Social enterprises and poverty reduction

Why does social enterprise have to operate at the margins? Why does it have to be small when poverty is only getting bigger? Social leadership today seems fixated on smallness: microcredit, small fair-trade boutiques, small CSR projects, individual small enterprises.
Clearly, the beauty in small things is that they can be tailored to respond to unique local conditions and aspirations. But can't responsiveness and respect for uniqueness be brought to scale?
This is the challenge assumed by a new London-based organisation called Globalegacy.
One day in 1999, I realised that I needed to change careers to really address poverty.
Ironically, I was executive director of a sizeable international NGO focused on community-based sustainable development.
On this particular day, I met leaders of an impoverished fishing community near Porto Alegre, Brazil, to discuss how to secure resources for a communal dock and refrigeration facility, which would transform their individual efforts into a real enterprise.
I could not help feel despondent that governments and international development organisations were unwilling to make substantial investments in bottom-up development initiatives like this one, despite the fact that my organisation had secured an entire chapter in the 1992 Rio Earth Summit action plan endorsing our 'Local Agenda 21' development strategy.
In 2002, I met Craig Cohon, Globalegacy's founder. He had recently left a 14-year career as a Coca-Cola executive where he oversaw budgets of hundreds of millions. When Craig decided to focus his career on the big issue, poverty, he tellingly moved outside of a major corporation to pursue a different business model.
Craig can still find his friends at the World Economic Forum in Davos while mine will more likely be at the World Social Forum in Porto Alegre, but from the start we felt that both Forums had a common limitation: they were thinking small about big global problems.
Our task has been to devise a social enterprise strategy that matches Porto Alegre commitment to community empowerment with Davos ingenuity on delivery and scale.
The resulting strategy focuses on scaling existing and new models of social enterprise in order to transform basic economic relationships between poor communities and the global economy.
We propose to reposition social enterprise, currently viewed as a quasi-charitable alternative to mainstream capitalism, as a mainstream global business segment that advances a new model of social capitalism.
TRANSFORMING ECONOMIC RELATIONSHIPS: The irony of successful social enterprise today is that poverty is increasing even in communities where social enterprises operate successfully. For example, a major review of successful microcredit programmes in Bangladesh concludes that while microcredit effectively helps families respond to risk and crisis, its impact on poverty has been small.
Globalegacy's hypothesis is that poor communities remain poor, despite increases in incomes, because their relationships with regional or metropolitan economies are typically characterised by negative exchanges. Poor communities are highly dependent on imports of products (eg clothing) and services (eg rent).
Their major export - unskilled labour - does not balance their trade account. Businesses successfully established in low-income areas tend to relocate. Impoverished communities tend to lack standard mechanisms for creating and retaining wealth, eg property ownership and banking facilities.
In short, chronically poor communities have resource-leaking poverty economies. As they connect to the global economy, they leak more acutely as imports increase, skilled workers relocate, and informal exchange systems give way to customer relationships where profits are repatriated.
Typical social enterprises provide services and help to circulate money in the poverty economy for longer, but do not plug leaks.
If this hypothesis is correct, then we need to focus less on the success of individual social enterprises and more on building entire enterprise clusters to transform the economic relationship between the impoverished community and its metro/regional market.
SMALL LOCAL ENTREPRENEURS AND MNCs: The failed promise of massive foreign direct investment (FDI) by MNCs in developing countries during the 1990s has been well analysed. But social enterprises need mainstream business support and partnerships if they wish to transform local poverty economies via export trade with more affluent markets.
The challenge facing social enterprises is threefold. They need to move beyond servicing only local, community markets to competing with traditional businesses in the metro market or beyond, channel more FDI to truly impoverished areas, and help tailor FDI investment so it improves rather than worsens local conditions.
MNCs also need to develop business in these markets.
This is where social entrepreneurs gain leverage. Consider the challenge facing McDonald's. To meet investor expectations, it must grow its business by 8-10 percent each year - equivalent to starting or acquiring a new Starbuck's-sized enterprise - very difficult in the limited, saturated markets presently served by MNCs.
Consider the world food industry: 91 percent of international food retailers' stores are located in high-income countries, serving only 16 percent of the world's population. But the poor still buy and sell food - 200 million urban farmers world-wide supply food to 700 million people.
If international retailers want to expand into these markets, they need to redefine their business model and find a way to partner with local food entrepreneurs.
GLOBALEGACY'S APPROACH: Globalegacy partners with community organisations and entrepreneurs, local governments and MNCs to establish local enterprise development companies (EDCs) that specialise in providing business development services tailored to each city's unique local market conditions and development aspirations.
Their longer-term mission is to support creation of export-oriented enterprise clusters. Through these EDCs the local social enterprise sector can secure local government's political, policy and financial support, and MNC talent, partnership and investment. MNCs learn how business can succeed in each market and are given opportunities to invest in or partner with relevant local companies.
Globalegacy has just established its first such enterprise development company in London and plans to start a second in South Africa in early 2004. Once established on a financially sustainable basis in their initial, targeted metro markets, they will support similar start-ups providing services to other metro markets in their country. These companies provide MNCs with an alternative to their top-down cookie-cutter models developed in affluent markets and enable them to become specialised investors in building new business lines from the bottom up. For example, a large fast food MNC might support a group of food vendors to standardise their local food offerings, apply effective health controls, regularise their supply chain and create an infrastructure to deliver products to the metro market daily. This MNC would be building a competitive local business and positively transforming its brand from a company offering McWorld choices and lifestyles to a company that empowers diversity and local communities.
Another mechanism created by Globalegacy to link MNC resources with local entrepreneurs is Stretch, a limited company that matches top quality MNC managers with local social entrepreneurs on 3-6 month business development assignments, designed to provide real mutual business development benefit.
IMPORTANCE OF COMMUNITY EQUITY: Today, SRI and social venture capital models position poor communities as charity-like beneficiaries of social enterprise investment. But if social enterprise is to become a vehicle through which poor communities can pursue their development aspirations, these communities must be engaged as investors and shareholders.
Hence Globalegacy's strong emphasis on community equity, which means that a significant portion of the equity of any enterprise it supports, including Globalegacy EDCs, must be provided to Globalegacy's community-based partner organisations - community banks, community development NGOs/CBOs, local trusts.
This does not mean that equity will be provided as a new form of charity. Access to equity will be provided in the form of warrants or options, exercisable at a low price, providing a form of compensation for each organisation's 'investments' in the enterprise.
These range from providing office space or access to a network to supporting the creation of a community bank.
Community equity ensures that part of the returns from successful enterprises - whether they remain located in the community or not - accrue to a dedicated community institution for reinvestment in the community.
It also makes it viable for traditional MNCs to be accepted as investors - not just CSR players - in the new business segment.
It ensures that when an MNC invests in a local company to pursue its traditional business objectives, its efforts are overseen by local leaders who play an active role in corporate governance. Community equity, in other words, permits the company to act as a vehicle for real partnership between community, corporate and public investor - to engage in a new model of social capitalism.-Courtesy Alliance