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«SESSION IV: SOCIAL ENTERPRISE AND PRIVATE ENTERPRISE THURSDAY, AUGUST 2, 11:00-12:45 P.M. PHILANTHROPY AND ENTERPRISE: HARNESSING THE POWER OF ...»

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SESSION IV: SOCIAL ENTERPRISE AND PRIVATE ENTERPRISE

THURSDAY, AUGUST 2, 11:00-12:45 P.M.

PHILANTHROPY AND ENTERPRISE:

HARNESSING THE POWER OF BUSINESS

AND ENTREPRENEURSHIP FOR SOCIAL

CHANGE

J. Gregory Dees

Duke University

EXECUTIVE SUMMARY:

Social entrepreneurs and supportive philanthropists are challenging conventional assumptions by deliberately using business ventures to serve the public good. This idea of using market forces in strategic ways to promote social improvements is not new, but what is new is the openness and enthusiasm with which entrepreneurial, market-oriented approaches are being embraced as an integral element in creating lasting social change. This is particularly true when the social problem being addressed is poverty in the developing world. In most developing countries, there are serious barriers to market development which prevent the poor from participating in useful economic relationships. Philanthropists can add value by directing their capital and resources to the ventures most likely to remove these barriers and engage the poor in constructive ways. In order for such business ventures to achieve lasting social impact, those who support them must address new challenges that arise and gain a better understanding of the conditions under which they operate and how philanthropists and social investors can best contribute.

I have never known much good done by those who affected to trade for the public good. It is an affection, indeed, not very common among merchants, Philanthropy and Enterprise 2 J. Gregory Dees and very few words need be employed in dissuading them from it. --Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations 1 As we enter the 21st century, over two hundred years since Adam Smith penned those words, his wisdom on this matter is being challenged by social entrepreneurs and supportive philanthropists who are deliberately using business ventures to serve the public good. George Soros candidly describes his own change of heart on this matter: “Where I have modified my stance is with regard to social entrepreneurship. I used to be negative toward it because of my innate aversion to mixing business with philanthropy. Experience has taught me that I was wrong. As a philanthropist, I saw a number of successful social enterprises, and I became engaged in some of them.” 2 The idea of using market forces in strategic ways to promote social improvements is not new. Many donors have made grants and program-related investments to enterprises that serve their philanthropic missions, including investments in some organizations that take the legal form of a for-profit venture. Without this philanthropic support, microfinance, for instance, would not have grownnearly as quickly and would not be reaching the 100 million or so that it is serving today.

What is new is the openness and enthusiasm with which entrepreneurial, marketoriented approaches are being embraced as an integral element in creating lasting social change. Established philanthropists are opening to this idea, and new philanthropic organizations are being designed to embrace it. The Acumen Fund was established in 2001 explicitly to use “entrepreneurial approaches to solving the problems of global poverty.” With founding support from Cisco Systems Foundation, Rockefeller Foundation, Kellogg Foundation, and many others, Acumen was designed to invest in “enterprises” that deliver “affordable, critical goods and services – like health, water and housing – through innovative market-oriented approaches.” In 2004, Pierre Omidyar, founder of E-Bay, and his wife Pam decided to restructure their philanthropic activities, dramatically replacing the Omidyar Foundation with the Omidyar Network, a limited liability company that could make investments in for-profits, as well as nonprofits. 3 In 2006, when the founders of Google, a wildly successful Internet search and media company, took steps to formalize their company’s “philanthropic” arm, they announced that it would be structured as a for-profit organization, “allowing it to fund start-up companies, form partnerships with venture capitalists and even lobby Congress.” 4 These are just a few of the most visible examples.

This trend is a reflection of a wider social entrepreneurship movement that emerged in the final decades of the twentieth century and has been accelerating into the twenty-first. 5

Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Edwin Cannan (ed.), (Chicago:

University of Chicago Press, 1976): 478 (originally published in 1776).

2 George Soros, Open Society: Reforming Global Capitalism, (New York: Public Affairs, 2000): 162.

3 Private foundations can and do invest in for-profits that serve their missions, but there are restrictions on this kind of activity to prevent self-dealing. A for-profit “philanthropy” avoids that issue.

4 Katie Hafner, “Philanthropy Goggle’s Way: Not the Usual,” New York Times, September 14, 2006.

5 See J. Gregory Dees and Beth Battle Anderson, “Framing a Theory of Social Entrepreneurship: Building on

–  –  –





This movement challenges old sector boundaries and encourages innovative approaches, using the tools from any sector that are most likely to be effective. 6 The logic for including entrepreneurial business ventures as part of the tool kit can be boiled down to three

principles:

1. Business ventures and markets can play an important role in creating lasting improvements in social conditions.

2. Entrepreneurs are particularly well positioned to discover and craft innovative approaches for addressing social problems.

3. Philanthropists have an essential role to play in stimulating, supporting, shaping, and even subsidizing socially beneficial entrepreneurial business activities.

In this paper, I will state the arguments for each of these principles, particularly in the context of poverty reduction, the focus of this conference. 7 I will then explore the new challenges facing philanthropists who use enterprise as a tool for achieving their social objectives, and will close with observations about how we should move forward.

BUSINESS, MARKETS, AND LASTING SOCIAL CHANGE

Proponents of the philanthropic use of enterprise point out that social and economic issues are inextricably intertwined. Anyone who wants to create lasting solutions to social problems would be wise to include business methods and market-oriented approaches as part of their overall tool kit. This is particularly true when the social problem being addressed is poverty in the developing world. They are not claiming that all social problems are amenable to market-based solutions or that any major social problem will be solved by business methods alone.

