A
N EXPLORATION OF THE DETERMINANTS
OF THE SOCIAL ENTREPRENEUR
Pitfalls and Promises in the Global Entrepreneurship Monitor’s Social Entrepreneurship Study
Julia Verheul 10455523 18 August 2014
MSc Business Studies: International Management University of Amsterdam
First Draft Master Thesis Supervisor: Dr. A.R. Muller Second reader: Dr. J.P. Lindeque
ABSTRACT
Social entrepreneurship is a topic of growing interest of academic researches and governments. Social entrepreneurs are individuals and groups with certain skills, capabilities and values, concerned with social change and looking for opportunities to create social wealth. However, little is known about what drives them and what factors influence cross-country variations in social entrepreneurship. Moreover, the field of social entrepreneurship is still in a stage of infancy.
Currently, little empirical quantitative research has been done to accelerate findings in this field. For this reason, the main purpose of this study is to statistically explore determinants of the social entrepreneurs’ context that might affect the probability of an individual to engage in social entrepreneurship. Therefore, several determinants from the demand and supply side theories of entrepreneurship are used to explore how macro-level and micro-level influences, including socio-political, economic and cultural influences, stimulate or impede social entrepreneurship.
Six hypotheses are formulated and a logistic multilevel model covering country level and individual level variables are used. Data was collected from the Global Monitor Entrepreneurship’s Adult Population Survey on social entrepreneurs combined with data from other sources. Data of a total of 67,647 individuals covering 28 countries are included in the model.
The results show that motivational supply-side factors best explain the probability of engaging in social entrepreneurship. A supportive context for entrepreneurship seems to be especially conducive. This research has several contributions. First, it increases understanding of the social entrepreneurs’ determinants, thereby developing the field of social entrepreneurship. Second, by multilevel modelling, the exploration of big data and the use of open source data opens a more validated discussion of this phenomenon.
Keywords: Social entrepreneurship; Social Enterprise; Social Entrepreneur; Supply-side; Demand-side; Global Entrepreneurship Monitor
TABLE OF CONTENT
LISTOFTABLES ... 4
LISTOFFIGURES ... 4
1. INTRODUCTION ... 5
2. THEORETICAL BACKGROUND ... 10
2.1. WHAT IS SOCIAL ENTREPRENEURSHIP? ... 10
2.1.1. Concept and Perspectives ... 10
2.1.2 A Working Definition of Social Entrepreneurship ... 14
2.2 DETERMINANTS OF SOCIAL ENTREPRENEURSHIP:AFRAMEWORK ... 15
2.2.1 Demand Side Perspectives ... 18
2.2.2 Supply Side Perspectives ... 23
3 DATA AND METHODOLOGY ... 33
3.1 DATA COLLECTION ... 33
3.2 DEPENDENT VARIABLE:MEASURES OF SOCIAL ENTREPRENEURSHIP ... 35
3.3. INDEPENDENT VARIABLES ... 36
3.4 CONTROL VARIABLES... 40
3.4.1 Individual Level Control Variables ... 40
3.4.2 Country Level Control Variable ... 41
3.5 MULTILEVEL ANALYSIS ... 43
4. RESULTS ... 47
4.1 CORRELATIONS AND MULTICOLLINEARITY ... 47
4.2 MULTILEVEL MODELING AND HETEROSKEDASTICITY ... 47
4.3 HYPOTHESIS TESTING ... 51 5. DISCUSSION ... 53 5.1. MAIN FINDINGS ... 53 5.2. LIMITATIONS ... 58 5.3PRACTICAL IMPLICATIONS ... 60 6. CONCLUSION ... 62 ACKNOWLEDGEMENT ... 64 REFERENCES ... 65 APPENDIX ... 73
LIST OF TABLES
Table 1. Overview of the Hypotheses and Their Proposed Effect 32
Table 2. Survival versus Self-Expression Index 37
Table 3. Descriptions of Variables for the Multilevel Model 42
Table 4. Variance Inflation Factors 44
Table 5. Country Level Variables (Bivariate Correlations) 47 Table 6. Individual Level Variables (Bivariate Correlations) 47 Table 7. Multilevel Logistic Regression Analyses Predicting the Probability 48
of Starting a Social Enterprise
LIST OF FIGURES
Figure 1. Research Model: Country-Level and Individual-Level Determinants 18
of Social Entrepreneurship
Figure 2A. Results: Scale 0.5 – 2.0 49
1. INTRODUCTION
“What business entrepreneurs are to the economy, social entrepreneurs are to social change. They are the driven, creative individuals who question the status quo,
exploit new opportunities, refuse to give up, and remake the world for the better.”
David Bornstein
Entrepreneurial initiatives, creativity and drive are nowadays perceived as the sources of economic growth and wealth creation. The general image people tend to have of entrepreneurs is one of business founders, money and prosperity. However, money is not necessarily the sole driving force. In the past decade, a shift took place and a new phenomenon emerged: social entrepreneurship.
Social entrepreneurs pursue a social mission when they engage in a business opportunity. The better part of academic literature on social entrepreneurship relates to exploiting opportunities for social change and improvement, rather than traditional profit maximization (Austin, 2006). This implies that social entrepreneurs are individuals and groups with certain skills, capabilities and values, concerned with social change and who are looking for opportunities to create social wealth. Moreover, the main characteristics of the ideal social entrepreneur, or “social hero”, are that they adopt a social mission while acting boldly and repeatedly on new opportunities to serve this mission. Also, they demonstrate an innovative approach of adaptation and learning (Dees, 1998). Hence, often under the umbrella of construction of social entrepreneurship, other related concepts are discussed such as social enterprises, non-market entrepreneurship, social venturing and sustainable entrepreneurship (Defourney & Nyssens, 2008; Hall, Daneke & Lenox, 2010; Sharir & Lerner, 2006; Shockley, 2009). Moreover, the boundaries of social entrepreneurship entail a mixture of private and public, profit and non-profit activities.
According to Mair and Marti (2006), social entrepreneurship is the trend of the 21st century. A major reason for the emergence of social entrepreneurs is the prevalence of certain needs in nowadays society. For example, according to the World Bank, 2.4 billion people are living below the poverty
line, earning less than $2 a day. Considering these numbers and the consequential problems such as starvation, illiteracy and short life expectancy, it is hardly surprising that there is a growing interest in the phenomenon of social entrepreneurship. In fact, just a quick glance suffices to see striking examples of social entrepreneurs in action. One of these individuals is Nobel Peace Prize winner Mohammed Yunus, who founded the Grameen Bank and has been pioneering the concept of micro-credit. The bank provides loans to nearly five million impoverished people in Bangladesh.
Social movements are also on the rise, such as the Skoll Foundation, the Ashoka Foundation and the Schwab Foundation, which have begun to advocate social entrepreneurship. One special characteristic of social entrepreneurship as a trend is its expansion within different domains such as politics, finance and business (Mair, 2010). In line with this thought, Thompson (2002, p. 414) cited former British Prime Minister Tony Blair, who states:
“In the second half of the century we learnt that government cannot achieve its aims without the energy and commitment of others—voluntary organizations, business, and crucially, the wider public . . . every year thousands of social entrepreneurs achieve extraordinary things in difficult circumstances.”
