By Noah Vetter.
This post explores the concept of social enterprises and their ability to encourage sustainable development. Using the example of Malô, a Mali-based social enterprise, the post highlights some of the advantages of the social enterprise model and their potential as development actors.
Market-based social enterprises can play an important role in encouraging sustainable microeconomic development and relieving poverty worldwide. Unlike traditional development actors, including non-profit organizations, non-governmental organizations (NGOs), and intergovernmental organizations (IGOs), social enterprises can organically stimulate microeconomic activity while simultaneously addressing social needs. Social enterprises can also provide a more sustainable platform for encouraging long-term economic development, as they are self-sustaining and not reliant on the generosity and intervention of the global community. These factors make social enterprises an encouraging platform for developing long-term economic sustainability and independence for impoverished communities.
What is a Social Enterprise?
There have been many differing attempts to define the term social enterprise, and the related terms social business and social entrepreneurship, however for the purpose of this article we will use the definition of a social business developed by Nobel laureate Muhammed Yunus. Yunus defines a social business as a traditional business that “aims for full cost recovery, or more, even as it concentrates on creating products or services that provide a social benefit.” Furthermore, he suggests that due to full cost recovery a social business is self-sustaining, and “free from the need to constantly attract new streams of donor funding to stay afloat,” a constraint for many traditional development actors. Gregory Dees is another popular advocate of social enterprises and was among the first theorists to attempt to provide a definition. Dees claims that social enterprises were born from the desire of nonprofit organizations to achieve financial independence and stability while at the same time increasing their competitiveness with for-profit companies moving into the social sector.
Social enterprises come in all shapes and sizes and their founder(s) come from many different backgrounds. Some social enterprises, like Muhammed Yunus’ Grameen Bank, are founded in developing countries by people who recognize a need within their own community and develop a social enterprise as a way of addressing it. Other social enterprises are founded by entrepreneurs in developed countries who utilize the resources available to them to address a need that they recognize in another country, such as Ten Thousand Villages. Some social enterprises manage to achieve a large scale and expand into new industries, while others remain as microenterprises or are co-operatives that serve their members but do not expand far beyond their immediate membership. Some have achieved complete financial independence, while others rely on income generation while also accepting significant contributions from corporations and philanthropic groups. Of those that have achieved financial independence, some work within impoverished communities and charge the community’s residents, while others work in the community but also work outside of it and only charge wealthier clients outside the community.
Social Enterprises vs. Traditional Development Actors
Based on the definition of social enterprises, it can be recognized that social enterprises are, in a sense, hybrids of traditional businesses and NGOs. Because social enterprises lie between the two, they have a number of advantages over traditional development actors (governments, multilateral agencies, NGOs, etc.). For example, many social enterprises must pass the ‘market test,’ meaning that they must be able to provide some form of value that can outcompete other similar enterprises in the market. While to some the need to pass the market test may seem like a disadvantage rather than an advantage, in fact, the need to outcompete other enterprises encourages a social enterprise to be innovative and efficient. To pass the market test, social enterprises are compared to their competitors in terms of desirability and affordability, which means that they must be at the cutting edge of their industry. Thus, successful social enterprises are constantly pushing the envelope of what is already being done and trying to bring new perspectives and techniques to the industry. In addition, compared to traditional development actors, social enterprises have the ability and flexibility to experiment with different methods of encouraging development. They are able to keep their costs and risks low by acting on a small scale, and much like traditional entrepreneurial ventures they can act as testing grounds and incubators of new ideas. According to Nobel laureate Douglass North, social enterprises have “adaptive efficiency” because they are decentralized and nimble and in turn it allows them to “explore alternative ways of solving problems.”Through the market test, social enterprises are forced to be client focused, address those at the “bottom of the pyramid,” and work from a bottom-up approach, a counter to the many critiques of NGOs.
…compared to traditional development actors, social enterprises have the ability and flexibility to experiment with different methods of encouraging development.
Similar to a traditional business, social enterprises generally view the beneficiaries of their services as customers, rather than as clients as many NGOs do. This often means that their beneficiaries are more included in the decision-making process and are given more opportunities for input than in the case of many NGOs, who often impose their services with fewer chances for input. Consider for example that you are providing a free meal, you are less likely to ask for the meal recipient’s feedback than if they were a paying customer who you are hoping will return and/or refer other paying customers. In addition, because the beneficiaries of social enterprises are often customers, meaning that they pay for the goods or services that are being provided to them, there is a greater sense of agency and ability to convey negative feedback as compared to when a good is being provided for free. If a client receives a service for free they are less likely to complain if it does not meet their expectations, but if they were to pay even a nominal fee for that same service they would feel more inclined to express dissatisfaction. Now that we have discussed some of the theoretical advantages of a social enterprise, let’s turn to their advantages in practice.
