How do institutional factors influence the opportunity recognition process of social enterprises?

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How do institutional factors influence the opportunity

recognition process of social enterprises?

Master Thesis Name: Pieter van der Grinten Student number: 10171630 Program: MSc. in Business Administration – Entrepreneurship & Innovation track Date: 24/6/2016 Supervisor: Dr. Y. Song

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Statement of originality

This document is written by student Pieter van der Grinten who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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Acknowledgements

I would like to express my sincere gratitude to my supervisor Dr. Yang Song for her expertise, patience, and her constructive support and cooperation, to Dr. Wietze van der Aa and Dr. G.T. Vinig and the Amsterdam Business School for granting me the opportunity of following this extraordinary and outstanding MSc. track, Entrepreneurship and Innovation.

With this opportunity I would also like to thank my family and friends for their constructive and encouraging support throughout this process. And a special thanks to my aunt Theresa for her support in the final phase of my research. In conclusion, I would like to express my sincerest gratitude to my parents, who gave me nothing but unconditional support, guidance, and encouragement throughout my studies.

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Abstract

This research focuses on how institutional factors influence the opportunity recognition process of social enterprises. The term social enterprise is used for a variety of organizations that, irrespective of their organizational structure or processes, create some sort of social value. In the academic literature on social enterprises, scholars make use of multidisciplinary research perspectives to analyze this field of entrepreneurship. In this research, the institutional approach is used to further investigate and elaborate on the complex and interconnecting dynamics of social enterprises. Conducting semi-structured, in-depth interviews with a variety of social entrepreneurs generated the data needed for further analysis. In addition, by creating an institutional framework consisting of different institutional theory factors, the scholarly research as well as the practice of social enterprises is further investigated. In order to achieve this, the opportunity recognition process of social enterprises is evaluated on three levels of institutional factors: the macro-institutional, organizational, and the individual factor level. This research supports the existing academic literature on institutional theory by adding an institutional factor’s framework. Additionally, it contributes to the academic literature by elaborating on the constructs of social enterprises, opportunity recognition processes and institutional factors. To stimulate the academic literature on social enterprises, several avenues for future research are identified.

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1. Introduction

In the academic literature, the research on entrepreneurship has increased significantly in recent years. Entrepreneurship is a broad concept, encompassing a wide range of activities. These activities range from the Schumpertian ideal that is associated with innovation (Schumpeter, 1934), towards the most basic form of entrepreneurship, namely, self-employment (El Harbi & Anderson, 2010). The degree of entrepreneurship differs between countries, but also between different regions, and over time. The economic and institutional factors of a country can drive and shape the success of entrepreneurial activities (Simon-Moya et al., 2014), but also limit its success. In addition, the notion of opportunities has been widely accepted as a defining element of entrepreneurship (Mair & Marti, 2005).

We live in an age wherein the activities and boundaries between businesses, governments, and non-profits are blurry. These blurry boundaries are the result of the search of many different players for more innovative, cost-effective, and sustainable ways to address social problems and deliver social value, such as health care and basic education (Dees & Anderson, 2003). One aspect of this development is the rise of entrepreneurs offering socially valuable products and services. This kind of entrepreneurship is coined ‘social entrepreneurship’, which is one of the basic constructs in this research. However, since the academic literature is not definitive regarding the scope of social entrepreneurs, social enterprises, and social entrepreneurship, these terms are further elaborated in the literature review.

The activities of social enterprises are associated with the perception of opportunities to create social value (Haugh, 2005), and the organizational structures of these social enterprises can take many forms, from non-profit, NGOs, to profit seeking organizations. What they have in common is that all these organizations focus on creating social value and consequently address a wide range of social problems such as unemployment, low quality housing, inequalities in access to social care and health services, deprivation, social exclusion, and high incidences of crime (Haugh, 2005). The

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7 existence of social enterprises is not new, but the interest in these organizations has increased in recent years because of their potential benefits towards social, economic and environmental issues. Social enterprises are claimed to significantly contribute to the fulfilment of unmet needs, the building of social capacity, and the creation of new forms of work (Amin, Cameron, & Hudson, 2003). Other outcomes of these organizations are defining new goods and services, promoting local development, fostering integration, improving attractiveness of industries and localities, creating jobs, and empowering and consolidating local assets (Haugh, 2005).

