they would not be able to obtain subsidies from others. Proposition 4 Social entrepreneurs obtain subsidized resources by selling their dreams as effective ways to solve a social problem for a deprived section of society. Selling Through Storytelling: Social entrepreneurs and microfinance practitioners both use storytelling extensively. Indeed, there seems to be some isomorphism in the narratives and this itself raises their perceived legitimacy (Nicholls 2010). This storytelling is true also for other empowerment initiatives which transform women’s lives and then use the success stories to inspire others to join in the social enterprise (Haugh and Talwar 2016). A significant element of these stories is that they are dealing with the poor, the disabled, women or other disempowered members of society. At the heart of SE are fellowship organizations and foundations such as Ashoka, Schwab and Skoll. All of these tell the stories of heroic social entrepreneurs on their Web sites (Nicholls 2010), and their role is to create buzz (Mauksch 2017). While membership of such organizations or categorization as B-Corps could help in selling dreams, all members

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do not seem to use category promotion to sell their dreams (Gehman and Grimes 2017). Proposition 5A Social entrepreneurs use storytelling as a powerful way of selling dreams to obtain subsidized resources. Indeed, as the enterprise grows, the focus shifts from the entrepreneur to the enterprise, and the stakeholders become interested in the ways that the enterprise will align itself with their objectives. The 5B proposition has been added to indicate that as social entrepreneurs shift from requesting charities to seeking impact investments and then to market finance, the focus of the story may change from society to internal corporate performance. This focus on governance therefore becomes a key aspect of social enterprise literature (Defourny and Nyssens 2010). Proposition 5B The stories would change to focus more on governance when the enterprise shifts its focus to obtaining market finance. Focus on Social Problems Compels Action: Storytelling, like fictional narrative, stimulates emotions, opens the mind and leads to visualization of possibilities that the reader may not have thought of (Oatley 1999; Marzec 2007). By attracting attention and transporting the reader into the world of the narrator, it provides possibilities of empathy and behavioral change (Dailey and Browning 2014) and may lead to increase in charity (Zak 2013). The stories of social entrepreneurs are different from those of commercial entrepreneurs, since they are aimed at garnering different stakeholder support. Accordingly, they are focused on social problems and the need for action as an investment rather than for consumption. The stories are made compelling by demonstration, ratification and appealing to charity, often dramatized by SE network associations. As mentioned by Mauksch (2017), the best example of the theater of SE is provided by the presentations of Muhammad Yunus, the recipient of the Nobel Prize for microfinance along with the Grameen Bank. If stakeholders find that the dream could be a commercially viable project, they would not commit society’s resources. Therefore, the social entrepreneur needs to make the need for subsidies apparent.

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There is no reason why vision should lead to positive action (deliberate path) and not the inverse: action leading to vision (emerging path) (Waddock and Steckler 2016). However, in both cases, the aspiration to make a difference is the first step toward SE (Waddock and Steckler 2016). For example, for Vijay Mahajan of BASIX (an MFI), the “urge to work to reduce poverty and unacceptable inequality” was an aspiration for which he explored many different alternatives till he found his path of action, which in turn led to commitment and a decade later to the creation of his MFI (Ashta 2016a). Social entrepreneurs who start with action would obtain funding and subsidized labor later, once they have a salable vision. The emphasis is on the credibility of the entrepreneur and their ability to transform their vision into reality. While Ruebottom (2013) finds that this rhetorical strategy creates legitimacy for overcoming resistance to social change, it is proposed that the rhetoric can be compelling enough for pro-active support to the social entrepreneur through the provision of factors of production at lower than market prices. It is the achieving of this subsidizing that differentiates the social entrepreneur from the commercial entrepreneur. Since stakeholders can buy into many competing and complementary dreams, if their funding is limited, they would tend to finance the dreams for which they feel the entrepreneur cannot find commercial funding. Stakeholders may also be watching each other and see who would finance the cause and to what extent. For example, government subsidies may crowd in private donations up to a certain point and beyond this point, they may crowd out private donations because private donors may feel that their money is irrelevant or because the NGO is perceived as an extension of the government (Brooks 2000). Proposition 6 The storytelling used by social entrepreneurs compels action on the part of stakeholders. It is also possible that in the process of selling the dream, the social entrepreneur must mold it to fit into the larger ecosystem of the dream of the funding agency. Thus, some amount of compromise and adulteration of the original dream may take place, creating another reason for transformation.

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Growth or Transformation from NGO to For-Profits

As the enterprise moves from the embryonic stage to the growth stage, attention shifts from the social entrepreneur to the not-for-profit enterprise. However, the entrepreneurship function of continuing innovation for long-term survival remains. For commercial enterprises, the embryonic stage is followed by one of fast growth. The problems of managing this fast growth in commercial enterprises are well known: requiring careful attention to profit margin, asset turnover, dividend or retention policies and financial leverage (Ashta 2008; Higgins 1977). However, for not-forprofit social enterprises, the dividend question is replaced with one of subsidies. Recent research shows that social enterprises who scale differ from those that do not in terms of developing capabilities to attract subsidies as well as earned income, and these are reinforced by a stewardship culture that enhances employee motivation to work harder (another form of subsidy if the higher work is not paid more) (Bacq and Eddleston 2018). Thus, a balance between different forms of earned and unearned income is inherent. Since raising subsidized funding requires constant efforts which could be better spent in increasing outreach, this stage leads to the question whether the NGO model is adequate. Some social entrepreneurs may stick to their original vision and mission and decide to sacrifice growth for possible impact. Demonstrating Impact: It has been indicated that the social entrepreneurs initiate their social enterprise by selling a story compelling action on the part of stakeholders. This storytelling raises subsidized resources by which the entrepreneur can start. However, the continuance of the subsidies requires a demonstration that the story is not only plausible but that the innovation does alleviate suffering effectively in at least a part of the target population. The social entrepreneurs use continuous impact measurement as a communication device to show that the results are good.

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Proposition 7A Social entrepreneurs need to use impact assessments to reinforce their story to continue reception of subsidized resources. In microfinance, this impact has been difficult to prove. We saw in the introduction that researchers disagree on whether there is any positive impact. Chapter 4 showed that in parallel to attempts to measure impact, an attempt was made to show that the organization itself was focusing on best practices of social performance. As the industry moved, the focus of microfinance research also shifted from impact to performance (GutiérrezNieto and Serrano-Cinca 2019). Proposition 7B Difficulties in measuring impact may lead to focus on performance of the enterprise ( governance, outcomes) rather than impact on the target population. In fact, Proposition 7B may be the motivator of a feedback to Proposition 5B: Because social entrepreneurs may not be able to measure impact, they may change their stories and target market finance rather than subsidies. This may then lead to the transformation. The Schism or Transformation: If social entrepreneurs are motivated by compassion and if they are willing to leave money on the table to do good and if stakeholders are providing subsidies, why would microfinance entrepreneurs have converted their enterprises into for-profit hybrids or commercial enterprises? A first explanation could be based on transaction costs and we saw this in Proposition 3B. Impact assessments are expensive and difficult and their results debated, especially since social factors are not easily measurable. At the same time, the continuance of subsidies requires that the social entrepreneur spends considerable time and energy to continuously enchant and seduce stakeholders and demonstrate impact and report this. At some point, some social entrepreneurs may even start becoming sensitive to critiques, such as those raised by Mauksch (2017) that their strategies of seduction are manipulative. Others may get tired of attempting to implement a dream which is modified by subsidizing agencies. They may, therefore, switch to the mainstream model and become forprofits or hybrids (Battilana et al. 2012). Finally, with the growth of the number of not-for-profits, even if total government subsidies increase, the

