What are the pros and cons of having social enterprises diffuse pro-poor innovations in an innovation system? Insights from sanitation drives in India

2017_2_shyamaBy Shyama V. Ramani, UNU-MERIT, Boschstraat 24, 6211 AX Maastricht, Netherlands. ramani@merit.unu.edu

For Citation: SITE4Society Brief No.15-2018
Related to the Sustainable Development Goals (SDGs) and National Programmes : #SDG6 (water and sanitation) and Swacch Bharat Abhiyan (SBM or Clean India Mission)
Country Focus: India
SITE Focus: Technology, Innovation, Governance
Sub-disciplines of science/social science/humanities: Economics of Innovation

Based on: Ramani, Shyama V., Shuan SadreGhazi, and Suraksha Gupta. “Catalysing innovation for social impact: The role of social enterprises in the Indian sanitation sector.” Technological Forecasting and Social Change 121 (2017): 216-227.

1Context: In rural India, where 68.84% of the population lives, the 2011 Census reported that 69.3% of households are without toilets, even though toilets had been diffused by the government since the mid-1980’s. However, about 54% have mobile phones. Interestingly, from the view point of the Indian rural communities, both mobile phones and toilets are ‘innovations’ as they are new to them. Both are pro-poor, i.e. artefacts with the potential to improve their quality of life and livelihood possibilities; but, unlike mobile phones, lack of toilet usage is deemed a critical risk for environmental hygiene and public health. Now, in any innovation system, whenever there is a crisis that needs to be addressed for social welfare, and markets and public programs somehow fail to do it, then social entrepreneurship is expected to emerge and address the needs-gap.

What is social entrepreneurship? Well, it is a social or environmental value generation or dissemination activity practised by a variety of economic actors ranging from individuals (do-gooders or social entrepreneurs), micro-enterprises to large firms. In the context of innovation, the crucial distinction between business entrepreneurship and social entrepreneurship is that for the former, diffusion of innovation is the end objective, whereas for the latter, impact through innovation adoption and effective usage is key. Firms which practice social entrepreneurship are called social enterprises, if they satisfy three conditions: (i) make a market or non-market offering addressing a social need; (ii) are financially viable, either through its direct offerings (through market or non-market routes) or via third party financiers like foundations and public agencies that support its activities; and (iii) apply business management principles in their internal governance, marketing and delivery of goods/services.

2Both social entrepreneurs and social enterprises have overlapping objectives and require similar capabilities, but there is a major distinction. Social enterprises behave like corporate ventures in the social   sector, tackling a problem only if they can leverage adequate resources to achieve their financial targets, whereas social entrepreneurs practise entrepreneurial effectuation and are more likely to make do with what they have to work towards their social mission. Given the above, the study of the evolution of sanitation coverage in India forms an ideal setting to explore the potential role of social entrepreneurship as a carrier of pro-poor innovations.

Research Questions:

  1. What are the advantages and limits of social entrepreneurship as a carrier of pro-poor innovations?
  2. How can the diffusion of pro-poor innovations be incentivized via social entrepreneurship?
  3. How can the adoption of pro-poor innovations be incentivized via social entrepreneurship?

 

Motivation for Research Questions: 
3Social enterprises are getting embedded more densely within innovation systems worldwide, because financiers are interested in social impact, but lack knowledge on the BoP communities. Hence, they are seeking social enterprises to implement their welfare enhancing BoP projects. Here, social enterprises serve as catalysers to transform the resources from the providers into innovations for the intended beneficiaries such that there is a social welfare enhancing transformation. That said, given the systemic uncertainties and challenges associated with the BoP context within a constantly evolving innovation system, how does such outsourcing perform?  This query is worthwhile, because while policy makers and scholars recognize that within a national innovation system, social entrepreneurship has a crucial role to play as an innovation carrier, they are much less clear on how the system ought to catalyse this process for optimal social impact. 

 Data and Methodology Used:

Two case studies of the evolution of sanitation coverage in India were constructed, the first at the sectoral level, and the second, at a village level. The sectoral study was compiled from the existing economics literature on sanitation drives in India as well as government documents. The village case study was based on the data accumulated by the author over a period of ten years (from 2005 to 2015) as a development practitioner in a multi-stakeholder platform to improve sanitation coverage in an Indian village through social entrepreneurship. The data used comes from extensive memos, reports to donors, notes by villagers and emails exchanged as a participant-observer in sanitation drives implemented by social enterprises both in that village and in other villages of India.