However, because of the nascent nature of the field of research on social entrepreneurship, much of the contributions and social value these enterprises generate remain descriptive and lack academic evidence. Therefore, since social entrepreneurship is a relatively new part of entrepreneurship’ academic literature, subjects such as the opportunity creation of these enterprises, processes, their organizational structures, performance, innovations, and the effect the external environment has on these enterprises is still rather unexplored. Haugh (2005) categorized the areas of social entrepreneurship that could be further researched along the following dimensions: defining the scope of social entrepreneurship, the environmental context, opportunity recognition and innovation, modes of organization, resource acquisition, opportunity exploitation, performance measurement, training education, and learning about social entrepreneurship. These research dimensions provide scholars with sufficient possibilities for future research. Following these research avenues, the focus in this master thesis is on the specific dimension of the environmental context of social enterprises. In particular, the institutional factors that affect the opportunity recognition and -creation process of social enterprises.

Where financial limitations, bureaucracy, inflexibility or an inability to define societal needs may explain gaps in the provision of services of governments and states, opportunities arise for entrepreneurs (Haugh, 2005). These potential market opportunities can be unattractive for general entrepreneurs due to information asymmetries, inadequate financial returns or other externalities, resulting in unattended consumer demand in these gaps. In these conditions, social entrepreneurs

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8 provide a residual function and are instrumental in garnering resources and capitalizing sub-market opportunities (Haugh, 2005). However, the question remains how these institutional factors influence the opportunity recognition process of social entrepreneurs.

Therefore, the goal of this research is to investigate the relevance of institutional factors on the opportunity recognition and creation process of social enterprises. In addition to the construct of social enterprises, this research focuses on the institutional environment and those institutional factors that possibly affect, influence and shape social enterprises and consequently, the social value they deliver. These institutional factors are further combined and subdivided in order to create more clarity on this broad theoretical framework while making the research more manageable. In addition, institutional theory models are described in order to elaborate on the different institutional factors, while the literature on (social) entrepreneurship is primarily used to investigate the constructs of opportunity recognition and social enterprises.

2. Central question

How do institutional factors influence the opportunity recognition process of social enterprises? In order to answer this main research question, the following sub-questions are created to outline and explore the specific dimensions that affect the opportunity recognition process of social enterprises. For instance, what macro-institutional factors have the most impact on social enterprises? How do macro-institutional factors impact the opportunity recognition process of social enterprises? Amongst these factors are political and legal, economic, sociocultural, technological and demographic factors. How does the opportunity recognition process of a social enterprise lead to their product focus? And finally, what role does the organizational culture play in the opportunity recognition process of social enterprises?

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3. Literature review

In this literature review the topics and constructs that are related to the main research question and the sub-questions are described in further detail to provide a general overview of the literature and the research area. First, the general topic of social entrepreneurship is discussed, after which the rise of the social economy and social enterprises are explained in more detail. Secondly, institutional theory is described, this theory precedes and serves as the foundation for one of the constructs of the central research question, institutional factors. Subsequently, the third construct of this thesis, the opportunity recognition process of social enterprises is further elaborated. Finally, the gap in the academic literature that is addressed by this research is discussed, followed by the conceptual model relating to the main research question.

3.1 Social entrepreneurship

Over the last decade social entrepreneurship has become an increasingly important cultural and social phenomenon. Consequently, the term has received considerable attention from different business sectors. Also, it shows up more frequently in the media, is referred to by public officials and is a common topic on universities and other educational institutions (Martin & Osberg, 2007). This is because the term transcends the popularity and fascination of the people who use it. As stated by Martin and Osberg (2007), social entrepreneurship signals the imperative to drive social change, and it is that potential payoff, with its lasting, transformational benefit to society, that sets the field and its practitioners apart. The field of research that is called social entrepreneurship intersects a number of domains, including entrepreneurial studies, social innovation, and non-profit management.

In order to address the topic of social entrepreneurship properly in this research, a definition of the phenomenon is accepted. The definition that is used in this paper is derived from the article of Austin, Stevenson, and Wei-Skillern (2006), and is formulated as: “Social entrepreneurship is an

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10 innovative, social value creating activity that can occur within or across the non-profit, business, and public sectors.” The reason this definition is chosen is because it is clear on the nature of the activity that entails social entrepreneurship, but keeps the options regarding the source from which these activities stem open. The factors that make up social entrepreneurship are addressed in the following paragraphs.