The recent Social Business Initiative introduced by the European Commission marks an important milestone in the promotion of national and subnational eco-systems for social entrepreneurial activities. As has been claimed by the Organization for Economic Co-operation and Development (OECD), the presence of social enterprises, and thus the promotion of their development, may result in short and long-term benefits. For instance, social entrepreneurs introduce innovative methods of addressing social needs. Furthermore, social enterprises are often better able in being effective in meeting public goals than purely public or purely private actors. The reason being that they are mostly locally rooted, that they have the knowledge, skills, and most importantly, they have explicit social missions. The role of social enterprises in the creation of jobs is also widely held (OECD, 2013). Jobs created in social enterprises tend to show valuable features, such as the support of vulnerable individuals in society. Consequently, hopes are pinned on social entrepreneurs to come up with effective solutions for present as well as future economic and social needs of society. Hence, the
increasing attention from both academics and policymakers into social entrepreneurship is not surprising (Dees, 1998; Hoogendoorn, Zwan & Thurik, 2010).
According to Dees (1998, p.5), “social entrepreneurs are a rare breed”. Understanding what drives them, how they interact with their environment and where they are prevalent seems crucial to be able to benefit from their significance and social importance (Lepoultre, Justo, Terjesen & Bosma, 2013). In the past few years, more and more researchers pointed towards context as a key role player in social entrepreneurial activity (Austin, 2006; Mair & Marti 2006, 2009; Short, Moss & Lumpkin, 2009). According to Boettke and Coyne (2009), only within a certain context do entrepreneurs have the incentive to discover and exploit opportunities. As argued by Austin (2006), contextual factors, such as regulatory, sociocultural and macroeconomic factors, all influence the prevalence of social entrepreneurship. Moreover, this context determines the business model, tactics and strategies applied by social entrepreneurs.
Some academics have recently begun to explore social entrepreneurship in an international context. Zahra, Rawhouser, Bhawe, Neubaum and Hayton (2008) note that, due to an increasing global wealth disparity, institutional and state failures, liberalization, technological advances and a rising awareness for the global environment, social opportunities are globalizing. Often, societies have to face uncertainty and rapid changes while they do not have the necessary tools or cost-efficient solutions. As suggested by North (1990), societies need “adaptive efficiency” in order to solve their social problems now as well as in the future. Numerous social entrepreneurs act on these social issues.
The work of Kerlin (2006, 2009, 2012), Nissan, Castano and Carasco (2012), and Hoogendoorn and Hartog (2011) began to map the differences in prevalence rates across countries. They stressed the importance of understanding how environmental factors influence the emergence of social entrepreneurial initiatives. In line with this consideration, Kerlin states that (2009, p. 32) “with much of the international literature focused on individual social entrepreneurs and case studies, broad organizational trends in social enterprise associated with particular regions or countries have been overlooked. Such organizational trends are important because they signal what is currently the easiest route for social enterprise activities in a given context.”
social entrepreneurs is not the key to their expected benefits as innovators and problem solvers. In addition, a set of supporting institutions1 is needed to promote an adequate level of social entrepreneurship. This includes the legal, cultural and organizational environment. Likewise, Baumol (1996) argues that entrepreneurship is an omnipresent feature of human nature and that the level of entrepreneurial spirit is the same across countries. The differences, however, are a consequence of how this entrepreneurial spirit is channeled. Hence, research may illuminate which contextual elements impose barriers or enable opportunities. Despite the growing interest, scholarly inquiry in this respect is still in a stage of infancy.
Therefore, this study focuses on determinants that might facilitate or hinder the level of social entrepreneurial activities and related perceptions. This will ultimately help to shed further light on the social entrepreneurial environment influenceable by policy makers. As such, it is one of the first to explore how features of the institutional landscape influence the probability of individuals to engage in social entrepreneurship. Furthermore, it will address how these determinants can be measured statistically using the Global Entrepreneurship Monitor.
The field of social entrepreneurship is dominated by conceptual work. The infancy of the field means that there is a shortcoming in the amount of empirical research. Short et al. (2009) emphasize the need for more studies that test the generalizability of theoretical propositions. Furthermore, they argue that the next vivo decades should serve to vastly augment the literature on social entrepreneurship and to establish legitimacy. Therefore, this study applies multilevel modelling to complete the currently used case study techniques. The Adult Population Survey (APS) 2009 of the Global Entrepreneurship Monitor (GEM)2 is used, which includes a special edition on social entrepreneurship. The attractive features of the GEM APS 2009 data have inspired a growing body of empirical research in comparative social entrepreneurship that explores associations between
1
The economic view of North (1990) describes institutions as the “human devised rules that shape human behavior” (p. 3), the sociological view of Meyer and Rowan (1991) refers to conventions “that take a rule-like status in social thought and action” (p. 42) (e.g. social processes, obligations and actualities).
2GEM was designed in 1999 and is a cross-national harmonized dataset on entrepreneurship. It has been assembled to facilitate cross national comparisons in the level of national entrepreneurial activity (Reynolds, 2011). In addition, GEM enables to estimate the role of entrepreneurial activity in national economic growth and provides insights into the determining factors that influence variety in the level of entrepreneurship across countries.
meso-macro attributes and social entrepreneurship and is, up until now, the only global dataset to measure social entrepreneurship.
In brief, this study responds to the call for further research on understanding the determinants of social entrepreneurship and the call for empirical, quantitative research. Several determinants of social entrepreneurship will be explored after constructing a large cross-national data set, based on GEM APS 2009, combined with data from various institutions. As such this study offers several contributions, both to the academic field and to practice.
First, the greater part of the literature on entrepreneurship emanates from commercial motives (Dacin et al., 2010; Nicholls, 2010; Short et al., 2009) and therefore may not be relevant for social entrepreneurs who may have other motivations aside from profit (Hoogendoorn & Hartog, 2011). This study proposes to advance past research in social entrepreneurship.
Second, it aims to contribute to a better understanding of what stimulates individuals to engage in social entrepreneurship and how this is influenced by contextual features. In this way, it enhances understanding of what makes some countries or regions more social entrepreneurial than others. This will be particularly relevant for managers willing to practice social entrepreneurship. Also, it may contribute to a better understanding of social entrepreneurs by governments and policy makers. Given the benefits of the presence of social entrepreneurs, it is of both theoretical and practical interest to better understand the roots of social entrepreneurship and to identify supporting institutions.
Last, by using a multilevel model approach this study introduces the use of more rigorous techniques that, as urged by Short et al. (2009), are highly needed to increase validity in the field of social entrepreneurship.
This study is organized as follows. The next section provides a theoretical background and introduces a definition of social entrepreneurship. Furthermore, it introduces a framework of determinants likely to influence social entrepreneurship and postulates hypotheses. The subsequent chapter elaborates on the data and methodology used. The final part of the study discusses the results and proposes implications for further research.
2. THEORETICAL BACKGROUND
2.1.
What Is Social Entrepreneurship?
This section explains the realm of social entrepreneurship and the emerging academic interest. First, it will elaborate on the state of art regarding the field of social entrepreneurship. Second, a working definition of social entrepreneurship will be brought forward.