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competition for subsidies may reduce average subsidies available for any one NGO pressurizing them to look for commercial revenue (Kerlin and Pollak 2018). This focus on financial performance may lead to employing highperforming managers, who then capture some of the benefit, as was the case of the Irish loan funds (Hollis and Sweetman 2001). This is present not only in the microfinance sector but also in other publicly owned NGOs too where executives ask for salaries rivaling those of the best private sector enterprises (see Crompton and Jupe 2007 for the example of Network Rail). If the NGO continues to receive subsidies, there is an ethical question of using public funds for private benefits. This problem was captured in Proposition 7B. Faced with these difficulties, the social entrepreneurs may wonder if it is not simpler just to make the enterprise more profitable by cutting costs, increasing prices to beneficiaries and sacrificing some social performance. Chapter 4 indicated that technologies such as management information systems, crowdfunding and mobile communications have played a great part in lowering costs and increasing scale in microfinance, both of which lead to higher expectations of positive future returns, stimulating impact investments in hybrid for-profit ventures. The existing not-for-profit social entrepreneurs may also find it worthwhile to increase outreach and reduce social outcomes. For this, they may end the not-for-profit social enterprise and make it a for-profit social enterprise. This has been the case of Compartamos and SKS and a host of other MFIs. Of course, if the entrepreneurs have lost their dream, at some point those sharing their dream will also wake up. They do so when the entrepreneur starts making their financial profits visible. Of course, if the social entrepreneur could justify that the high financial profits are accompanied by high social impacts, society would consider him extremely efficient. But since the present state of research has difficulty in measuring social impact, society assumes that high financial profits or high salaries of managers have meant the sacrifice of social returns. Therefore, just as high government subsidies crowd out private donations (Brooks 2000), there may be a scale effect indicating that high manager salaries crowd out public subsidies and private donations.

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A second explanation could be based on institutional norms and beliefs. There is a growing literature which indicates that there is an increasing pressure on marketization of social enterprises which are expected to use subsidies in an efficient manner (Dempsey and Sanders 2010). The microfinance practitioners were very influenced by the pro-market logics of CGAP, the World Bank and IFC. The narratives of these influential global actors indicate that they take an investment approach to subsidies where the donations should build the infrastructure to finally make the sector autonomous. Social entrepreneurs who are influenced by this logic lose their dream and focus on financial sustainability. Therefore, they too cut costs and increase efficiency and lose social goals and, eventually, stakeholder support. This explanation was captured in Proposition 2C. Logically, once the enterprise or cause for which the social entrepreneurs are fighting can be provided by for-profits, the raison d’être for the SE ends, and it becomes a commercial enterprise. By this stage, the social entrepreneurs would have created the institutional pillars on which commercial entrepreneurs can take over. Many MFIs today start directly as for-profits. Indeed, once it has been shown that for-profit models can work, others copy the model. This was perhaps conversely implicit from the definition of Tan et al. (2005) who recognize that social entrepreneurs may become for-profits later. Another similar explanation could be gleaned from the American insurers (Blue Cross and Blue Shield) who converted to for-profits. Till the 1970s, these not-for-profits had 50% market share with all commercial insurers sharing the rest, thus allowing the two not-for-profits to negotiate considerable discounts (Feldman and Greenberg 1981). However, in the 1980s, the for-profit commercial insurers challenged the federal taxexempt status of the not-for-profits in the 1980s. With lower tax advantages, the not-for-profits could not compete with the for-profits. Blue Cross and Blue Shield found they were left only with high risk customers and that they would have to either charge very high premiums or close down owing to high compensation claims. For a long time, they continued charging high premiums but commercial insurers gained market share (Robinson 2004). Thus, the Propositions 2C, 3B and 7B on evolving motivations, changing institutional beliefs and the possibility of enormous profits, have

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helped form the basis of the dynamism of the extended realistic theory. These explanations for transformation are not found in theories which focus on identity of the entrepreneur for creating the enterprise (for example, Wry and York 2017); such theories are difficult to adapt to the reasons for transformation because they do not explain why identities change and, moreover, why role and personal identities of entrepreneurs would change in the vast majority of cases from purely not-for-profit to balanced or mixed to purely commercial and not vice versa. The latter is important because when purely entrepreneurial firms add a corporate social responsibility approach, or a triple bottom-line approach, they are moving from a pure entrepreneurship, slightly toward a SE model (Schneider 2017). We nuance our propos with “slightly”, because a move to add a small CSR dimension does not make the commercial enterprise a social enterprise. For example, the purely entrepreneurial firm Microsoft may provide funding to extend broadband connectivity to rural areas as part of its CSR, but this is linked to its business model. In our industry life cycle-based model, these reverse movements are not visualized, but future research may find black swans. Proposition 8 The subsidies would end if the not-for-profit social enterprise becomes a for-profit hybrid or commercial enterprise or if there is visible evidence of private capture of public subsidies. Therefore, at the middle of this second stage, some not-for-profit social enterprises will transform into for-profit hybrids or commercial enterprises. From microfinance, the evidence seems to be that shareholderbased governance systems as well as better salaries for employees (instead of a dependence on volunteers) lead to faster growth than the NGOs who continue to be subsidy-dependent. As growth takes place and the enterprise crosses the break-even, the need for social justification further reduces and the entrepreneur can focus on financial sustainability. Indeed, the NGOs may be forced to focus on the financial bottom line owing to competition from commercial enterprises. Even after converting to for-profits, the firms may keep vestiges of social mission. This is illustrated in Fig. 5.2. Proposition 8 which featured in Fig. 5.1 earlier is repeated in Fig. 5.2 to show the link between the two.

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Life cycle of Social Enterprises

P10

Revenue

P9

P11

Shakeout Stage (Alliances and crisis owing to past image)

Maturity stage

Faster Growth stage for firms who become for-profit P8

P12

Firms that transform into commercial enterprises

The shared dream ends Common Embryoic stage

Decline stage

Firms that remain as NGOs

Time

Fig. 5.2 The industry life cycle of the social enterprise

Proposition 9 The transformed commercial enterprises would be on a steeper growth curve compared to the social enterprises.