Because this field of research is relatively new, when comparing it to the general field of entrepreneurship for example, it is subject to definitional debates and a conceptual lack of clarity (Dacin, Dacin, & Tracey, 2011). This already implies several avenues for future research and research areas. Perrrini and Vurro (2006) identify four main elements of which social entrepreneurship consists. First, there is the mission, vision, and organizational values of the social enterprise. Second, the entrepreneurial opportunities and innovation that relate to the basis on which social enterprises compete with their competitors. The third factor is the entrepreneurial business model of the social enterprise, which directly affects how the company operates. Finally, the social outcomes that may lead to social transformations in the market or society the social enterprise operates in. These elements not only provide information about the constructs of social entrepreneurship but they can also be used to identify the differences between entrepreneurship and social entrepreneurship. Another indicator of the growing academic interest in social entrepreneurship is the increasing number of definitions that are used for the topic. Due to the lack of a generally accepted definition of social entrepreneurship some questions arise. For example; what makes the social entrepreneur entrepreneurial? Or, what makes the social entrepreneur social? Venkataraman (1997) summarized in his article the definitions of some scholars regarding the meaning of an entrepreneur. In this article (Venkataraman, 1997), it is argued that an entrepreneur is someone who is being entrepreneurial. However, there is no scholarly consensus about what it means to be entrepreneurial. Venkataraman (1997) observed: “There are fundamentally different conceptions and interpretations of the concept of the entrepreneur and the entrepreneurial role, consensus on a definition of the field in terms of the entrepreneur is perhaps an impossibility”. In contrast, what

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11 makes the social entrepreneur social then? The primary indication that an entrepreneur is social is that they are driven by social goals; that is, the desire to benefit society in some way or ways. Stated differently, the social entrepreneur aims to create ‘social value’, which is their contribution to the welfare or well being in a given human community (Peredo & McLean, 2006). Other scholars such as Dees and Elias (1998) have a more radical point of view regarding the social nature of social entrepreneurs stating that for social entrepreneurs the mission is explicit and central. In other words, mission-related impact becomes the central criterion, not wealth creation. Where Peredo and McLean (2006) state that for the social entrepreneur wealth is just a means to an end, Mair and Marti (2006) regard social entrepreneurship as a process that integrates social and economic value creation.

These examples point out that there is not just one definition of the term social entrepreneurship. Interestingly, some academic scholars specifically do not wish to create a premature definition of social entrepreneurship. They state that the lack of clear definitional boundaries prevent academics prematurely excluding avenues of research on the topic (Mair, Robinson, & Hockerts, 2006). These fuzzy definitional boundaries invite scholars from different disciplines to exchange ideas and lines of thought on the topic, which leads to a more vivid discussion on the different factors affecting social entrepreneurship. Not only does this influence the field of social entrepreneurship, but also other research domains. By purposely accepting broad definitions, knowledge will also increase in, for instance, fields regarding social and economic wealth creation, institutional and social change, and social and economic development, as a result of interdisciplinary discussions (Mair, Robinson, & Hockerts, 2006).

3.2 Social economy

As stated in the previous paragraph, the field of social entrepreneurship has been growing in the last couple of decades. Social entrepreneurship is one of the components that make up what researchers

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12 call ‘the social economy’. From the beginning of the 1990s, the social economy has gradually been recognized in the academic literature as the third sector (Defourney & Nyssens, 2001), next to the public and the private sector. The term ‘économie sociale’ was first mentioned by the Frenchman Charles Dunoyer in 1830 when the term carried approximately the same meaning as it does today (Moulaert & Ailenei, 2005). There are several authors that argue that the emergence of social economy, in the form of policy, practice, concepts and institutions, coexists with, and is a response to periods of crises. It is a way to react to the non-satisfaction and alienation of needs in times of socioeconomic crises by either the public or private sector (Moulaert & Ailenei, 2005). This is shown by, for instance, the co-operatives in the agricultural and financial world in response to the needs of small producers in the late 1800s. Another example is the consumption and housing co-operatives that were set up for unemployed workers during the financial crisis in the early 1930s. Some of these initiatives were later even adopted in the model of the welfare state; however, the social economy remains active in areas where public and private sectors do not meet the needs of people. Therefore, in the broadest sense of the word, the social economy could be defined as: “the study of all efforts made to improve the condition of people” (Moulaert & Ailenei, 2005).