2.1.1. Concept and Perspectives
Social entrepreneurship research covers a period of almost twenty years with the first article appearing in 1991 (Short et al., 2009). Although the increasing interest in social entrepreneurship has led to a significant increase in publications, research has been challenging.
An important stream in the study of social entrepreneurship has been dedicated to defining the concept. Many researchers have focused on explaining what social entrepreneurship exactly entails and emphasize the lack of consensus on the concept. Definitions of social entrepreneurship have been developed in a number of different domains and yet a generally accepted definition does not exist (Fowler, 2000; Peredo & McLean, 2006; Hoogendoorn & Hartog, 2011)3. According to Light (2006), the current definitions are too exclusive, whereas Martin & Osberg (2007) argue that they are too inclusive. However, the majority of the literature refers to an ability to leverage resources that address social problems. A key distinction that can be found in all definitions is the social mission as the driving force behind all social initiatives. Social mission is defined broadly to include societal, health, economic, environmental aspects and human welfare in the social entrepreneurial actions (Zahra et al., 2008). According to Dees (1998, p. 4), “Any definition of social entrepreneurship should reflect the need for a substitute for the market discipline that works for business entrepreneurs”.
To reflect this, the five main characteristics meant to define a social entrepreneur are: (1) Adopting a mission to create and sustain social value (not just private value); (2) Recognizing and relentlessly pursuing new opportunities to serve that mission; (3) Engaging in a process of continuous innovation, adaptation and learning;
3For a discussion of the different concepts and definitions, see: Mair (2010); Zahra et al. (2009); and Dacin et al. (2010).
(4) Acting boldly without being limited by resources currently in hand;
(5) Exhibiting heightened accountability to the constituencies served and for the outcomes created.
Other streams of research aim to compare social entrepreneurship to other forms of organizations, such as the studies identifying the differences and similarities between social entrepreneurs and commercial entrepreneurs. Catford (1998) notes that both social entrepreneurs and commercial entrepreneurs have a high awareness for social justice. Furthermore, Prabhu (1999) states that social entrepreneurs have a high resistance to uncertainty and have, just as their commercial counterparts, the tendency to control their environment. As noted by Austin, Stevenson and Wei-Skillern (2006), a key distinction between social entrepreneurs and mainstream entrepreneurship has to do with the mission of the entrepreneur. The bottom line of a social entrepreneur is to create social value by addressing a social need whereas, for commercial entrepreneurs, the bottom-line is usually to maximize profits. Besides the role of earned income, two other selection criteria seem to stand out in the pertaining literature: the predominance of a social mission and the importance of innovation (Lepoultre et al., 2013). In addition, Austin (2006) argues that whereas commercial entrepreneurs aim for breakthroughs and creation of new needs, social entrepreneurs are primarily concerned with creating innovative approaches to effectively address long-standing needs.
Another stream of research focuses on the core elements of social entrepreneurial processes, such as the identification of social opportunities (Ferri & Urbano, 2010). Zahra et al. (2008), for example, note that social opportunities emerge from a combination of pervasiveness, relevancy, urgency, accessibility and radicalness. For instance, whereas urgency is one of the main reasons for individuals to enroll in social entrepreneurial activities, for commercial entrepreneurs this might be less attractive because of their focus on profits. Moreover, urgent needs may disappear, which is discouraging for a commercial entrepreneur aiming for sustainable competitive advantages (Zahra et al., 2008). Furthermore, the market size has to be large or growing in order to be structurally attractive for commercial entrepreneurs, whereas for social entrepreneurs a recognized social need is usually sufficient. In addition, it has been argued that the discipline of the market applies less to social entrepreneurs (Austin et al., 2006). The fact that social entrepreneurs pursue a mission to create social
value instead of aiming for economic returns may protect them from the same type of punitive discipline that occurs in the commercial marketplace (Austin et al., 2006). For instance, in many situations social entrepreneurs pursue an opportunity despite an unfavorable context. In fact, the unfavorable context may be a reason for social entrepreneurs to pursue opportunities to address social change. For this reason, social entrepreneurs are expected to act differently to adverse contextual conditions than their commercial counterparts (Austin et al., 2006).
Lastly, one research domain is dedicated to the identification of environmental factors. Overall, it has been argued that background and context explain a large part of social entrepreneurial activity. Moreover, it provides more insights in what facilitate their prosocial behaviour (Robinson, 2006). In their effort to fulfill social and economic goals, social entrepreneurs often have to face complex and unpredictable environments (Neck, Brush & Allen, 2009). Along the same line of reasoning, Mair and Marti (2009) note that social entrepreneurs address social needs that market or governments inadequately provide. In this sense, social entrepreneurs create social opportunities in situations when others fail to address certain needs. Hence, it is proposed that social opportunities and institutional contexts are connected (Zahra et al. 2008).
In the current state of research on the conditioning factors of new social enterprises several factors are suggested to be conducive to the rate of social entrepreneurial activity, such as the prevalence of environmental or social problems (Elkington & Hartigan, 2013; Mair & Marti, 2006; Zahra et al., 2008), a culture supporting entrepreneurship and the level of development of economic and social and formal systems (Borzaga & Defourney, 2004; Elkingtong & Hartigan, 2013). While the majority of the articles on social entrepreneurship use qualitative methods4 and are primarily case studies, the introduction of the GEM’s special edition on social entrepreneurship places social entrepreneurship into the broader framework of the regulatory, social-cultural, demographic, political and macro-economic context. As a result, the exploration of the determining factors in the context of social entrepreneurs has started (Estrin, Mieckwich & Aidis, 2013; Hoogendoorn & Hartog, 2011; Lepoultre et al., 2013; Urbano & Ferri, 2010).
4 See Short et al (2009, p. 165) for the complete overview of characteristics of conceptual and empirical articles on social entrepreneurship.
While using different theories for assessing the determinants of social entrepreneurship, these works all assume that social entrepreneurial processes are both influenced and regulated by regional and country-level attributes such as formal and informal institutions5 and economic and demographic conditions. For instance, Kerlin (2012) provides a comprehensive analysis of social enterprises in seven regions around the world by using the social origins theory6. Lepoultre et al. (2013) provide a descriptive analysis of the variation in social enterprise activity across countries. Urbano and Ferri (2010), Hoogendoorn and Hartog (2011) and Estrin et al. (2013) have analyzed the GEM APS 2009 dataset and present regression analyses. Hoogendoorn and Hartog (2011) explore the macro-economic drivers of social entrepreneurship and indicate that social entrepreneurship is a welfare driven phenomenon. However, it should be noted that sixty percent of the variation in the rates of social entrepreneurship across countries remain unexplained (Hoogendoorn & Hartog, 2011). Furthermore, Ferri and Urbano (2010) focus on several informal and formal institutions and find that public spending and social attitudes influence social entrepreneurship. Still, they indicate that further insights into financial structures and support measures, such as social networks, are needed. Estrin et al. (2013) explore social entrepreneurship from a micro perspective and analyze the individual’s choice on becoming a social entrepreneur. Accordingly, they argue that social entrepreneurship seems to attract people with different socio-demographic profiles compared to commercial entrepreneurs. They refer to the value or goal orientations underlying social and commercial entrepreneurship to explain their findings. They conclude that future research is needed to tease out the underlying mechanisms. Thus, while these studies focus on different aspects of the social entrepreneurial context, they all suggest the high importance of environmental factors to the emergence and implementations of social entrepreneurial activities. Despite these contributions, quantitative cross-national studies of what actual increases the probability of an individual to engage in social entrepreneurship (over commercial or non-entrepreneurship) are scarce.