5.3

Shakeout

In this stage, the large enterprises approach market saturation. Extant theory indicates that some will merge with others, and some will be driven out by competition. We can add that, from the microfinance experience, the previous image of the MFI being a social enterprise may harm its image as a commercial enterprise and may even harm the industry. This is because stakeholders expect the enterprise in an industry to behave according to their expectations, grounded on its previous not-for-profit status. These expectations are slower to change than the decisions of managers to transform. Therefore, there would be a clash between social expectations

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on social performance and actual social performance. This tardiness of social expectations to change may also be matched within the firm in the hesitation of the transformed enterprise to change its vision and mission statement (Ashta 2018). This suggests that social entrepreneurs who transform to commercial enterprise need to maintain a fine line in managing profits: to be profitable but not too profitable so that the public stakeholders who formerly subsidized the sector do not feel that their money has gone to private pockets. The experience of SKS and Compartamos suggests that high financial performance may lead to negative stakeholder feedback. Proposition 10 In addition to mergers and alliances, the shakeout of hybrid for-profits and commercial firms may stem from stakeholder revolt if the high profitability of the former not-for-profit social enterprise comes into the public eye. The theoretical advantage of the social enterprises that became for-profit is that most of them are larger and the one which grew the fastest may have more market share and cost efficiencies to survive. However, for those that remain NGOs, the answers are no longer clear. First, certainly they are facing competition from market-oriented firms, but the NGOs pricing may still benefit from subsidies. Second, they have the advantage of remaining local and having deep relationships with their clients in such local niches. If they are genuinely creating impact, this survival itself is a testimony to their usefulness in accompanying their target population through meaningful services. There are many markets where microfinance has reached saturation. They come to attention because the competition leads to multiple lending to the same borrower, which leads to over-indebtedness and increase in non-repayment. However, it is too early to make any propositions on whether NGOs who remain local will be shaken out. Niche not-for-profits in underserved areas may continue to exist. After all, if the industry life cycle is country specific, as shown by the financial inclusion data, it may also be region specific within large countries, especially within federal countries where legal competency for that industry may rest with the States rather than at the federal level.

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Maturity

There is little research on the maturity of social enterprises based on the modern-day microfinance experience in developing countries, although Massele and Fengju (2016) suggest financial indicators appropriate for this period. The market having been bifurcated into two segments, one could expect that maturity of NGOs will be at a lower level of outreach than those of the enterprises which became commercial. However, one could also find that some NGOs that are truly efficient and providing social impact continue to grow and reach maturity later, when commercial organizations may have already started their decline. The examples of NGOs like BRAC in Bangladesh and SKDRDP in India show that multi-purpose NGOs may continue to grow. However, from the history of developed countries, we could find some similarities. One study on not-for-profit trustee-based mutual savings banks in the USA indicated that the maturity of the not-for-profit industry is reached at lower level than those of for-profit joint stock mutual savings banks and of commercial banks (Wadhwani 2011). Other histories indicate that maturity sets in soon after legislation is enacted favoring banks. This leads to a following proposition. Proposition 11 Legislation favoring mainstream for-profit organizations may lead to the earlier maturity of the not-for-profit social enterprises.

5.5

Decline

As with all commercial enterprises, as new innovations enter the market, the old firms may die out or transform themselves into other lines of business. For NGOs too, if their work can be done more efficiently by some other organization, their need for continuing may disappear. The parallel with mutual banks in the USA indicates that not-for-profits may one day end their role. By the 1980s, the trustee-based mutual savings banks had failed, demutualized or been absorbed by commercial banks (Wadhwani 2011).

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There is some thinking on the politico-economic consequences of SE. The leaders of NGOs may become too popular, creating a competition with political leaders. The growth of microfinance may require stakeholder support, but stakeholders, such as political actors, can also cause its decline. This has already been witnessed in the Andhra Pradesh crisis where political actors passed legislation to ensure that microfinance firms fail (Picherit 2015). Similarly, as China transformed from a social to a market economy, 90% of social welfare organizations failed owing to an end of government support (Ding 2017). One consequence of these measures is that not-for-profits who may choose to stay will find themselves declining earlier than the for-profit hybrid and commercial entries as the latter forms slowly invade niches that not-for-profits may be occupying. However, as a logical extension, hybrids too may end as the sector may no longer have the same social image. Proposition 12 The decline of the social enterprise model is hastened as political actors will take policy measures favoring conservative players. Having seen the lessons of microfinance research viewed from a life cycle lens for the development of an evolutive SE theory, the next chapter concludes with a summary of the theoretical findings and offers some directions for teaching and future research.

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Schneider, A. (2017). Social Entrepreneurship, Entrepreneurship, Collectivism, and Everything in Between: Prototypes and Continuous Dimensions. Public Administration Review, 77 (3), 421–431. https://doi.org/10.1111/puar. 12635. Tan, W.-L., Williams, J., & Tan, T.-M. (2005). Defining the ‘Social’ in ‘Social Entrepreneurship’: Altruism and Entrepreneurship. The International Entrepreneurship and Management Journal, 1(3), 353–365. Thornton, P. H. (2001). Personal Versus Market Logics of Control: A Historically Contingent Theory of the Risk of Acquisition. Organization Science, 12(3), 294–311. Venugopal, V., & Abhi, S. (2013). A New White Revolution: Case Study of a Social Entrepreneur. South Asian Journal of Management, 20, 144–152. Waddock, S., & Steckler, E. (2016). Visionaries and Wayfinders: Deliberate and Emergent Pathways to Vision in Social Entrepreneurship. Journal of Business Ethics, 133(4), 719–734. https://doi.org/10.1007/s10551-014-2451-x. Wadhwani, R. D. (2011). Organisational form and Industry Emergence: Nonprofit and Mutual Firms in the Development of the US Personal Finance Industry. Business History, 53(7), 1152–1177. Whetten, D. A. (1989). What Constitutes a Theoretical Contribution? Academy of Management Review, 14, 490–495. Wry, T., & York, J. G. (2017). An Identity-Based Approach to Social Enterprise. Academy of Management Review, 42(3), 437–460. Zak, P. (2013). How Stories Change the Brain. Greater Good: The Science of a Meaningful Life.

6 Concluding Remarks on Social Entrepreneurship Theory Development, Teaching and Future Research

Abstract Ashta concludes the book and looks at the “So What” question. How does this realistic theory make any difference to other social entrepreneurship theories, education and research? Ashta’s first significant contribution in this chapter is to highlight the reasons for dynamism that emerged from this book. Second, this work combines the work on social entrepreneurship with that on microfinance to enable a richer understanding of both. Ashta’s third contribution is to show how this relates to management education to stimulate growth of social enterprises and reinforcing the need to make the prospective social entrepreneur prepared for success and failure. The fourth contribution is to amplify on the areas of research that the series of broad propositions has highlighted. Keywords Social entrepreneur · Social enterprise · Dreams · Story · Impact · Microfinance

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This book started with the importance of social entrepreneurship and the need for dynamic theory building for this field (Chapter 1). Chapter 2 established that most of the SE theory was very interesting but static. Chapter 3 invoked one possible dynamic theory, the life cycle concept, and applied it to some social enterprise historical experiences in developed country microfinance industries. Chapter 4 then zoomed in on the most successful SE sector, modern-day microfinance, to see what lessons developing country experiences could offer for understanding the transition between two stages of the life cycle. The life cycle perspective to microfinance obtained in Chapters 3 and 4 helped develop previous reflection on the realistic theory of SE (Chapter 5). It is now time to conclude with a short discussion on the development of the realistic theory of SE, indicate a few practical considerations for educators, provide a note on limitations and finally guide the young researcher who wants to work in this area.

