The WDI Social Enterprise in Emerging Markets/Democracies Initiative: Donor Exodus, the Problem of NGO Sustainability, and the Promise of Social Enterprise
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Ask any nonprofit leader the world over what dominates their schedules and keeps them awake at night, and they will say fundraising. In the United States, especially in the last decade, non-governmental organizations (NGOs) have started to explore alternative funding strategies as a way to free the organization from this constant pressure and allow staff to concentrate on mission. Some NGOs have incorporated an income generating activity or social enterprise within their existing structure, while other NGOs have been created as a largely self-financing social enterprise.
What is a Social Enterprise?
Social enterprise as an alternative funding strategy is a relatively new concept, although nonprofits like hospitals and schools have operated with social enterprise principles for decades. A social enterprise is any income-generating activity undertaken by an NGO to become more financially sustainable and less donor dependent. Social enterprise models generally fall somewhere in the following spectrum: on the one end is an income-generating activity that is not directly related to the NGO's mission, but merely serves as an organization's "cash cow" (for example, leasing unused office space); on the other end is income-generating activity and mission fulfillment in one (for example, a moving company created for the express purpose of employing ex-convicts, using part of the proceeds to train the next group of ex-convicts as movers). While one is not necessarily more desirable than the other, it is generally believed that the social enterprise that is more closely related to the NGO's mission is less likely to cause cultural clashes among staff, and more likely to improve efficiency within the organization.
NGO Sustainability in International Context
In Central and Eastern Europe and Eurasia (CEE) and Latin America and the Caribbean (LAC), NGOs have generally been slower to adopt social enterprises. There are several obstacles to social enterprise in these regions. Repressive governments, combined with strict nonprofit tax laws that seek to restrict rather than enable NGO activity, forced many NGOs to shield their operations from persecution or unwanted attention. In CEE nations where economies were until fairly recently centrally planned, there was little freedom for conventional private enterprise, much less social enterprise. Although the legal environment for NGOs is improving in some countries, NGOs must also contend with a lack of access to seed capital from international donors or local philanthropists. Foreign aid agencies have been exiting in droves from LAC and CEE countries. While many of these countries are considered middle-income according to their per-capita GDP, this statistic often reflects the averaging of extremes of poverty and wealth. According to the CIA World Factbook's latest figures, eight countries in Latin America and the Caribbean—Guatemala, Honduras, Nicaragua, Haiti, Bolivia, Colombia, Peru, and Suriname—exceed South Africa's poverty rate of 50 percent. Only 10 percent of Thailand's population lives in poverty by world standards, yet by these same standards an astonishing 80 percent of Moldova's population lives in poverty. According to GINI coefficients, the standard measure of income inequality, large pockets of persistent poverty in both regions remain comparable to rates in Asian and African countries with much larger foreign aid programs.
The philanthropic sector, especially in Latin America and the Caribbean, has historically been centered in tithing to the Catholic Church, and it has been slow to respond to changes in the nonprofit sector. In both regions, social service provision is generally considered the domain of the state, and because nonprofit funding generally derives either directly or indirectly from the state, independent NGOs have struggled from political persecution or simply lack the funds to continue operating. Many of the CEE governments have privatized the large Soviet-era state apparatuses over the last 15 years, including contentious privatizations of pension and health care systems.
During the Latin American debt crisis in the early eighties, the governments of Mexico, Chile, and the Dominican Republic, among others, sought loans from the World Bank as a lender of last resort. These World Bank loans were contingent on governments implementing certain structural adjustments recommended by the International Monetary Fund (IMF). This IMF "conditionality" attached to the loans forced governments to cut or nearly eliminate social spending from the federal budget in the name of fiscal austerity, and funds were largely redirected toward debt repayment. More recent financial crises have caused Ecuador to default on U.S. Treasury Department Brady Bonds in 1999 and Argentina to do the same in 2002.
As a consequence of the state's decreasing role in social service provision in LAC and CEE countries, NGOs have sought to fill the void and take on new and unprecedented roles as providers of social services. Funds from international donors and local philanthropy are often not sufficient to cover the high cost of serving disadvantaged populations, especially given the diminished presence of the foreign aid community in both regions. The remaining foreign support, searching for exit strategies, has tended to fund proposals to move organizations toward social enterprise, corporate partnerships, and market strategies to make them less grant dependent. NGOs have started to think creatively about funding and search for alternatives to the traditional grantseeking model.
Social Enterprise Examples from LAC and CEE Countries
Three organizations in particular exemplify the social enterprise internationally: PROFAMILIA in the Dominican Republic, Fundación ph15 in Argentina, and the Integra Foundation in Slovakia. Profiles of each organization demonstrate the need to support their efforts and encourage the sharing of best practices between them and other organizations in various stages of implementing a social enterprise.