5 Based on North’s (1990) institutional framework. The institutional framework (1990: p. 6) is defined as “the set of fundamental political, social, and legal ground rules that establishes the basis for production, exchange, and distribution” and is divided in informal and formal institutions.
In short, while much has been written on defining social entrepreneurship, its characteristics and how it differs from mainstream entrepreneurship, it can be concluded that few studies have put social entrepreneurship in relation to contextual variation and quantitative cross-countries studies are limited. Most notably, the difference in prevalence across the globe and how social entrepreneurship is influenced by its social, economic, political, cultural context has been an understudied subject, whereas it seems that the market-selection mechanisms work differently for social entrepreneurs than for commercial entrepreneurs. As argued by Prahblu (1999) the background of the social entrepreneur is crucial for triggering the desirability of starting a social enterprise. Therefore, this study continues on these previous works and aims to capture more information of the contextual influences of social entrepreneurs. Thus, as suggested by previous research, the remainder of this study focuses on several cultural and other institutional determinants that increase the probability of individuals becoming social entrepreneurs.
2.1.2 A Working Definition of Social Entrepreneurship
Several scholars (e.g., Short et al., 2009; Zahra et al., 2008) recommend using a broad definition of social entrepreneurship. In addition, in order to do an international comparative analysis a universal applicability of the concept is needed. In line with the used data set, this study adopts the following views proposed by Mair and Marti (2006, p.37):
“First, we view social entrepreneurship as a process of creating value by combining resources
in new ways. Second, these resource combinations are intended primarily to explore and exploit opportunities to create social value by stimulating social change or meeting social needs. Third, when viewed as a process, social entrepreneurship involves the offering of services and products but can also refer to the creation of new organizations” (Lepoultre et al., 2013).
To that effect, the following definition of Zahra et al. (2008; p. 118) has been retained and slightly adapted: “Social entrepreneurship encompasses the activities and processes undertaken by individuals and organizations with a social mission, to discover, define and exploit opportunities in order to enhance social wealth in an innovative manner.”
This definition covers the various key aspects of social entrepreneurship. Social wealth is referred to as the result of the social value created minus the social cost (Zahra et al., 2009)
2.2 Determinants of Social Entrepreneurship: A Framework
One major reason for the difficulty policy makers and academics have with understanding the variety of prevalence of social entrepreneurial activities is that it is an interdisciplinary subject, spanning a vast range of fields. Therefore, in addressing why variations in social entrepreneurship occur the Eclectic Theory proposed by Verheul, Wennekers, Audretsch and Thurik (2002) is introduced. The Eclectic Theory is derived from literature on mainstream entrepreneurship. A way to study the determinants of social entrepreneurship is according to the level of analysis. From this perspective, a distinction can be made between the micro-, meso-, and macro-level of social entrepreneurship. The differences between these levels of analyses are respectively the individual entrepreneurs, the sector or industry and the national economy. In the literature on mainstream entrepreneurship, it is asserted that entrepreneurial success partly depends on behaviors and characters of the individual; however, certain environment conditions can help or hinder these entrepreneurial activities (Lee & Peterson, 2001). For instance, family, financial resources, support systems and governments all are possible influences on entrepreneurial activities. Hence, a combination of political, cultural, economic and social forces may have an influence on the supply of and demand for social entrepreneurs. The main purpose of the eclectic theory is to provide a coherent framework that combines the different strands of entrepreneurship.
In the core of the Eclectic Theory is the integration of determinants shaping the supply of entrepreneurs on the one hand and the determinants influencing the demand for entrepreneurs on the other. According to Verheul et al. (2002) in order to explain the level of entrepreneurship discrimination between demand (product market perspective), and supply factors (labor market perspective) is customary. Factors on both sides of the demand and supply of entrepreneurship are the intermediary linkages between aggregate conditions and the probability to engage in entrepreneurship. These conditions include opportunities, ‘external’ resources and ‘internal’ individual characteristics such as preferences, i.e., values and attitudes (Verheul et al., 2002). Considering, that the
market-selection mechanisms work differently for social entrepreneurs and since the profit motive (economic returns) that forms the motivation for commercial entrepreneurs to take risks is less important for social entrepreneurs, it is expected that contextual features work differently in shaping the demand side and supply side of social entrepreneurs. Thus, identifying the factors drifting either the supply or the demand sides of social entrepreneurship is the key for policy makers to understand how policy instruments can contribute to increase social entrepreneurship rates.
Figure 1 displays the proposed research model and is a mixed-determinant multilevel model that covers the varying determinants from supply and demand-side perspectives that affect the probability of an individual to engage in social entrepreneurship. The demand side contains social entrepreneurial opportunities through the presence of social needs (Zahra et al., 2009). It is assumed that social needs decrease or increase with government size and the quality of governmental institutions. It is presumable that there are more socially excluded people in the absence of public institutions or when government institutions are badly provided. Therefore, it is expected that low governance effectiveness, resulting in a malfunction of public services and policy formulation, increase the demand and therefore the opportunities for social entrepreneurs (Hypothesis 1).
In addition, the stage of economic development is one main driver of the demand side of entrepreneurship. However, in the case of social entrepreneurship is it difficult to pinpoint whether it influences the demand side or the supply side of social entrepreneurs. Henceforth, supply and demand-side determinants of social entrepreneurship can be contradictory and with economic development, for both sides are some robust arguments. While this study acknowledges the effect of economic development on the demand side of social entrepreneurs, as it seems reasonable to believe that in a poor country there are higher poverty rates and less well developed public institutions resulting in social needs, it also proposes that economic development has a positive effect on the supply of social entrepreneurs by means of self-expression values (Hypothesis 2). Self-expression values are a cluster of values that include social toleration, life satisfaction, public expression and an aspiration to liberty (Inglehart & Welzel, 2005). While the construct of economic development is initiated at the demand side a hypothesis for the influence of self-expression values is postulated at the supply side.