6.1

Development of the Realistic Theory of SE

A reformulation of the realistic theory of SE, based on the foregoing propositions in the previous chapter, would be the following: Social entrepreneurs are able to induce owners of other factors of production to work at lower than market rates, in a legitimate fashion, by effectively selling their dream through storytelling indicating that they are doing more good to a disenfranchised aspect of society than commercial enterprises, and compelling innovative action to solve a social problem through a shared dream. The shared dream ends when the social entrepreneur shows visible evidence that they have made enormous financial profits without being able to visibly demonstrate that social impact has also been enormous. When the shared dream ends, society withdraws its support for the sector and this may then lead to a transformation of the Social Enterprises in the sector to a for-profit hybrid or commercial form. With this increased competition, the not-for-profits that chose to remain would witness a slower growth, a lower maturity level and an earlier decline. More specifically, we had promised in the introduction a theory which is more dynamic than the existing approach to SE theory which we found

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was usually a dispersion of static approaches. These static approaches had grounded our own initial approach that we have termed a static realistic theory (SRT), presented in Chapter 2. We had promised that we will now further review theory in microfinance sector (which we did in Chapters 3 and 4), to try to understand how and why social entrepreneurs evolve and transform from not-for-profits to for-profits. We have done this in Chapter 5. However, for visual clarity, and to satisfy the rapid researcher looking for dynamics, we provide the reasons in Fig. 6.1. We outline five reasons: high profits, high salaries, high costs, lack of impact and loss of the original dream. Some of these reasons influence public and private donors and lead to competition from conservative actors, notably the opportunity to make high profits. The others work on the passion of the CEO of the social enterprise, who may be a different person from the original social entrepreneur. This formulation of our theory, or a part of it, could be termed as a communicative theory of SE, being based on dreams, storytelling and narratives. Our theory considers that not-for-profit SE is social in all three functions of value creation, value allocation and value distribution, illustrated in Fig. 5.1, because stakeholders are involved in all three.

Fig. 6.1 The dynamics of transformation: reasons why not-for-profit may play a smaller part in any specific sector over time

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However, instead of making the decisions multilaterally, the societal stakeholders may delegate to the entrepreneur decision making on some or all the three economic functions, unless they feel that the individual’s decisions are not contributing to the promised dream. The previous chapters, and Fig. 4.1, have already illustrated the role of storytelling, story enacting and story testing in the creation, allocation and distribution of value, based on the observations of researchers in microfinance. Now, Fig. 6.2 relates this further to microfinance in terms of the well-cited triangle of microfinance: outreach, financial sustainability and impact (Zeller and Meyer 2002). The storytelling is required to get subsidies and promotes sustainability, the story enactment leads to outreach, and the story testing is about measuring impact. In fact, the triangle of microfinance could be applied to SE in general, an instance of the wider applicability of the microfinance experience. Within this triangle of SE, what we have developed here is the relationship between the value proposition and the creation, capture and distribution of the value through story enacting, storytelling and story testing to achieve outreach, sustainability and impact.

Fig. 6.2 Values and stories configured within a triangle of social entrepreneurship

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The transformation of the social enterprise into a commercial enterprise or into a for-profit hybrid may be required in the growth stage. A transformation into a for-profit enterprise may then lead to a new source of crisis in the shakeout stage as former subsidizing stakeholders feel aggrieved that their charity was misappropriated. Thus, understanding the evolution of the social enterprise in the growth and stakeout stages requires understanding the dreams sold by the social entrepreneur and the subsidies received in the embryonic stage. Any theory which does not incorporate these dynamics would be leaving the practitioner unprepared to stakeholder reactions. This is not to say that such individual elements of focused research are not valued; without their painstaking gathering of detail and formulation of the building blocks, we could not have proceeded. However, there is place for holistic theories, such as this one, too. Table 6.1 presents the differences between the original approach to the realistic theory that was static (Ashta 2019) and the extended realistic theory developed in this book by taking into account the evolution of an industry. Some of the first eight propositions are almost the same, but others have evolved and four new propositions have been added to take into account the life cycle theory.

6.2

Practical Considerations for SE Training and Education

A few scholars have started the discussion on how SE should be taught (Howorth et al. 2012; Pache and Chowdhury 2012; Smith et al. 2012; Yunxia et al. 2016; Zietsma and Tuck 2012; Plaskoff 2012; Kickul et al. 2012; Kummitha and Majumdar 2015). This book adds to this discussion on management education in preparing social entrepreneurs. First, social entrepreneurs need to learn to dream of possible scenarios in which society can evolve and how to get there. This means that they learn to recognize problems as sources of opportunities. These opportunities are often created by dreaming of social innovations. Creativity and motivation are the underlying traits which can help elaborate this vision. Developing their sociological imagination (Mills 1959 [2000]), i.e., making them aware of and understand the links of the entrepreneurs to society, may help in

Social entrepreneurs have a dream to solve a social problem faced by a segment of society Social entrepreneurs are motivated by a mix of their need for esteem, feelings of passion and compassion, and their bent for problem solving and creativity to make their dreams come true

Social entrepreneurs are able to obtain subsidized resources from society

Social entrepreneurs obtain subsidized resources by selling their dreams as effective ways to solve a social problem Social entrepreneurs obtain subsidized resources by selling their dreams through storytelling

The story telling used by social entrepreneurs compels action on the part of stakeholders

1

3

4

6

5

2

Static realistic theory of SE (SRT)

Social entrepreneurs start with a dream to solve a social problem faced by a segment of society Social entrepreneurs are usually motivated by a mix of their need for esteem, feelings of passion and compassion, and their bent for problem solving and creativity to make their dreams come true. However, they may also initiate action to protect their markets from government action. These motivations evolve and may lead to transformation of the enterprise Not-for-profit social entrepreneurs need to obtain subsidized resources, whether from themselves or from others in society. These subsidies create hidden costs which increase as the social enterprise grows Social entrepreneurs obtain subsidized resources by selling their dreams as effective ways to solve a social problem for a deprived section of society Social entrepreneurs use story telling as a powerful way of selling dreams to obtain subsidized resources. The stories would change to focus more on governance when the enterprise shifts its focus to obtaining market finance The story telling used by social entrepreneurs compels action on the part of stakeholders

Extended realistic theory of SE (with life cycle elements)

Comparative table to show the evolution of propositions of the realistic theory

Proposition

Table 6.1

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Social entrepreneurs use impact assessments to reinforce their story to continue reception of subsidized resources

The dream ends when the social entrepreneur shows visible evidence that he has made enormous economic profits without being able to visibly demonstrate that social impact has also been enormous

7

8

The transformed commercial enterprises would be on a steeper growth curve compared to the social enterprises In addition to mergers and alliances, the shakeout of hybrid for-profits and commercial firms may stem from stakeholder revolt if the high profitability of the former not-for-profit social enterprise comes into the public eye Legislation favoring mainstream for-profit organizations may lead to the earlier maturity of the not-for-profit social enterprises The decline of the social enterprise model is hastened as political actors will take policy measures favoring conservative players