3.3 Social enterprises

Although an increasingly broad consensus exists about the social economy, the concept of the social enterprise is more recent and also less well defined (Defourney & Nyssens, 2001). The term social enterprise is widely used in the academic literature regarding social entrepreneurship to indicate organizations that serve social needs or goals in some way. In general, the term social enterprise is used in one out of two ways. On the one hand, the term social enterprise stresses the entrepreneurial approach that is used by these organizations to achieve their social goals. In addition to stressing the entrepreneurial side of the organization, the term can also be used for organizations that, besides creating social value, strive for profit. On the other hand, a social enterprise is an

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13 organization that employs and integrates people that are completely, or partially, excluded from the regular labour market. This is one of the most common definitions of a social enterprise. However, the exercise of defining the social enterprise is, just as with social entrepreneurship in general, difficult to pin down (Harding, 2004).

One person’s definition of a social entrepreneur is another person’s definition of an aid worker or volunteer. In the line of this example, the meaning of the word social enterprise can potentially cover all enterprises from non-profit organizations, through charities and foundations, to cooperative and mutual societies (Harding, 2004). Dees and Elias (1998) argue that the social aims and social ownership of social enterprises are combined with trading viability. In the article of Harding (2004) it is argued that social enterprises are ‘orthodox businesses with social objectives, whose surpluses are principally re-invested for that purpose in the business or community, rather than the need to maximize profit for shareholders and owners’. However, the definition that is provided in the article by Harding (2004) excludes social enterprises that have a social mission, that contribute to their community in several ways and do not have the need to maximize profit for the shareholders, but in fact do make a profit for their owners. In order to prevent the scope of the social enterprises from becoming too narrow, the definition of a social enterprise by Dees and Elias (1998) is adapted in this thesis: ‘A social enterprise is an organization that combines their social aims and social ownership with trading viability’.

Historically, from the days that the for-profit production enterprises set up social housing plans for their impoverished factory workers until now, private companies precede or complement government action in responding to specific social demands. It is usually at a later stage that the governmental agencies attempt to regulate, or financially support, these activities. There are various reasons why there is a need of governmental intervention in the private non-profit or for-profit sector, historically as well as nowadays. One example is that of ‘philanthropic insufficiency’, which is coined as the difficulty that these organizations can have with mobilizing sufficient resources to address the social need. Another example of the limitations of the social enterprises is termed

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14 ‘philanthropic idiosyncrasy’, the risk that some groups are favoured in respect to others (Defourney & Nyssens, 2001). This governmental involvement can even lead to some quasi-collective services that benefit a community as a whole.

Social enterprises can provide social value by providing specific products and services to people. Furthermore, like the initiatives in the past century, the social contribution that these enterprises offer can play a big role in the socio-economic landscape (Defourney & Nyssens, 2001). However, the future of these social enterprises is to a large extent conditioned and limited by the opportunities that have a positive effect on their development and business. Both internal as well as external factors affect the opportunity recognition process of social enterprises, and these institutional factors can either encourage or obstruct the opportunities available to them. This is where the external environment and, consequently, institutional factors come into play. In order to elaborate on which institutional factors are relevant and which have the most influence on the opportunity recognition process of social enterprises, the institutional factors are further described at the hand of the institutional theory.

3.4 Institutional theory

In the academic literature on the field of entrepreneurship, factors and conditions affecting the entrepreneurial success have increasingly become one of the main topics of research. These factors can be identified as the characteristics of the entrepreneur, but they can also consist of external conditions and variables. For instance, the available level of technology, the economic or demographic conditions of a country, the cultural environment of an organization, or the legal regulations all affect and influence the level of entrepreneurial success of social enterprises in different countries (DiMaggio, 1988).