In the Dominican Republic, the family planning clinic and advocacy organization PROFAMILIA has responded to the need for financial sustainability by adopting a social enterprise model. PROFAMILIA serves nearly half a million Dominicans, primarily women, through a cross-subsidization model: clients who pay full price in effect subsidize clients who are unable to pay or can only pay smaller amounts. They also market their own products, including condoms, birth control pills, intra-uterine devices, emergency contraception, and pregnancy tests. The organization's mission expressly states their dual commitments to reproductive healthcare and financial sustainability.
Fundación ph15 is another organization where the social enterprise is of a piece with the organization's mission. Ph15 was started by a photographer in response to a group of disadvantaged teenagers in Buenos Aires who wanted to learn photography. The "ph" stands for photography, and the "15" is a reference to Villa 15, the marginalized barrio where the teenagers live. Fundación ph15 describes itself as "a space where a group of kids look spontaneously and voraciously at what surrounds them and what they carry inside themselves, a space where they express who they are and what they feel, through images full of different lights." To help fund their work and provide a marketplace for the students' photographs, the Fundación sells the photographs on their website with profiles and quotes from the photographers. Half of the proceeds of the sale fund the photography lessons of future students, and the other half go directly to the photographer.
The final example is a Slovakian organization whose mission is to serve women at risk—divorced women, refugee women, victims of domestic violence, women with alcoholic or chronically unemployed partners, women with disabilities, and Roma—through the development of microenterprise. The Integra Foundation serves over 2,500 women at risk in Slovakia, Bulgaria, Romania, and Serbia through business start-up technical assistance and seed investment to identify markets for their crafts and products.
Although the organization began with a traditional funding model, Integra founded its own brand and a retail outlet in Bratislava, Slovakia, called Ten Senses. The store markets products made by Integra's clients, as well as other fair trade goods from across Europe, and its proceeds are used to support the business start-up program, the organization's initial purpose. The Ten Senses store is an outlet for the products that are a direct result of the microenterprise support received by the women; therefore the social enterprise is very much integrated with Integra's mission.
The WDI Social Enterprise in Emerging Markets/Democracies Initiative
The Social Enterprise in Emerging Markets/Democracies Initiative at the William Davidson Institute at the University of Michigan (WDI)—in partnership with players in the international social enterprise community—seeks to address the obstacles to social enterprise and to encourage organizations like PROFAMILIA, Fundación ph15, and the Integra Foundation to share best practices and lessons learned with each other and with the larger social enterprise community.
The Initiative supports NGOs seeking sustainability and increased social impact through application of appropriate business strategies. We draw on our network of social enterprise academics, students, NGO leaders and business experts to facilitate intellectual capital creation and documentation; encourage learning and information sharing; and apply best practices through direct technical assistance. WDI's Social Enterprise Initiative hopes to serve as a conduit: channeling resources to NGOs implementing social enterprises, and disseminating experiences and advice from those NGOs back to social enterprise researchers.
We focus our energies in LAC and CEE countries, in particular through our NGO Alliances in both regions. The two Alliances are the laboratory for our social enterprise work: ideas formulated by social enterprise researchers are "road-tested" by NGO Alliance members implementing social enterprises in difficult environments. Strategies that prove unviable are abandoned, while successful and replicable ideas are disseminated to other emerging market/democracy NGOs.
The Initiative engages in the following concrete activities. We build ongoing collaborative relationships with grassroots civil society organizations through our two NGO Alliances. We bridge the gap between social enterprise academics and practitioners through our quarterly electronic newsletter and our widely disseminated policy briefs. We provide a variety of technical assistance: business consulting from student teams and internships, faculty-led business training for NGO leaders, and NGO scholarships to attend Executive Education programs. On our website we have built a clearinghouse for social enterprise research, video clips of speakers for remote audiences, a discussion forum to facilitate direct exchange of ideas, and an online marketplace for Alliance member products (<http://www.wdi.umich.edu>).
We promote learning about social enterprise though our monthly Social Enterprise Speaker Series at the U-M. We are completing five case studies as a collaborative effort with the Nonprofit Enterprise & Self-sustainability Team (NESsT), USAID, and a team of business students that will serve as the launch of our Social Enterprise Case Study Series. We have named several social enterprise experts as WDI Research Fellows or Policy Fellows. We have also collaborated with the Harvard Social Enterprise Knowledge Network's Roberto Gutiérrez from the Universidad de Los Andes in Colombia and Kim Alter, visiting scholar at the Skoll Centre for Social Entrepreneurship at the Said School of Business at Oxford University, to define and disseminate information about social enterprise to the academic and practitioner communities.
Social enterprise is not a shibboleth nor is it an easy answer for struggling NGOs in the developing world, but with the right mix of mission and self-sustainability, NGOs will be in a better position to affect the kinds of societal changes they envision. Social enterprise, if nothing else, is another powerful element of the kind of resilient and diverse civil society that fosters economic growth and political transparency in the developed and developing worlds alike. WDI's Social Enterprise in Emerging Markets/Democracies Initiative is excited to be operating at the center of a robust community of practitioners and academics seeking to tap the promise of social enterprise.
Porter McConnell is coordinator of the NGO Alliance in Latin America & the Caribbean at the William Davidson Institute at U-M.