The supply side provides resources, abilities and shapes the individual characteristics to seize the opportunities. It constitutes demographic developments and is influenced by aspects of the cultural context that frames the individual preferences and capabilities to engage in social entrepreneurial activities. Besides self-expression values, several other supply-side factors will be discussed. First, the preference of an individual to engage in any entrepreneurial activity is likely to be within the cultural domain (Verheul et al., 2002). The nation’s dominant attitude towards social entrepreneurship is prone to shape an individual’s preference towards starting a social enterprise. Also, as argued by Reynolds et al. (1999) at the level of symbols, rituals and heroes, the stories in the media about successful entrepreneurs and the respect for those who start a new business seem to be indicators of an entrepreneurial culture. Therefore, it is assumed that both national embedded values (hypothesis 3) and a supportive context (hypothesis 4) towards entrepreneurship are likely to influence social entrepreneurship. Next, resources are critical for starting and running a viable social enterprise (Austin, 2006). This includes both financial capital as well as social capital. Since social entrepreneurs make little economic profits they have to come up with creative arrangements (Austin et al., 2006). Therefore, they are highly reliable on their social network. It is expected that the level of social capital in society is conducive to the supply of social entrepreneurs. Social capital is defined as the ability to access resources through social relationships and is embedded in informal cultural norms encouraging helpfulness, friendliness, and cooperation (Payne, Moore & Griffiths, 2011). The main reason in favor of this assumption is the fact that caring behavior should encourage more individuals to turn to social entrepreneurial activities (hypothesis 5). Also, it is asserted that one of the main difficulties social entrepreneurs experience is access to finance (Ferri & Urbano, 2010). Since, the capital market might not be suitable for social entrepreneurs, due to little financial returns, it is expected that they are highly dependent on the level of informal financial support (hypothesis 6). Informal investors are business angels, friends and the family. To sum up, self-expression values, national values, a supportive context, social capital and informal financial capital are included at the supply side.
2.2.1 Demand Side Perspectives
Governance effectiveness. Various studies on entrepreneurship identify government activism as a key macro-level determinant of entrepreneurship (Aidis, Estrin & Mickiewicz, 2012; Verheul et al., 2002; Wenneker & Uhlaner, 2002). The role of governments and the quality of governance, or in North’s terms (1990) formal institutions7, may also influence social entrepreneurial activity.
North (1990) asserts that institutions influence the prevalence rate of new venture creation. For instance, institutional factors in the external environment that foster entrepreneurial development include favourable market incentives and the availability of property rights. On the other hand, inadequate institutional development (institutional voids) can complicate new venture development
7 Formal institutions as defined by North include economic contracts, legal and political rules and may influence market entry and exit. Opposite of formal institutions are the informal institutions that include norms, social needs and attitudes.
(Baumol, 2010). Institutional voids are situations where institutional arrangements that support markets, such as governance structures and other methods of control, are absent, weak, or fail to accomplish their purpose (Mair & Marti, 2009). Mainstream entrepreneurship is mostly negatively related to a corrupt environment and weak rule of law. Furthermore, a hostile external environment may impede the level of capital investment and therefore restrict the rise of the entrepreneurial spirit. Hence, entrepreneurs are discouraged from starting ventures if there are no formal institutional structures (or substitute informal ones) (Acs, Desai & Hessels, 2008).
The belief that governments have an important role to play in the prevalence rate of social entrepreneurs is also widely held. Multiple theories have been written to explain the interaction between social entrepreneurs and governments. According to Kerlin (2009) social entrepreneurship manifests itself at the intersection of state, market and civil society. Additionally, the literature lends significant support to the idea that, due to their connection to civil society and the economy, the rate of social entrepreneurship may be indirectly shaped to a great degree by what the role of the government entails. Furthermore, governments’ malfunctioning was a recurring theme in the seven regions and countries studied.
However, what might be seen as an unfavorable contextual factor for market-based commercial entrepreneurs could be an opportunity for the social entrepreneur (Austin et al., 2006). In contrast with institutional theory of mainstream entrepreneurship, institutional void theory (Dacin et al., 2010; Mair & Marti, 2009) suggests that there will be more need for social enterprises when the government is inadequately providing public and non-excludable goods. Several studies have pointed towards the prevalence of social needs, due to a malfunctioning or a small government, to be a main driver on the demand side of social entrepreneurship. Based on the classical economic theory,
government/market failure theory explains the presence of social enterprises as a result of the
endurance of market and government failures. First, as previously noted social entrepreneurs strive to solve social problems (Dees, 1998). Often, such problems are a result of market failures8 (Austin et al., 2006). The demand for social entrepreneurship may be high when government, commercial
8 According to Nissan et al. (2012), the rationale of non-profits can be explained by market failures, such as asymmetric information, externalities, market power and distributional or merit good concerns.
businesses, and civil society are unable or unwilling to fulfill these needs (Mair & Marti, 2009; Zahra et al., 2009). Also, government failure exists and does not always provide the right or sufficient institutions. The main determinants of the prevalence of social entrepreneurs are the opportunities that result from the unmet needs in society (Zahra et al., 2008). Thus, institutional void theory (Dacin et al., 2010; Mair & Marti, 2009) suggests that there will be more need for social enterprises when the government is inadequately providing public and non-excludable goods. Similarly, other researchers (e.g., Borzaga & Defourny, 2004; Elkington & Hartigan, 2013; Mair & Marti, 2006; Zahra et al., 2008) note that social entrepreneurs see room for opportunities in the failure of both market and government.
North (1990) suggests that in situations where formal institutions fail, informal institutions will come into play to reduce uncertainty and provide constancy to organizations. From this perspective, social entrepreneurs “bridge the gap between the private and public sectors, the state and the market, to develop effective and efficient solutions to our most complex and pressing social problem” (Leadbeater 1997: p. 8).
To illustrate, in India the presence of the caste system and the discrimination across social strata has driven social entrepreneurs to address the gap between formal legislation and society in India. International development organization BRAC in Bangladesh, that has the social mission to alleviate poverty and empower the poorest of the poor, is a result of this void (Mair & Marti, 2009).
On the other hand, some researchers argue that, while there is a positive relationship on the demand side between social entrepreneurial activity and unmet social needs, a negative relation can be found between the supply of social entrepreneurship and a low level of government effectiveness. As noted by Sud, VanSandt and Baugous (2009) partnerships between government and social entrepreneurs are better able to address social ills in certain contexts. Moreover, behavioral theory suggests that, besides the fact that opportunities must be salient in one’s mind; an individual must also see a feasible manner to accomplish the fulfillment of these chances. In addition, previous research (Hardling & Cowling, 2006; Hoogendoorn et al., 2011) indicates that social entrepreneurs are more afraid of failure, in particularly bankruptcy, than commercial entrepreneurs. The fear of failure might be strengthened when institutions are perceived as insufficient. This implies that when individuals’
belief that government institutions are malfunctioning, they might also perceive the probability of successful establishing a social enterprise as low. In that case, the prevalence rate of social entrepreneurs decreases when governments are ineffective and in countries that are characterized by institutional void.
Several studies have been conducted on the failure and institutional void theory. Hoogendoorn and Hartog (2011) propose that a relation between government and the prevalence rate of social entrepreneurs is negatively related with government expenditure on welfare. Likewise, Estrin et al. (2013) assume that social entrepreneurship is negatively influenced by governmental activism and refer to the size of the government. However, Hoogendoorn and Hartog (2011) also argue an alternative view – the interdependence theory– that assumes that governments and social entrepreneurs are complementary. Interestingly, Hoogendoorn and Hartog (2011) find support for the interdependence theory, whereas the results on government activism hold support for the predictive negative effect on social entrepreneurship.
Still, ample case studies show that individuals may act in situations where the right services are not provided. Assuming that the main driver of social entrepreneurship is addressing social needs, it is asserted that the prevalence rate of social entrepreneurship is higher in countries where there are more institutional voids (Mair & Marti, 2009). Therefore, the present study assumes that when individuals perceive governance effectiveness as low, meaning the quality of public services, the quality of the civil service and the quality of policy formulation, it may result in room for opportunities. In this sense, it encourages social entrepreneurial activity. Since there is no consensus on this theory and as a result of this discussion, the subsequent hypothesis is postulated as such:
H1. Governance effectiveness is negatively associated with the probability of individuals engaging in social entrepreneurship.