This reflects a turn away from charity, in the classic alms-giving sense. While charity may be necessary to relieve the symptoms of severe poverty, most of those fighting poverty would agree charity does not provide a lasting solution. Some, such as Muhammad Yunus, the founder of Grameen Bank, pioneer in microfinance, and 2006 Nobel Laureate, believe charity can be downright harmful. He observes, “When we want to help the poor, we usually offer them charity. Most often we use charity to avoid recognizing the problem and finding a solution for it... Charity is no solution to poverty. Charity only perpetuates poverty by taking the initiative away from the poor. Charity allows us to go ahead with our own lives without worrying about those of the poor. It appeases our consciences.” 8 Not all proponents of social entrepreneurship would be as harsh in their assessment of charity, but most of them take pains to distinguish their work from charity.

Gregory Dees, “Taking Social Entrepreneurship Seriously: Uncertainty, Innovation, and Social Problem Solving,” SOCIETY, vol. 44, no. 3, March/April 2007.

6 It is important to note that social entrepreneurship is not simply about enterprise creation. It is about finding innovative solutions to social problems. Enterprise is only one tool social entrepreneurs might use. For a general introduction to the concept, see David Bornstein, How to Change the World: Social Entrepreneurs and the Power of New Ideas, (Oxford University Press: New York, 2004).

7 Social enterprise is not simply about poverty reduction. Enter[rise can be used to address any area of potential social improvement, including health care, education, the environment, the arts, and so on.

8 Muhammad Yunus, Banker to the Poor: Micro-lending and the battle against world poverty, (New York: Public Affairs,

–  –  –

Many things can improve the quality of life and the life chances of the poor, such as education, health care, clean water, and reduced conflict, but none of these will do much to alleviate poverty without opportunities for economic participation and empowerment. 9 Martin Fisher, a social entrepreneur whose organization, KickStart, sells irrigation pumps in

Kenya and Tanzania, frames the argument:

Within less than a generation, poor families in Africa have been thrown from essentially a subsistence lifestyle into a primarily cash-based economy. Ability to earn income is suddenly a paramount skill. Yet approaches to development continue to be based on the assumption that the primary need of people in poor places is something other than a way to make money— better healthcare, education, water, housing, and so forth. This is misguided.

... The way to address the challenge of persistent poverty is to create sustainable income-earning opportunities for millions of people. Income is development. 10 Income is central, but Fisher’s logic should be extended to other forms of economic participation as well. Increases in income alone are not enough to improve the quality of life for the world’s poor. As people increase their earnings, they need access to markets with suitable and affordable products and services on which to spend their income and through which to improve the quality of their lives. 11 They also need access to savings institutions in order to build financial reserves as a cushion against tough times and as a source of capital to invest in education, housing, or business opportunities. Finally, the poor need access to credit that will allow them to leverage their own resources to improve their quality of life and productive capacity. Anyone who is serious about finding lasting solutions to poverty needs

to consider supporting economic participation in these four key roles:

Producer: Income generating and productivity enhancing opportunities Consumer: Affordable, important quality-of-life goods Saver: Secure and accessible methods to accumulate financial assets Borrower: Capital on reasonable terms In most developing countries, there are serious barriers to participation in each of these roles by the poor. Markets developing on their own typically have been slow in providing avenues of participation for the poor. Social enterprises commonly address one or more of these dimensions of economic participation.

ENTREPRENEURSHIP, INNOVATION, AND DISCOVERY

9 See Nicholas Stern, Jean-Jacques Dethier, and F. Halsey Rogers, Growth and Empowerment: Making Development Happen, (Cambridge, MA: The MIT Press, 2005): esp. 225-242.

10 Martin Fisher, “Income Is Development: KickStart’s Pumps Help Kenyan Farmers Transition to a Cash Economy,” Innovations, (vol. 1, no. 1, Winter 2006): 9.

11 This is where efforts to create products for the “base of the pyramid,” the world’s poorest, can play an important role. See C. K. Prahalad’s The Fortune at the bottom of the Pyramid: Eradicating Poverty through Profits.

(Upper Saddle River, NJ: Wharton School Publishing, 2005) and Stuart Hart’sCapitalism at the Crossroads: The Unlimited Business Opportunities in Solving the World’s Problems, (Upper Saddle River, NJ: Wharton School Publishing, 2005).

Philanthropy and Enterprise 5 J. Gregory Dees In theory, existing large corporations could take on the job of supporting economic engagement by the poor. Why support relatively new, small, entrepreneurial efforts? We have strong evidence that economies work best when they empower independent entrepreneurs to engage in innovation alongside larger organizations. Entrepreneurs engage in a process of innovation, experimentation, and adaptation that is much more difficult to execute in more centralized, bureaucratized, or politicized environments. Entrepreneurs are not constrained by the rules, budgets, cultures, or politics of larger organizations. According to William Baumol and his colleagues, “Radical breakthroughs tend to be disproportionately developed and brought to market by a single individual or new firm.” 12 Proponents of social entrepreneurship hold that the social sector needs the same kind of independent innovators to develop effective, high-potential solutions to social problems. To quote Soros again, “Philanthropy, social work, and all forms of official intervention are mired in bureaucracy. Yet there are imaginative, creative people who really care about social conditions. I have come around to thinking that entrepreneurial creativity could achieve what bureaucratic processes cannot.” 13 If there is an arena in which we need breakthrough innovations, it is in poverty reduction.

Entrepreneurs have flexibility to take risks, learn, and adapt as they go. Many will fail, and many others will significantly modify their original ideas as they learn what works and what does not. They serve as an important learning laboratory for society. This is important because there is no way to know in advance what will work as a tool for solving a persistent social problem, such as poverty. Entrepreneurs act as “Searchers,” to use William Easterly’s term. “A Searcher admits he doesn’t know the answers in advance; he believes that poverty is a complicated tangle of political, social, historical, institutional, and technological factors.



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