Social entrepreneurs need to use impact assessments to reinforce their story to continue reception of subsidized resources. Difficulties in measuring impact may lead to focus on performance of the enterprise (governance, outcomes) rather than impact on the target population The subsidies would end if the not-for-profit social enterprise becomes a for-profit hybrid or commercial enterprise or if there is visible evidence of private capture of public subsidies

Extended realistic theory of SE (with life cycle elements)

Note The static realistic theory was the initial approach (Ashta 2016, 2019). The extended realistic theory is as developed in this book

12

11

10

9

Static realistic theory of SE (SRT)

Proposition

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creating the compassion required for motivating the students to become social entrepreneurs. Second, they need to articulate this dream and to sell it to conservative stakeholders through compelling stories and narratives. They need to be aware that stakeholders may require justifications before stepping in, and there will be attempts by stakeholders to modify their dream in the name of shared realities. Therefore, they need to do their homework well to justify their solution. Selling these stories may be necessary for the institutional work of influencing enabling regulations and changing social norms. This requires relationship-building with institutional associations: local, national and global. The narrative of the stories may be different for beneficiaries, donors and professionals (Dey and Steyaert 2018). Third, social entrepreneurs need to be aware of the different legal forms that may exist in their country. Based on these, they need to make decisions on governance and be prepared for transformation if they start with a notfor-profit model rather than a for-profit hybrid model. These decisions require a sound understanding of sustainable growth rates and financial strategies that can influence these. They need to know that technology offers them a variety of online possibilities such as open-source, freemium and multi-sided models for growth. They should also be aware that alternative financing is available from a number of new models including crowdfunding, social impact bonds or contracts and impact investments. Fourth, they may also need strong training on social impact measurement and choice of relevant indicators. These social metrics may differ based on the source of financing. Specifically, the social entrepreneur should be prepared to make sacrifices and ensure that they do not give an impression that the subsidies are being captured for private uses. Indeed, they may have to personally subsidize their enterprise by earning lower than the market rate for CEOs of commercial enterprises. Fifth, social entrepreneurs also must be prepared emotionally for both failure and success. The dreams may not come true. This is disappointing and difficult because of personal facing up, but also because of the idealization inherent in the mythization of the social enterprise (Dey and Steyaert 2018), which means that many stakeholders were pulled into the venture and, therefore, the failure causes shame. Even if the enterprise is successful, it may grow only because the market has taken over.

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Thus, educators need to demystify the notion of social enterprise and the students should be prepared to become just another commercial enterprise and view subsidies as temporary. Either way, it means social entrepreneurs need to be prepared to invite subsidizing stakeholders to their party and then to bid them good-bye. The transformation to a for-profit may lead to a backlash from stakeholders who do not find this switch acceptable. Yet, some social entrepreneurs can weather the storm, while others may pull down an entire industry. Communication and public relation skills are, therefore, an important part of SE education so that the social entrepreneur can demystify the idealization of the cause and the cherished beliefs of the public. Social entrepreneurs who lobbied for legislative support in early stages may later need to focus on delaying the withdrawal of such legislative support and thus prolonging the growth stage. Small niches where public services cannot reach and where profits cannot be easily made will always be present. For example, rare diseases are difficult to treat since the number of doctors willing to study the disease and apply themselves to this unique market may be insufficient owing to lack of profitability. However, globalization and information technology advances may show that a social business case is possible by cumulating the niches found in each country and having a global approach to treating these rare diseases (Yunus 2017). This means that social entrepreneurs need to find means of encouraging cooperation in the global society to be able to pollinate their ideas and solutions. Such global cooperation requires recognizing that complex societies need each other. The life cycle of such global NGOs may depend on being able to keep global cooperation functioning, in addition to public support within each country. Certainly, social entrepreneurs, like any entrepreneurs, will probably fail initially and get up again to find new solutions. However, the cost of failing in the field is significantly more than the cost of learning in the classroom. So, the classroom education and training need to be focused on valuable lessons to avoid repeating the mistakes others have already made. Case studies on failure need to be added to those focusing on success. If nothing else, the classroom experience will sensitize the students to look at business and work with a double bottom line entrepreneurial mind-set, which would be useful to both business and society. However, the classroom

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needs to involve multiple stakeholders to provide diverse perspectives. For example, discussions with trainers indicate that practitioner-mentors can play a vital role in transmitting experiences of successes and failures on both bottom lines, explaining the interaction of the two bottom lines, as well as transmitting positive mind-sets to cope with the complexities.

6.3

Limitations

As with all case studies, a first limitation is the generalization or external validity of these propositions beyond microfinance or, perhaps, beyond social finance. The study of the case is nevertheless interesting in itself because of the insights it generates for the field of microfinance, which is affecting over a billion people. It may find parallels in some other SE sectors, especially if technology allows reduction in costs permitting a marketable solution in such other sectors. Here is an example where the life cycle concept may be relevant. One kind of social enterprise in France is work integration social enterprises with State conventions. They take the long-term unemployed (certified by the state employment agency: Pôle Emploi), hire them for two years and give them on the job training, in sectors such as recycling of waste, temporary work, transport and services, and construction work. They provide socio-professional support to reinforce the capacity of these employees to work and be employed in mainstream enterprises. Statistics from one region, Bourgogne-Franche-Comté, indicate that over half of these formerly excluded employees become employable by mainstream enterprises. Of the remaining, some decide to get more education or work in other specialized firms to improve their adaptability. About a third go back to exclusion. With a reported impact of two-thirds included, the government provides them subsidies, without which they would not be sustainable. Twenty percent of their revenue are public subsidies. There are 1200 such enterprises in France, labeled as insertion enterprises or temporary work insertion enterprises. Together, they trained 22,000 effective full-time workers in 2018. Part of their work is made easy because some public tenders have a reservation clause requiring the applying firm to employ such fragile employees. Initially, this public

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support helped these social enterprises grow. However, according to the director of the federation of insertion enterprises in Bourgogne-FrancheComté, with time, large mainstream employers started employing a few such fragile people to fulfill the reservation clause, enabling their mainstream group to get the public contracts. In view of this competition from the mainstream conservative actors, and since public subsidies may one day be phased out, the fate of the pure social enterprises of insertion could be in doubt. This shows that effectively, the State would have shifted its support in favor of mainstream actors. A second limitation of our theory is that NGOs may also decline if the State takes over the function of providing the service that social enterprises provide. For example, in the UK, before the National Health Service (NHS), voluntary hospitals were caring for the poor sick. The importance of their work over two centuries shows that they relied on the rich (donations as well as paid services) to cross-subsidize free services to the poor (Cherry 1997). Nevertheless, their fragility finally led the State to realize that this work should be done on a public basis and the NHS was started in 1948. Similarly, nationalization, privatization and experimenting with decentralized not-for-profit have been present in the British railway system, as in the case of Network Rail (Crompton and Jupe 2007), but no solution seems to be optimal. This book has not gone into this area since this is not supported by the microfinance story which shows the opposite. State development banks were not able to provide microcredit (Akerlof 1970) and in India, where they do so, the non-performing loans tend to be higher than those of Microfinance Institution (MFIs) (Parekh and Ashta 2018). Although SE life cycle does not necessarily follow the specific story of microfinance, it may do so, and the wider SE theorists and practitioners should keep this possibility in mind. Third, this book started by considering social enterprises that started as not-for-profits and later converted to for-profits. It was assumed that such entrepreneurs had a strong dose of altruism. However, there may be entrepreneurs who do not have altruism as their true motivation, but who start social enterprises as a transient vehicle to fulfill their ulterior profit motives. Firstly, this includes social enterprises, which, if successful, would be converted to commercial enterprises. Secondly, this also includes social enterprises where the receipts of voluntary donations by individuals or the