Economic Development and Entrepreneurship
As argued by Acs et al., (2008) the environment shaping the economy influences the dynamics of entrepreneurship within any given country. This environment consists of interactions between
institutions and economic development, which in turn have an impact on other characteristics such as access to capital and resources, quality of governance and shaping the preferences and perceptions of entrepreneurs. Economic behavior (North, 1990) and economic transactions (Williamson, 2000) are heavily influenced by the interdependencies between economic development and institutions as they spawn direct and indirect effects on both the supply of and demand for entrepreneurs. In addition, Acs et al. (2008) note that if one wants to study entrepreneurship across countries, the nexus between entrepreneurship, economic development, and institutions is a crucial field of inquiry.
Economic development is often measured in terms of Gross Domestic Product (GDP) per capita. Porter, Sachs and McArthur (2002) divide countries according to their economic development in three stages: (1) the factor-driven stage, (2) the efficiency-driven stage, and (3) the innovation-driven stage. Countries at the factor-innovation-driven stage show high rates of non-agricultural self-employment. At this stage, countries compete on the basis of low production cost efficiencies and produce low value-added products. Little knowledge or innovation is created in this phase. The efficiency-driven stage moves towards a better-educated workforce and advancing technology. This stage is marked by a decrease in self-employment. The last stage, the innovation-driven stage, is marked by an increase in entrepreneurial activity due to a shift from manufacturing companies to service firms. Also, improvements in information technologies and high value of the elasticity of factor substitution have eased the market for entrepreneurs.
Various studies display a U-shaped relationship when relating economic development to entrepreneurial activity (Acs et al., 2008; Wennekers, Wennekers, Thurik & Reynolds, 2005). This implies that when economies develop, rates of entrepreneurship decline. However, these rates increase again when economic development is high. Wennekers et al. (2005) interpret these findings in terms of “necessity” entrepreneurship and “opportunity” entrepreneurs9.
In the case of social entrepreneurship, the opposite might be expected. Low levels of economic development and welfare increase poverty rates and the chance of people being socially
9
Necessity entrepreneurs are individuals who are involved in entrepreneurship, because they had no other option for work. Opportunity entrepreneurs indicate that the main driver for being involved is the opportunity of being independent or to increase income rather than simply maintaining income (GEM).
excluded. Hence, this might increase the demand for social entrepreneurs. Several studies have linked economic development and the rate of social entrepreneurship. For instance, Bosma and Levie (2010) suggest that the opportunity cost in developing countries might be higher. Furthermore, they assume that individuals in countries with higher economic development are more likely to have satisfied their needs. This might imply that demand for social entrepreneurial activities decreases.
Previous research (Hoogendoorn & Hartog, 2011; Nissan et al., 2012) linked GDP per capita to economic development and suggests that a higher level of GDP per capita decreases the social needs, hence, the demand for social entrepreneurship. Hoogendoorn and Hartog (2011) show an inverted U-shape for social entrepreneurship. Accordingly, they suggest that social entrepreneurship is a welfare phenomenon. However, material welfare, as measured by GDP, is only one dimension of a country’s development. In other terms, the economic indicator is not the only way to interpret welfare. Hence, welfare also has to do with the fulfillment of needs, both subjectively and objectively. Therefore, the next section explores to what extent survival and self-expression values influence social entrepreneurship from the supply side perspective. Additionally, several other factors will be elaborated on.
2.2.2 Supply Side Perspectives
Self-Expression Values. While this study acknowledges the presence of social needs as driver for social entrepreneurial activities as argued in previous section, it also proposes that fulfilling ones needs mainly occurs when someone is in a stage of self-expression. With respect to the fulfillment of needs, Maslow’s pyramid of needs (1943) is a well-known example. Maslow’s pyramid illustrates that there is a hierarchy of needs consisting of five layers. These layers are ranging from lower-order needs of physical well being and safety (e.g., food, shelter, and stability) to the higher-order needs of influence and personal development (e.g., self-esteem and the strive for self-actualization).
Inglehart and Welzel (2005) propose a theory quite similar and note that values in societies change as a consequence of economic growth and industrialization. Comparable to Maslow’s pyramid of needs, personal values shift from survival towards self-expression. Survival values stress the importance of physical and economic security. They are related to low levels of trust and tolerance and
have a relatively ethnocentric outlook (Ingelhart & Welzel, 2005). On the other hand, self-expression values give concern to environmental protection, growing tolerance of foreigners, homosexuals, and gender equality. Also, self-expression values exerts influence on the level of trust, due to the fact that wealth and physical security make people more trusting and cooperative (Inglehart & Welzel, 2005). The largest shift from survival to self-expression values occurs in the transition from efficiency-driven to innovation-driven societies. Furthermore, survival values are peculiar for eastern-world countries, whereas self-expression values are characteristic for western countries (Inglehart & Welzel, 2005).
Survival and self-expression values propose opposing views with respect to social entrepreneurship rates. On the one hand, it might be expected that rate of social entrepreneurial activity is positively related to survival values when this is approached from the demand side. It seems intuitive that a higher level of survival values causes an increase in demand for social entrepreneurs.
However, from a supply side perspective it is feasible that the supply of social entrepreneurs increases by the rate of self-expression. This is in line with the view of Levie and Bosma (2010), who argue that one will only act on the needs of others when one’s own needs are met. Referring back to the necessity entrepreneurs, when societies experience higher levels of social pains people may pay more attention to survival, and thus involve in regular entrepreneurship instead of social entrepreneurship. Only once the lower-order needs of physical, safety and emotional well-being are satisfied will individuals turn to the higher-order needs. Also, the urge for having a mission outside one’s own needs seems to correspond with what Elkington and Hartigan (2013) describe as the “social hero.” Hence, self-expression values are contributory to the supply of social entrepreneurship.
While it is reasonable to assume that the extent of fulfillment of the basic needs is higher in welfare states and therefore the demand for social entrepreneurship is lower, it is likely that the supply-side of social entrepreneurship is positively related to the extent of self-expression values. With respect to social entrepreneurship being a welfare phenomenon (Hoogendoorn & Hartog, 2011) this study assumes that in welfare states there are higher levels of self-expression values. Subsequently, the next hypothesis is proposed:
H2. Self-expression values are positively associated with the probability of individuals engaging in social entrepreneurship.
National entrepreneurial values.