Institutional theory has proven itself a useful model as a theoretical foundation in exploring a broad range of topics in several domains, ranging from political science and organization theory to

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15 the domain of entrepreneurship (DiMaggio & Powell, 1991). Institutional theory especially plays a major role in explaining the institutional drivers and determinants of entrepreneurial success, apart from the entrepreneurial or organizational resources (Bruton, Ahlstrom & Li, 2010). In its early days, institutional theory focused predominantly on organizational conformity, without developing theory that relates to action in this line of field. As a result, institutional theory acted as a model to explain and review the homogeneity of organizations in their organizational fields (Battilana, 2004). Organizations could secure their positions and legitimacy by conforming to the present set of formal rules and norms of the institutional environment (Bruton, Ahlstrom & Li, 2010).

In this case, ‘institutions’ are termed including the formal set of rules (North, 1990), ex-ante agreements, less formal shared interaction sequences, and taken-for-granted assumptions and interpretations that companies and organizations expect to follow (Bruton, Ahlstrom & Li, 2010). These sets of rules and interaction sequences originated from governmental agencies, regulatory structures, laws, courts, professions, and many other societal and cultural practices that exert conformity in some way (DiMaggio & Powell, 1983). As a result, ‘institutions’ thus create a certain environment consisting of rules, but also other less formal behavioural expectations, by which general, natural, and abiding conditions are collectively installed for the players that operate in such an environment.

Referring to institutions as stated in the previous paragraph, institutional theory is concerned with the regulatory, cultural and social influences that affect the survival and the legitimacy of organizations (Bruton, Ahlstrom & Li, 2010). This field of research covers and overlaps within and between academic literature regarding sociology, organizational theory, economics, and political sciences. Scott (1995, 2007) has categorized the institutional factors that are influencing organizations and entrepreneurs in three dimensions.

The first institutional factors’ category, the regulative pillar, as the name already states, is a model for rational action behaviour as a result of rules, sanctions, and conformity. The behaviour of

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16 the organization is guided by the rules of the game (North, 1990). These ‘rules of the game’ stem from government legislation, standards and agreements between countries, industries and companies. Not only can these regulative institutional factors provide guidance for organizations and result in organizational compliance, but governmental legislation for instance, or the lack of it, can also lead to an entrepreneurial reaction by organizations. Entrepreneurial reactions as a result of regulative institutional factors are areas in which companies can generate or create value, after which the institutional factors are changed or installed.

The second category, the normative pillar, is based on organizational and individual behaviour that stems from professional, social, and organizational interaction (Scott, 1995, 2007). By defining what is appropriate in either social or commercial situations, institutions can provide guidance to individuals as well as organizations. The set of institutional forces that determine the normative behaviour are derived from the norms and values that consciously set out rules for people to follow. Values are referred to as ‘what is considered to be proper’, and norms are, based on the applicable values, ‘how things should be done’ (Scott, 1995, 2007). Normative institutional factors exert influence on entrepreneurs and organizations on how they should behave, while these institutions impose some sort of social obligation that constitutes the norms and values of a society.

Finally, the cognitive pillar as summarized by Scott (1995, 2007). This pillar has derived its authenticity from the cognitive area of research that has emerged in social sciences. It is fundamentally grounded on behaviour of individuals regarding models that subjectively constructed meanings and rules that limit appropriate actions and beliefs (Bruton, Ahlstrom & Li, 2010). The influence of this pillar is predominantly focused on the individual level, derived from factors such as language, culture, taken-for-granted assumptions and behaviour that people do not actively think about, but still engage in.

The three levels of institutional theory by Scott (1995, 2007) address a multitude of internal as well as external institutional forces that can influence the social enterprise and consequently, the

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17 social entrepreneur. However, there are additional institutional factors that directly impact the contextual environment of organizations, and thus social enterprises. These institutional factors are described and explained in the following section.

3.5 Institutional factors

Institutional theory has risen to prominence as a powerful tool to explain organizational as well as individual action (Dacin, Goodstein & Scott, 2002). Since the early mentioning of the ‘institutional framework’ by Davis and North (1970), comprising of the set of fundamental political, social, and legal ground rules that establish the foundation for production, exchange, and distribution, numerous additions have been made. The additions to the institutional framework of Davis and North (1970) and the institutional factors of Scott (1995) can take many forms, for example, the place, time, organizational form of the social enterprise, the way of financing, and the people involved. All these institutional factors have a direct impact on the organization. Other factors that impact every organization, but social enterprises in a more specific way, are the way the mission statement and the vision of the organization influences entrepreneurial behaviour (Austin, Stevenson, & Wei-Skillern, 2006), and the characteristics, attitude, skills and conviction of the entrepreneur (Austin, 2006).