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State are the primary motivation, and impact is secondary. In addition to this, the State may decree, as in India, that a percentage of corporate profits must be spent on social responsibility, leading to the creation of foundations which focus on social causes that favor the enterprise. It is, therefore, possible that SE must be considered over a sufficient time horizon to elicit the real motivations of founders. One can also suppose that motivations can evolve over time and that social entrepreneurs may opt for-profit entities to better address the social needs that motivated their initiatives. There are social enterprises that start directly as for-profits. While we contend that this happens in the growth and later stages of the industry, some of the propositions of the realistic theory may not be applicable to them. For example, the work on transition from not-for-profits to forprofits is not applicable to them. However, many of the issues raised in this book may be of some relevance. For example, education has typically been a not-for-profit sector. Yet, for-profits have come in with a viable business model. This business model includes low costs of educating and high numbers of students which, in turn, is based on student loans for financing the school fees. This has led to high indebtedness and high non-repayment rates of student loans, often owing to inadequate job opportunities of the graduates. The lack of opportunities could possibly be linked to cost savings on quality of education. All this is driving the ethical debate on forprofit education in the USA, especially the for-profit universities targeting adults from weaker neighborhoods. Finally, there is the limitation of the life cycle concept that we raised earlier: It does not indicate the exact life in number of years or even decades. However, what research on microfinance can add to this concept, within this limitation, is that the phases may become shorter with new technologies coming in. Because of technological change, it may become profitable to serve niche markets with commercially viable models. Also, because of technological change, the disruption in the industry may happen faster, leading to a shorter life cycle.

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Future Research Directions

This theory has used the industry life cycle concept to provide an overview to SE and social enterprises and their transformation. It started by assuming that in the early stages of a social sector industry, firms start as notfor-profits. Indeed, this was the case in microfinance. Researchers are free to pinpoint black swans in microfinance and in other sectors where, in the embryonic stage, for-profits entered directly without any not-for-profit preceding the way. The theory has gone deeper in one possible transformation: from not-for-profits to for-profits. But researchers could go further to develop this theory which would become richer if we are able to look at different contingencies that provoke different behavior. For example, another black swan event that researchers could look for would be commercial enterprises which transformed into not-for-profits. Black swans do not disprove the other merits of a broad theory such as this but enrich it. We recognize that in some countries the States may certify some commercial enterprises to be hybrid social enterprises because of the extent of the corporate social performance, but it is unlikely that such enterprises change their status to be not-for-profits. Each of the twelve propositions opens the door to future research to validate or develop the theory. This could be based on empirical research in microfinance as well as other sectors to see if the sector creates a difference and, if so, why. The first proposition indicates that social entrepreneurs start with a dream and they later look for resources. But there may be social entrepreneurs who have resources, maybe the spouses of wealthy people, and they are searching for a dream. This would then invert the process. Empirical research could discover what is the proportion of different profiles: the dreamers and the wealthy. Proposition 2 indicates that the different motivations evolve and that this evolution may lead to the transformation of the enterprise. Future researchers could take a quantitative approach and measure tipping points of change in motivations which end up in transformation. Proposition 3 suggests that subsidies create hidden costs and that these costs increase with the scale of the enterprise. Future researchers could create an inventory of different hidden costs and determine if they are

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fixed or variable. This book has focused on financial costs, but there may be other barriers to entry and to change, and how social entrepreneurs overcome these needs to be researched. The conservative stakeholders may think that the social entrepreneur is mad or at least unreasonable. These institutional barriers are addressed in microfinance where bankers were unwilling, initially to provide financing (Yunus 2003). Such challenges are present in other SE sectors too. For example, the elders of illiterate people may not want social entrepreneurs to come and educate their children. One social entrepreneur in North India mentioned that she was threatened many times and her schoolhouse stoned by the men because she was teaching children how to read. Beyond this simple extension for research, can we say that conservative illiterate men treated the intruding social entrepreneur as a mad person and subjected her to the same treatment that ancient society reserved to mad people (Foucault 2003 [1961])? Perceived madness could then be better linked to incomprehension. Proposition 4 specifies that the dreams are sold to obtain subsidies. Later propositions have focused on story telling but there may be many other marketing techniques for fund-raising. Future researchers could create a typology of fund-raising techniques and indicate which is used when. Propositions 5 and 6 have focused on the use of stories for marketing the dreams. However, the telling of these stories may need to vary with the stakeholders. For example, in religiously diverse countries, social entrepreneurs may need to either aim at only one religion or have different stories for different audiences. With so many stories being told by so many social entrepreneurs, how do social investors and donors separate the signal from the noise? What are the characteristics of social entrepreneurs or their projects that the audience is looking for? What are the characteristics of achievable dreams? Another suggested direction would be to see how ritual and narratives might support the creation of social value and how the notion of image and identity uses marketing and organization behavior. Propositions 7 and 8 indicate that subsidies would end if impact could not be proved or if it was found that public subsidies were going into private pockets. This would then motivate the transformation from a not-for-profit to a for-profit enterprise searching for market incentives. This suggests some motivation for transformation in terms of conflicting

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logics and inefficiencies, but these may be neither exhaustive nor sufficient. For example, how and under what circumstances does compassion transfer to self-interest? Is there a threshold of inefficiency which makes the entrepreneur give up the social cause and turn to the market? Previous research shows that the underlying tension in social enterprises is different from that of commercial enterprises. But why do these different tensions lead social enterprises to become commercial enterprises and not vice versa? Can these tensions be measured? Moreover, not-for-profits or commercial enterprises could be replaced by public services and vice versa. Thus, a good field of future study would be to show which kind of tensions lead to which direction of change. For Proposition 7, they could examine if there are cases where subsidies may continue even if some entrepreneurs provide market-based solutions. Proposition 8 suggests that donors withdraw subsidies if they are not happy with the social impact. However, one question that has not been addressed is the relationship of donors and private investors in the transformation of social enterprises into commercial enterprises. Proposition 9 indicates that transformed firms grow faster than the not-for-profits. However, this may be because of a success bias: We do not observe firms that failed after transformation. Therefore, future researchers could focus on the contingent variables which impact the success or failure after transformation. Proposition 10 considers that this transformation is a possible reason for shakeout. In the life cycle theory, the shakeout stage comes after a high growth stage. However, social enterprises are diverse: large and small, global and local. It still needs to be determined whether it is large NGOs with global ambitions that transform into for-profits later or whether it is small local NGOs who find it difficult to get subsidies that look for commercial avenues. It is also possible that the conditions for transformation may not be the same. Proposition 11 considers that maturity and decline set in after legislative change in favor of more mainstream models. Future researchers could examine if there are counterexamples where other forces, such as technology, make a social enterprise industry obsolete. With the high speed of technological change today, this factor may make many sectors profitable where earlier it was not possible to do so.