The Case of Malô
Malô, meaning rice in the Bambara language, is a Mali-based social enterprise that provides fortified rice to communities in West Africa. Malô’s website states that their vision is to “revolutionize the rice value chain in Africa so that everyone has access to quality, affordable, and nutritious rice.” Malô buys its rice at a premium from smallholder farmers in West Africa, who cannot afford to process or bring the rice to the market themselves. Malô then processes and fortifies the rice with micronutrients in their facilities, before packaging it and selling it to local retailers, relief agencies, and school meal programs, under the brand name Supermalo. Malô’s goal is to use rice as a driving force for Mali’s development and create a value chain that produces high-quality job opportunities, including as farmers, truck drivers, marketers, etc. Because of its status as a social enterprise and the local nature of its products, Malô is able to appeal to local markets in Mali and convince consumers to purchase their product, despite a small premium.
Malô’s goal is to use rice as a driving force for Mali’s development and create a value chain that produces high-quality job opportunities
The fact that Malô processes the rice for farmers is extremely important, because currently 80 percent of the rice that is grown in Mali is milled by individuals or co-operatives using inefficient methods that have an average yield of just 55 percent, which means farmers are able to sell far less than what they are producing. By buying and processing the rice themselves, Malô is able to ensure a consistency of output, while also reducing milling and logistical costs for farmers. In addition, because Malô is a large rice producer they have agreements with animal feed manufacturers and fertilizer companies to sell rice byproducts like rice husks and rice bran, allowing them to earn greater revenue and use more of the rice than individual farmers could, as they would be unlikely to sell such byproducts.
Farmers benefit from the fact that they have a guaranteed buyer in Malô. As a result, they have less need to borrow against their crops and risk becoming indebted. Farmers also often struggle to find buyers that are willing to pay fair prices for their crops during the harvest period, which means they store their crop until prices are better. But storing the crop represents a large opportunity cost because the revenue they are missing out on by not selling their rice immediately could go to cover household expenses, to plant a second crop of rice, or to plant another crop. Thus, by being able to sell their crops immediately farmers are able to take advantage of these opportunities and potentially earn more disposable income, which they can spend at other local businesses thereby supporting the local economy. In turn, Malô has found that by being a guaranteed buyer, farmers are willing to spend the time to ensure that their harvest meet Malô’s quality standards.
Central to Malô’s vision is the provision of nutritious rice, which is an important goal in Mali where over one-third of childhood deaths are the result of poor nutrition and 38.5 percent of children experience stunted growth as a result of malnutrition. Malnutrition compromises future development because it has negative effects in terms of health as well as educational attainment and economic output. It also serves to further exacerbate ongoing humanitarian and political crises within the country. Therefore, finding ways to address malnutrition is central to many development programs.
Beyond just buying and selling rice, Malô works to build capacity among local farmers, guaranteeing that they earn the prices they deserve for their output, thus increasing Mali’s agricultural self-sufficiency. By fortifying rice, Malô provides a culturally appropriate food that helps to improve community health and sets an example of the economic viability of fortifying rice for other communities. These successes of Malô can be contrasted to the actions of traditional development actors who often provide food aid that is produced in another country and imported, thus in no way benefiting, and in some ways harming, local producers. In addition, while many traditional actors provide technical assistance to farmers to increase their agricultural output, they do little to ensure that farmers are able to get their product to market and earn sufficient income.
While by no means a perfect solution to all development challenges, social enterprises have significant potential to encourage sustainable development, and in some ways address the failings of traditional development actors. Social enterprises are also, in many ways, a correction to the failings of purely profit driven enterprises, which ignore or further grind down many of the World’s poorest people. By addressing the failures of both traditional development actors and profit driven enterprises, social enterprises offer a new way to address many of the World’s most pressing social issues and drive sustainable economic development. While not a replacement, social enterprises offer an alternative platform that if utilized properly by individuals and the international community could serve as an excellent complement to existing actors. Their hybrid structure provides social enterprises with a unique set of skills that can play an important role in addressing the challenges of international development.
Noah is from the United States. Prior to starting at IDS, he completed undergraduate degrees in International Business and International Studies. He is interested in the role of inclusive businesses in promoting sustainable development and finding ways to encourage innovation in development practice.