From an institutional perspective, social enterprises operate within the boundaries of a social framework of norms, values, and taken-for-granted assumptions about the definitions of acceptable or appropriate economic behaviour. The economic choices that these social enterprises make are not solely constrained by the informational, technological, and income limits, as are emphasized by neoclassical models, but are also constructed by social limits. These social limitations can be human in origin, such as habits, norms, and customs. Thus, the institutional view on social enterprises suggests that the motives of their behaviour extend beyond economic optimization to social justification and social obligation (Zukin & DiMaggio, 1990).

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18 The institutional framework that is created for the analysis of the different institutional factors is combined from several before mentioned institutional theories. As a result, the categorizations of the institutional factors that influence social enterprises in one way of another are divided in three different ways in this research.

The first category builds on the institutional framework of Davis and North (1970), consisting of the political/legal, economic, sociocultural, technologic, and demographic factors that directly impact the environment in which social enterprises operate. This category is concerned with the macro-institutional factors that comprise the external environment of the social enterprise. These factors can influence the opportunity creation and recognition process of social enterprises in a variety of ways. For instance, the demographic characteristics of an ageing population of a country can have a significant impact on the opportunity recognition process of companies offering some sort of healthcare service or medications for elderly people, while a sociocultural shift towards more biologically produced vegetables can create opportunities for fair-trade companies.

Secondly, institutional factors can have an impact on the behaviour of social enterprises on the organizational level, as devised by Scott (1995, 2007). In this category, organizational focus that stems from professional, social, and organizational interactions of the opportunity recognition process of social enterprises is researched. The influence of these factors can be the result of what is appropriate in certain social or commercial situations and the norms and values that are set out for organizations to follow. These factors refer to ‘what is considered to be proper’ and ‘how things should be done’ (Scott, 1995, 2007). Thus, this category entails the different sectors in which social enterprises operate, such as the business, civic, or governmental sector. Another factor that makes up this category is the product focus of the organization. There are significant differences between the influences of the institutional factors that affect the opportunity recognition process of social enterprises focusing on the environment compared to the ones that focus on improving healthcare services.

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19 The final category is comprised of institutional factors that influence the social enterprise from an individual level, as devised by Scott (1995, 2007), from the cognitive dimension of institutional theory. This group of institutional factors consists of different attitudes, taken-for-granted assumptions, motivations, skills, perspectives, and behaviour of the social entrepreneurs and the employees themselves. The institutional factors that impact the opportunity recognition- and creation process of social entrepreneurs are, from this perspective, more individually oriented. Thus, the personal considerations, motivations and skillset of the employees and the social entrepreneur can have a significant influence not only on the opportunity recognition process, but also on the choice of opportunity exploitation.

The different institutional factors that comprehend the contextual variables of social enterprises overlap in several ways. For instance, the institutional factors that are derived from the theories of Davis and North (1970), Scott (1995, 2007) and North (1990) have several elements in common with the categorization of Austin (2006). Therefore, a clear distinction should be made between the different levels of analysis regarding these institutional factors, as stated in the previous paragraphs.

Institutional factors play an increasingly important role in the field of entrepreneurship research. The early literature on entrepreneurship focused primarily on the resources of the different enterprises, and how these resources could be used most efficiently. This focus has more recently shifted towards issues such as the culture, the legal environment, tradition and history in an organization, industry, or country (Bruton, Ahlstrom & Li, 2010). In addition to this shift in research from resources to the context of enterprises, is the apparent dichotomy and continuous dynamism where the context (institutions) enables the agents (social enterprises) to act, and as a result of their actions the socioeconomic context is changed (by creating social value) (Mair & Marti, 2005). It is for this reason that in the research of Giddens (1984), the context (institutions) that makes up the structures in which enterprises operate, is both a product and a constraint upon the outcomes of an

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20 enterprise. Institutional factors are thus argued to provide opportunities as well as constraints for entrepreneurs.