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Proposition 12 considers that legislative change disfavoring a not-forprofit model is brought out by fear of the political actor owing to the popularity of social entrepreneurs if they are doing good to others or unpopularity of the social entrepreneurs if they are making too much money. The high financial returns may also attract conservative actors who lobby to level the playing field. The interesting triangle between the three sectors (private, public and not-for-profit) could have large scope for social entrepreneurship research.

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Kickul, J., Janssen-Selvadurai, C., & Griffiths, M. D. (2012). A Blended Value Framework for Educating the Next Cadre of Social Entrepreneurs. Academy of Management Learning & Education, 11(3), 479–493. Kummitha, R. K. R., & Majumdar, S. (2015). Dynamic Curriculum Development on Social Entrepreneurship—A Case Study of TISS. The International Journal of Management Education, 13(3), 260–267. Mills, C. W. (1959 [2000]). The Sociological Imagination. New York: Oxford University Press. Pache, A.-C., & Chowdhury, I. (2012). Social Entrepreneurs as Institutionally Embedded Entrepreneurs: Toward a New Model of Social Entrepreneurship Education. Academy of Management Learning & Education, 11(3), 494–510. Parekh, N., & Ashta, A. (2018). An Institutional Logics Perspective to Evolution of Indian Microcredit Business Models. Strategic Change: Briefings in Entrepreneurial Finance, 27 (4), 313–327. Plaskoff, J. (2012). Building the Heart and the Mind: An Interview With Leading Social Entrepreneur Sarah Harris. Academy of Management Learning & Education, 11, 432–441. Smith, W. K., Besharov, M. L., Wessels, A. K., & Chertok, M. (2012). A Paradoxical Leadership Model for Social Entrepreneurs: Challenges, Leadership Skills, and Pedagogical Tools for Managing Social and Commercial Demands. Academy of Management Learning & Education, 11(3), 463–478. Yunus, M. (2003). Banker to the Poor: Micro-Lending and the Battle Against World Poverty. New York: Public Affairs. Yunus, M. (2017). A World of Three Zeros: The New Economics of Zero Poverty, Zero Unemployment, and Zero Net Carbon Emissions. London, UK: Hachette. Yunxia, Z. H. U., Rooney, D., & Phillips, N. (2016). Practice-Based Wisdom Theory for Integrating Institutional Logics: A New Model for Social Entrepreneurship Learning and Education. Academy of Management Learning & Education, 15 (3), 607–625. https://doi.org/10.5465/amle.2013.0263. Zeller, M., & Meyer, R. L. (Eds.). (2002). The Triangle of Microfinance: Financial Sustainability, Outreach, and Impact. Baltimore, MD: The John Hopkins University Press. Zietsma, C., & Tuck, R. (2012). First, Do No Harm: Evaluating Resources for Teaching Social Entrepreneurship. Academy of Management Learning & Education, 11(3), 512–517.

Index

A

agency problems 32, 34, 84 altruism 25, 125 Ashoka 22, 99 associations 6, 7, 100 asymmetric information 29, 33, 52, 54, 67, 68

B

B corporation 8 beliefs 28, 98, 105, 123 blended value 5 business model 24, 106

C

capital 2, 9, 11, 23, 26, 29, 32, 33, 67–70 capitalism 2, 33

charity 3, 6, 7, 25, 26, 30, 33, 74, 100, 119 collateral 52 commercial banks 54, 56, 109 commercial enterprise(s) 2, 5, 8, 10, 24, 26, 29, 33, 34, 60, 97, 99, 102, 103, 105–109, 116, 119, 121–123, 125, 127, 129 commercial entrepreneurship 23, 28, 94 commitment 25, 101 Compartamos 72, 76, 104, 108 compassion 25, 26, 31, 69, 97, 103, 120, 122, 129 competition 9, 50, 58, 76, 96, 104, 106–108, 110 conflict 28, 34 control 7, 25, 28, 29, 34, 55, 61, 69, 72 conventional entrepreneur 23

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2020 A. Ashta, A Realistic Theory of Social Entrepreneurship, https://doi.org/10.1007/978-3-030-32142-0

133

134

Index

cooperatives 6, 8, 57, 59, 68, 97 Corporate Social Responsibility (CSR) 8, 106 creation 5, 22–24, 26, 31, 34, 50, 67, 76, 101, 117, 118, 126, 128 creativity 26, 27, 33, 68, 95, 97, 120 credit 52, 53, 57, 59, 67, 68, 96 credit unions 56 cultural entrepreneurs 23 customers 29, 98, 105

D

decline 9, 49–52, 56, 60, 66, 72, 80, 109, 110, 125, 129 definition 5–7, 22, 23, 105 Development Credit Corporations 60 dividend(s) 7, 30, 50 donation 7, 8, 28, 30, 34, 53, 98, 101, 104, 105, 125 double bottom line 32, 77, 84, 123 Drayton, B. 22 dream 14, 26–31, 34, 70, 72, 95–97, 99–101, 103–105, 116–122, 127, 128 drift 28 dynamic(s) 5, 9, 15, 22, 24, 25, 33, 34, 38, 48, 49, 61, 66, 94, 116, 117, 119

E

EBSCO 3–5, 10–13 economic development 2 education 2, 11, 12, 74, 75, 119, 123, 124 efficiency 25, 32, 61, 97, 105 embryonic 7, 9, 10, 49, 67, 94, 102, 119, 127

emotion(s) 26, 31, 70, 100 employees 29, 35, 69, 70, 78, 106, 124 empowerment 28, 73, 99 environment 2, 25, 30, 48, 50 esteem 25, 26, 77, 97, 120 evolution 10, 49, 56, 98, 119, 127 expectations 29, 71, 107 F

financial capital 2 financial exclusion 52 financial inclusion 73, 74, 80, 108 financial sustainability 77 firm life cycle 9, 49–51, 66 foundation 6, 15, 57 funding 31, 72, 97, 101, 106 G

Gandhi 27 governance 8, 28, 56, 100, 103, 106, 120–122 government 2, 3, 23, 28–30, 52, 57, 69, 97, 101, 103, 104, 110, 120, 124 Grameen Bank 10, 32, 71, 98, 100 group dynamics 34 group lending 68 growth 2, 9, 23, 25, 49–52, 66, 67, 69, 72, 76, 78–80, 82, 84, 94, 102, 103, 106, 107, 110, 119, 121, 122, 126, 129 guarantors 52 H

Haas 59 health 2, 12, 29, 99, 125

Index

history 10, 51–54, 56, 59, 60, 94, 109, 116 human capital 2, 73 hybrid(s) 7, 8, 10, 25, 26, 28, 31–33, 51, 78, 97–99, 103, 106, 116, 119, 121, 122, 127