Main findings and discussion: 

  1. For any challenge, composition of social entrepreneurship practitioners in an innovation system depends on the underlying business opportunities: Social entrepreneurship emerges whenever there are grave social or environmental problems, but the business opportunities for revenue generation from making impact determines which type of actor will be mainly engaged in this activity. When business opportunities are scarce, social entrepreneurs will dominate, and in the opposite case, social enterprises, with or without Presentation2social entrepreneurs will be the main actors. This was confirmed by the sectoral case study. In India’s pre-liberalization period, i.e. before 1991, passion-driven social entrepreneurs, Mahatma Gandhi and Bhindeswar Pathak being notable examples, strived for maximal social impact with whatever resources they could mobilize. The situation changed completely thereafter.

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2. For any challenge, greater business opportunities will increase the volume of social entrepreneurship: Echoing the widely confirmed proposition for mainstream innovation driven sectors that tend to emerge and grow, when there are institutions ready to bear the costs of risky investment, the density of social enterprises and the volume of their activities in an innovation system will also depend on the financial resources made available for risky pro-poor innovation creation and diffusion. After liberalization in 1991, and the declaration of universal sanitation coverage as a national mission, business opportunities for social enterprises were created by the state, international agencies, faith-based organizations from foreign countries, industry associations and large firms. Notably, unlike in mainstream knowledge intensive sectors, in the context of deep poverty, multinational faith based organizations that have established their legitimacy are an important financier.

  1. Collaboration with social enterprises poses strategic risks: Sanitation drives are a principal agent game, where the principal is the sponsor and the social enterprise is the agent. A principal-agent model is a setting where the payoff to the principal 5depends on an action taken by the agent, which may not be observable. Further, the principal may not be able to fully confirm some of the agent’s characteristics such as the latter’s true intentions about fulfilling the contractual obligations or engagement. Thus, when financiers interested in making a social impact, say toilet usage, hire social enterprises on the basis of trust, despite incomplete information about the latter’s capabilities or intention, they take strategic risks that are no different from those taken with organisations in mainstream markets. Strategic uncertainty stemming from incomplete information about social enterprises can pose risks at the level of partner selection and thereafter in contract implementation. Adverse selection or inadequate selection processes may lead to the hiring of an ill qualified partner. Thereafter, imperfect monitoring systems and/or incentive systems can allow for moral hazard in the form of inadequate effort by the social enterprise. Both these problems can lead to sub-optimal outcomes as illustrated in our case studies.

 

  1. Access ≠Adoption ≠Sustained usage = Demand side challenges: Our village case study demonstrated that ‘need’ is not always a ‘want’ of the BoP and further it need 6not be supported as ‘demand’ i.e. willingness to pay. After adoption, there can be abandoning, and thus ‘adoption’ need not be maintained or sustained. This is because in BoP markets, there is often a gap in perceptions of innovation value between the provider and intended beneficiaries. Unless this gap is breached, the intended beneficiaries are not motivated to adopt the innovation efficiently. The innovation providers may not be aware of other challenges faced by intended beneficiaries such as lack of financial resources, ownership of required complementary assets (say water for toilet use), knowledge and skills for usage and maintenance of the innovation provided. Again, if these problems are not tackled, the social impact will be sub-optimal, as the dynamics of toilets abandoning revealed in our case study.

 

  1. Systemic Implementation challenges: Even in the absence of adverse selection (i.e. the partners are good) and moral hazard (i.e. no partner cheats), there could be systemic challenges like unexpected inflation, lack of capabilities, sudden problems in supply etc. as captured in the figure.

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Policy Recommendations:

Financiers should take a long term view: To enhance the positive social impact from pro-poor innovations the focus must not only be on the management of technology, but also on the management of social impact. Rather than opportunism for its own sake, it is the cost, time and target-driven pressures embedded in the project routines of financiers and revenue maximizing social enterprises that drive the system towards immediate rather than long term social impact maximization. These problems can be addressed if financiers are made aware of them.

8Sustainability audits should be introduced for social enterprises: While striving to create an enabling environment for social entrepreneurship, long term impact evaluation audits must be conducted to identify and reward ‘sustained social impact’ makers. For this purpose, devising guidelines corresponding to the sector or pro-poor innovation concerned, along with workshops for the social enterprises on the quality and sustainability of their initiatives can promote early systemic dialogue for best possible impact. Social enterprises have to be induced to go beyond provision of knowledge, technology or products for immediate impact to catalyze efficient adoption for sustained social impact.

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