There is a general intuition that cultural rather than economic variables carry a significant part in explaining differences in entrepreneurial activities across countries (Wennekers, Thurik & Noorderhaven, 2010). In spite of the presence of a favorable environment, the probability to engage in entrepreneurial activities is likely to be embedded in national cultures10 that are supportive and encourages entrepreneurship (Lee & Peterson, 2001). Also, Reynolds (2011) argues that more individuals will involve in business creation when cultural support is widely shared among the adult population. Likewise, according to Elkington and Hartigan (2013), social entrepreneurs are positively influenced by a culture that encourages entrepreneurship. Furthermore, it is assumed that social entrepreneurship is neither simply a social trend nor solely an economic approach to accomplish, for example, corporate social responsibility practices. It is also a cultural phenomenon as it may rely upon traditions and customs. Hence, it is expected that social entrepreneurship is highly intertwined with culture.Previous research into entrepreneurship (e.g., Verheul et al., 2002; Wennekers et al., 2005) has pointed out that national culture is likely to influence the level of entrepreneurship. Hofstede (1980, p. 5) defines culture as “the collective programming of the mind which distinguishes the members of one group or category of people from another.” Hofstede notes that culture is a highly complex phenomenon, since it is intangible and includes both deeply embedded values and manifestations. Values are defined as “a broad tendency to prefer certain states of affairs over others” (Hofstede, 1980, p. 18). Moreover, culture shapes the behavior of individuals (Stephen & Uhlaner, 2010). In an early stage of life, cultural orientations are formed and thereafter rarely modified. Hofstede states that with the flow of new generations culture slightly changes, albeit slowly. Further, culture influences institutions, and vice versa. These institutions include the family, education systems, politics and legislation. Also, Prahbu (1999) suggests that entrepreneurial intentions aimed at fulfilling a social objective are formed by the social, moral and educational background.
According to Hayton, George and Zahra (2002), values are shaped by a nation’s culture and exert a direct effect on the characteristics of an individual. In addition, needs and motives towards
10
This study acknowledges the existence of subcultures and immigrant cultures within a nation, but lays focus on the dominant culture in a nation.
entrepreneurship are indirectly influenced by these values. Some cultures seem to be more conducive to entrepreneurship than others. Hofstede categorizes four parameters that distinguish countries culture. These are known as the Hofstede dimensions of national culture: Power Distance, Individualism versus Collectivism, Masculinity versus Femininity, and Uncertainty Avoidance. In 2010, two dimensions were added: Pragmatic versus Normative and Indulgence versus Restraint (Hofstede, 2010).
Hayton et al. (2002) provide an extensive overview of empirical studies that have examined the relation between national culture and entrepreneurship. As a consequence, they assert that the cultural profile – in particular of high individualism and low uncertainty avoidance11 – is conducive to entrepreneurship. For instance, in countries with low levels of uncertainty avoidance, taking risks is accepted like changing jobs or, in the case of entrepreneurship, start an own business. Hence, low uncertainty avoidance encourages the willingness to enter into unknown ventures (Hofstede, 1991). Also, Thomas and Mueller (2000) note that entrepreneurs strive in cultures that are low in uncertainty avoidance and in individualistic societies. In addition, Thomas and Mueller (2000) link the degree of individualism and low uncertainty avoidance to two distinguishing characteristics of entrepreneurs: locus of control and innovativeness. In the literature on mainstream entrepreneurship, it is found that an internal locus of control orientation is more prevalent in individualistic cultures than in collectivistic cultures (Thomas & Mueller, 2000). Similarly, the degree of innovativeness is linked to low uncertainty avoidance cultures. For example, this combination of a highly individualistic and low level of uncertainty avoidance is said to be the driving force of Denmark’s reputation as curious nation and innovativeness (Hofstede, 2014).
In the field of social entrepreneurship, little research has been done to identify the national cultural profile of social entrepreneurs. Henceforth, the aggregated psychological traits perspective of Davidsson (1995) suggests that when a society contains more people with entrepreneurial values, more
11Individualism refers to the preference of a loosely knit social framework in which individuals are expected to take care of only themselves and their immediate families. Uncertainty avoidance refers to a general acceptance for uncertainty and risk (Lee& Peterson, 2001) and to “the extent to which the members of a culture feel threatened by uncertain or unknown situations, these are strengthened by basic institutions such as family, schools and the government” (Hofstede, 1991, p. 113).
people will be entrepreneurs (Wennekers & Uhlaner, 2002). Therefore, it might be assumed that countries where a more entrepreneurial cultural profile prevails will produce more (potential) social entrepreneurs.
Besides the aggregated psychological trait perspective the previous mentioned dimensions, uncertainty avoidance and individualism, may be of particular importance for social entrepreneurs for some other reasons. On the one hand, it has been said that social entrepreneurs are motivated to alleviate a deep feeling of uneasiness with the status quo (Prahbu, 1999). Countries exhibiting strong uncertainty avoidance levels maintain rigid codes of belief and behavior. In this respect, it is presumable that challengers of the status quo can be found in countries that have more (unfavorable) restrictions. On the other hand, a high score on uncertainty avoidance increases the resistance of change. Thus, this might hinder an individual to engage in social entrepreneurship. In contrast, low uncertainty avoidance cultures accept and feel comfortable in unstructured situations or changeable environments and try to have as few rules as possible (Hofstede, 1980). Moreover, cultures described as open and innovative often seem to be more conducive to social entrepreneurs, since the latter regularly have to come up with radical, innovative solutions (Zahra et al. 2008). As Hofstede (1980, p. 184) contends:
“In low uncertainty avoidance cultures, the inherent uncertainty of life is more easily accepted and each day is taken as it comes. Social deviants are not perceived as threatening, hence there is a greater tolerance for creative or novel behavior. In low uncertainty avoidance cultures, there is more willingness to take risks, and achievement is often recognized in terms of pioneering effort.”
In some situations, social entrepreneurs need to act upon unpredicted events and are confronted with a great deal of uncertainty. Moreover, in their effort to come up with effective ways of addressing certain needs, social entrepreneurs are often pioneers and have to make decisions based on relatively little information and experience. Cultures that support this way of thinking are high in individuality, masculinity and are willing to accept living with uncertainty (Lee & Peterson, 2001). Furthermore, it has been argued by Borzaga and Defourney (2001) that, in countries where informal sources provide social services, the presence of social enterprises is not widespread. For example, in
countries where traditional institutions such as family and religion are high, people are expected to take care of each other instead of starting a social enterprise. In previous research, the degree of individualism is used to link these traditional institutions to the rate of collectivism and individualism (Hoogendoorn & Hartog, 2011). Accordingly, the results show that the prevalence rate of social entrepreneurs is higher in individualistic societies. This implies that in countries were ties between individuals are loose, social entrepreneurship is more widely spread.
Therefore, with the abundance of literature defining social entrepreneurs as highly innovative actors and change agents (e.g., Austin et al. 2006), it is expected that individualistic cultures with low levels of uncertainty avoidance are likely to be conducive to individuals becoming social entrepreneurs. Accordingly, the following hypothesis is postulated:
H3. Individuals are most likely to engage in social entrepreneurship in national cultures where uncertainty avoidance is low and individualism is high.