I

identity(ies) 5, 25, 70, 106, 128 impact 3, 11, 12, 26, 30–34, 53, 67, 71–73, 75, 77, 78, 84, 94, 95, 98, 100, 102–104, 108, 109, 116, 118, 121, 122, 124, 126, 128, 129 impression 14, 34, 122 industrial concentration 51 industry life cycle 9, 10, 49, 51, 66, 106, 108, 127 inequality(ies) 2, 33, 71, 101 Initial Public Offering (IPO) 31, 72, 76, 78 innovation(s) 7, 11, 22, 23, 25, 27, 31, 33, 38, 48, 50, 55, 56, 60, 61, 66, 68, 71, 72, 96, 102, 109, 119 institutional entrepreneur 23, 29 institutional voids 29 institutional work 29, 71, 78, 122 interest rates 52, 57, 59, 69, 76 intrinsic 26 invention 27 investment(s) 9, 10, 50, 122

L

legal forms 6, 122 legal status 6

135

legislation 52, 57, 59, 69, 79, 109, 110 legislative 52, 54, 129, 130 life cycle 9, 15, 31, 38, 49–51, 55, 58, 60, 66, 67, 84, 94, 116, 119–121, 124, 125, 129 life cycle theory 9, 15, 49, 50, 60, 66, 94, 119, 129 Loan Funds 52 local 57, 58, 108, 122, 129 logic 25, 69, 105

M

management 9, 11, 14, 23, 25, 28, 33, 34, 49, 50, 55, 56, 66, 69, 71, 78, 119 manager 23, 34, 50, 53, 57, 69, 104, 107 marketing 25, 28, 29, 49, 70, 128 Martin Luther King 27 maturity 9, 49–51, 66, 79, 80, 109, 129 media 7, 23, 29 microcredit 13, 54, 56, 68, 71–74, 77, 82, 84, 96, 125 Microfinance Institution (MFIs) 53, 60, 66–72, 74, 75, 77–79, 97, 98, 101, 104, 105, 107, 125 microsavings 54, 72 mission 6, 8, 27, 28, 60, 77, 99, 102, 106, 108 mission drift 5, 32, 34, 35, 72, 77 Montes de Piedad 52, 53, 97 moral intensity 28 motivation 25, 33, 34, 95, 97, 102, 119, 125, 128 mutual savings 54, 56, 109

136

Index

N

narrative(s) 29, 30, 61, 70, 99, 100, 105, 117, 122, 128 nature 38, 48, 60 naturological 48 norms 28, 79, 105

proposition(s) 14, 22, 29–31, 38, 76, 94, 97, 98, 100, 103, 105, 108, 109, 116, 119, 124, 126–128 purpose 14, 22, 74, 109

R O

opportunity 2, 26, 50 organization organizational form 22, 23 OTELO 7 outreach 29, 32, 69, 74, 77, 84, 97, 102, 104, 109, 118

Raiffeisen 59 rational 3, 25, 29, 55 regulation(s) 2, 29, 78, 98, 122 resources 23, 29–33, 73, 97–100, 102, 103, 120, 121, 127 risk 9, 25, 58, 61, 67, 73, 105 role 5, 23, 25, 32, 68, 74, 99, 106, 109, 118, 124 rules 2, 79 rural 7, 53, 67, 71, 77, 106

P

passion(s) 25–27, 35, 70, 97, 120 pawnshops 53 performance 5, 25, 34, 67, 72, 77, 78, 100, 103, 104, 108, 121 personalities 5 philanthropy 33 political 28, 29, 56, 59, 61, 96, 110, 130 political actors 28, 61, 96, 110 political legitimacy 56, 61 poverty 2, 67, 68, 71–74, 77, 101 private enterprise 3, 61 problem 5, 22, 25–30, 32, 33, 49, 50, 52, 56, 67, 69, 71, 73, 77, 96, 97, 99, 104, 116, 120 product life cycle 49–51, 66 profit 3, 5–8, 10, 25, 31–35, 49–51, 53, 55, 59, 67, 69, 75–78, 84, 98, 102–109, 117, 120–123, 125, 127, 128, 130 property rights 2

S

savings 52, 54–58, 68, 74, 97, 98, 109 Savings Banks 53, 56, 59, 60 Savings Trusts 52 scale 6, 28, 32, 71, 72, 102, 104, 127 Schulze-Delitzsch 59 self-esteem 25, 95 self-help groups 68 self-interest 26, 129 sense giving 78 sense-making 70 shakeout 9, 49, 51, 59, 66, 79, 80, 108, 119, 129 shared values 32 Skoll Foundation 6 social business 10, 30 social capital 29, 72 social change 33, 101 social costs 23

Index

social finance 38, 55, 60 social logic 25 social norms 28, 122 social performance 34, 72, 76–78, 103, 104, 108, 127 Social Performance Task Force (SPTF) 78 social problem(s) 2, 23, 26, 27, 95, 100 social reporting 34 social value 12 society 5, 11, 23, 27, 29, 31, 48, 58–60, 76, 95, 96, 99, 100, 104, 116, 119, 120, 123, 128 solution 26, 27, 49, 56, 123, 129 stakeholder(s) 5, 23, 28–31, 33–35, 69–71, 78, 84, 95–98, 100–103, 107, 108, 110, 117–120, 122–124, 128 static 4, 7, 15, 22, 23, 38, 48, 66, 94, 116, 119, 121 Static Realistic Theory (SRT) 22, 26, 27, 29–31, 33, 34, 96, 120, 121 stewardship 28, 29, 102 story 31, 33, 52, 67, 73, 95, 98, 100, 102, 103, 118, 120, 121, 125, 128 storytelling 14, 31, 70, 99–101, 116–118, 120, 128 stress 3, 31, 79 subsidy(ies) 7, 14, 29–31, 33–35, 54, 56, 67, 69, 73, 84, 94, 95, 97–106, 108, 118–125, 127–129 subsidized, 2, 7, 29–31, 33, 53, 73, 95, 98–103, 108, 120, 121 suicides 79

137

Swaya Krishi Sangam (SKS) 71, 76, 104, 108

T

target segment 22, 98 technology 2, 27, 49, 76, 122, 124, 129 tension 23, 24, 32, 77, 129 transaction costs 54, 61, 67, 68, 84, 103 transaction size 68 transform 10, 24, 34, 72, 97, 99, 101, 106–109, 129 transformation 9, 23, 25, 26, 29, 33, 35, 57, 76, 78, 84, 94, 97, 103, 106, 116, 119, 120, 122, 123, 127–129 transition 9, 15, 38, 50, 61, 84, 116, 126 trust 29, 61, 97

U

urban, urbanization 53, 57, 71, 77

V

value allocation 24, 31, 117 value creation 24, 31 value distribution 24, 31, 117 value proposition 5, 27, 67, 68, 72, 96, 118 value(s) 11, 12, 24, 27, 28, 30–32, 34, 72, 76, 95, 98, 117, 118, 128 village banking 68 vision 3, 27, 29, 30, 95, 96, 99, 101, 102, 108, 119

138

Index

voluntary 7, 57, 125 volunteer(s) 7, 55, 106

wicked problem 27, 28, 49 women 67–69, 71, 73, 77, 99

W

Y

wealth 23 wealthy 52, 127

Yunus, M. 10, 30, 31, 68, 71, 76, 96, 100