Supportive context. According to Mair and Noboa (2003) social entrepreneurs are encouraged by desirability, which is affected by emotional and cognitive attitudes. Besides the deeply rooted inner values the ‘cultural capital’ of a country also encompasses the existence of role models (Verheul et al., 2002). A role model may be someone in the family or network of the individual, but also persons in the media. For instance, Bill Gates of Microsoft, who is a famous social entrepreneur, may trigger perceptions of desirability and therefore stimulates individuals to engage in social entrepreneurship. Moreover, it is argued that social support ‘enables’ the entrepreneur to view the creation of a social venture as something feasible (Mair & Noboa, 2003). Therefore, a supportive context is an important element in the process of formation of social entrepreneurial intentions. Reynolds (2011) suggests that a supportive context for entrepreneurship contains three perceptions: (1) entrepreneurship as a desirable career choice, (2) entrepreneurs have a high status and respect, and (3) regular stories in the media about successful new businesses. Moreover, the probability of individuals to start a new business increases when their immediate social context is considered as supportive. Also, Thomas and Mueller (2000, p.67) state, a “supportive” culture increases, ceteris paribus, the entrepreneurial potential of a country.
Since economic profits play a minor role for starting a social enterprise, other factors may be at play, such as status. Therefore, it is assumed that when in the immediate context of the individual, the status for entrepreneurs is high, there are frequent stories of role models in the media, or entrepreneurship is perceived as a desirable career choice, this reinforces the probability to engage in social entrepreneurship. In this vein, the next hypothesis is formulated:
H4. A supportive context for entrepreneurship is positively associated with the probability of individuals engaging in social entrepreneurship.
Social Capital. Social capital is often regarded as an informal counterpart to formal institutions (Westlund & Adam, 2010). Moreover, the nation-level social capital theory places social capital as “endowed,” rooted in long lasting, difficult to change cultural traits (Estrin et al., 2013). Furthermore, bridging weak-ties social capital enhances contact and collaboration among members of a diversity of unconnected groups on a nation-level. Also, social capital has positive externalities, which can be labeled as a wide radius of trust, (Fukuyama, 2001), or bonds of solidarity within a given nation (Estrin et al., 2013).
Several studies have emphasized the importance of social capital in the field of entrepreneurship since it binds networks of relationships and make cooperation possible (Stephan & Uhlaner, 2010). Generally, trust is used in order to measure social capital within a population. Fukuyama (1999) defines trust as the circle of people who embrace cooperating norms. Furthermore, it assumes that people in general have good intentions. The impact of trust as a common proxy for social capital on economic variables is well known as well. It reduces transaction costs, as it reduces cost needed for controlling and maintaining contacts, and eases the provision of resources. Additionally, trust enforces informal information flows and knowledge exchange. Therefore, trust contributes to innovations (Westlund & Adam, 2010).
Assuming that social entrepreneurs also benefit from social capital for the aforementioned reasons these advantages might be even more important for social entrepreneurs. According to Townsend & Hart (2008), every new venture has to overcome the liability of newness. This implies that new ventures aim to gain normative social approval by increasing their legitimacy to a level that is
passively accepted by the majority of the society. However, due to the dual bottom line of social entrepreneurs combined with the ambiguity of the concept of social value, direct results of social enterprises are hard to measure. While economic profit is easy to measure the creation of social wealth is difficult to quantify (Zahra et al., 2009). Hence, this may have a negative impact on the credibility of the social enterprise. In order to get moral approval and legitimacy, social entrepreneurs need to receive society’s trust. Also, the social mission and belief that social entrepreneurs are acting for the benefits of others is critical.
In addition, Boettke and Coyne (2009) highlight this principal-agent problem. The level of trust influences the view of donors on whether the agent, in this case the social entrepreneur, is achieving the desired goals. Furthermore, they identify reputation as an important informal institution and reputations are developed over time by building trust. Moreover, a strong reputation that engenders trust among its contributors increases the willingness to invest in the social enterprise and its mission (Prahbu, 1999). Also, reputation for fairness and skill in dealing with the individual needs may be the trigger for attracting great resources instead of being an interesting, but unfunded idea (Austin et al., 2006).
Since social entrepreneurs aim for social wealth instead of economic profits social entrepreneurs often have to seek out creative arrangements (Austin et al. 2009). In the creation of a social enterprise, social entrepreneurs have to mobilize resources to be able to come up with innovative solutions and pursue social, rather than private, goals. Therefore, the social entrepreneur must focus on building a rich network of contacts and resources. To conclude, the probability for individuals to become social entrepreneurs increases when they have the resources to be able to come up with innovative solutions and pursue their social goals. Also, they often require voluntary activities and collaboration and social capital serves as a model for caring behavior (Stephan et al., 2014). Therefore, it might be proposed that higher levels of trust lead to more grants, funds and cooperation. From this line of reasoning, it is highly likely that socials enterprises flourish in environments with a high degree of social capital. In this vein, the next hypothesis is proposed:
H5. Social capital is positively associated with the probability of individuals engaging in social entrepreneurship.
Informal financial support. According to the OECD (2013) and many academics (e.g., Ferri & Urbano, 2010; Sharir & Lerner, 2006; Zahra et al., 2008), one of the main barriers that social entrepreneurs encounter is the lack of finance. Similar to mainstream entrepreneurship, appropriate sources of finance are critical for the establishment and development of social enterprises. However, the social purpose of social enterprises limits social entrepreneurs from tapping into the same capital markets as commercial entrepreneurs (Austin, 2006). Therefore, the creation of a social enterprise might be more complicated than the creation of traditional businesses.
Whereas, in the commercial capital markets, the key motivation for all players involved is most often building a profitable company and earning an attractive return on investments, this works differently for social enterprises. Social ventures emphasize the social impact of an undertaking and might therefore be hampered to provide timely financial returns (Elkington & Hartigan, 2013). Thus, starting and managing an enterprise that has a social mission may experience difficulties in accessing funds and capital.
Another source of finance is the grant funding market through charitable donations and grants. Also, the informal market is indicated as an important source of equity capital. This market consists of two main segments: business angels and friends and the family of entrepreneurs (Reynolds, 2011).
Social entrepreneurs often rely on the grant funding market and informal financial support (Austin et al., 2006). Since social entrepreneurs serve consumers that are generally unable to cover the costs, social entrepreneurs have to rely enduringly on these sources. In addition, due to the fact that social entrepreneurs address specific socials needs (oftentimes people and funding are motivated by a specific social problem) it is difficult to switch products or markets. Also, Austin (2006) argues that a greater effort is put into ensuring that the business continues rather than effort put into the social mission itself. Hence, this may discourage individuals to create a social enterprise.
Since social entrepreneurs encounter difficulty receiving capitals from formal institutions such as banks, e.g. loans, it is expected that social entrepreneurs rely heavily on other sources than formal institutions, such as informal investors. Therefore, the next hypothesis is proposed:
H6. Informal financial support is positively associated with the probability of individuals engaging in social entrepreneurship
To conclude, this theoretical chapter introduced several potential determinants of the prevalence of social entrepreneurship. Despite the fact that most of these concepts have found acceptance in the pertaining literature, contrasting ideas in respect how they matter remain. Moreover, there is lack of evidence testing their validity. Therefore, the next two chapters will move on to test the hypotheses quantitatively. The hypothesized effect of the independent variables on social entrepreneurship is listed in table 1.
Table 1. Overview of the Hypotheses and Their Proposed Effect
Hypothesis Effect
H1: Effect of governance effectiveness -
H2. Effect of a society’s degree of self-expression values +
H3. Effect of national values +
H4. Effect of supportive context +
H5. Effect of social capital +