Recently, a stream of entrepreneurial research has been focusing on the social value that stems from the opportunities that were discovered and exploited by entrepreneurs, in order to distinguish social entrepreneurship from other entrepreneurial phenomena (Guclu, Dees, & Anderson, 2002). However, the institutional forces that influence the structures, processes, and mind-set of organizations and the members that influence the opportunity recognition process of social enterprises are seldom subject to extensive scrutiny in the literature on social entrepreneurship. This is why researching how these institutional forces influence the opportunity recognition process of social enterprises can be a contribution to the literature of social entrepreneurship. Thus, this research contributes to a better understanding of social enterprises by focusing on a fundamental unit of analysis in the literature on social entrepreneurship: the interaction between institutional factors and the social enterprise. This interaction is a crucial part to understanding why and how social enterprises identify and exploit new opportunities, and how social value is created.

As a distinct aspect of the theory on entrepreneurship, this paper shifts its focus to the process of opportunity recognition, creation, and exploitation in social enterprises. This is the third major construct that is addressed in this thesis.

3.6 Opportunity recognition

According to Blöndal (2003), the non-profit sector has become more entrepreneurial in recent years. Social enterprises have distinguished from non-profit organizations by their high level of entrepreneurship (Haugh, 2005). Consequently, creating an understanding of how entrepreneurs think, identify and exploit opportunities is necessary to the development of literature on entrepreneurship (Shane & Venkataraman, 2000). Since the literature on social entrepreneurship is

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21 less well established than the literature on entrepreneurship in general, understanding how social entrepreneurs identify and exploit opportunities contributes to the academic literature in this field.

Opportunity recognition is an important process for both entrepreneurs and organizations. As stated by Phillips and Tracey (2007): “entrepreneurial opportunity recognition is the ability to identify situations in which new goods, services, raw materials, markets and organizing methods can be introduced through the formation of new means, ends, or means-ends relationships”. It could be argued that opportunity recognition is one of the necessary abilities a successful entrepreneur must possess (Ardichvili et al., 2003). The models that are designed to analyse the different opportunity recognition, discovery, creation, and exploitation processes are based on assumptions from a wide range of disciplines, from psychology to economics (Ardichvili et al., 2003). In the field of social entrepreneurship there are many possibilities for opportunities to arise. It is possible these opportunities arise as a result of disadvantaged groups, social excluded people, poverty, and can be addressed by offering housing, health care, education, culture, employment, social care or addressing environmental issues (Haugh, 2005). These are all potential opportunities for social entrepreneurs to generate value for a community or group of individuals.

Another possibility is that social enterprises create value by innovating the way by which services are delivered to disadvantaged groups, or implement new strategies for income generation, or exploiting opportunities by servicing existing customers with new products, or new raw resources. However, the dynamics of entrepreneurship can be vastly different depending on the differences in institutional contexts and the business environment they operate in (Acs, Desai & Hessels, 2008). Depending on the institutional factors in different countries such as economic development, demographic characteristics, social elements, and culture, the opportunities for social entrepreneurs can also differ significantly. As a result, the opportunity recognition or creation processes are not the same for every social enterprise.

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22 The creation of opportunities and the opportunity recognition process of social enterprises can also differ significantly between organizations. The social mission of the enterprise can categorize these organizations in the relevant policies, procedures, the organizational culture and the different types of consumers they deliver value to. Opportunities arise or are recognized by different organizations for a number of reasons, or as the result of different institutional factors. For instance, the privatization and decentralization of social services in the United Kingdom have created huge opportunities for social enterprises (Haugh, 2005). Other opportunities could be discovered or created in the value chain, as argued by Dees and Anderson (2003). Opportunities for economic or social innovation can also stem from the internal management, the organization’s structure or strategies, or multi-stakeholder engagement in these areas (Haugh, 2005).

Prior literature on opportunity recognition has identified many different factors that can contribute to the recognition of opportunities. One possibility of how social entrepreneurs recognize opportunities is suggested by research on human cognition. This theory proposes that entrepreneurs perceive connections between seemingly unrelated events or trends in the external worlds (Baron, 2006). Among these, three elements have been specifically identified as important, and thus have received the most attention in the academic literature. These are: prior knowledge of a market or industry, customers as the foundation for recognizing new opportunities, or alertness to new opportunities (the capacity to recognize them when they emerge) (Baron, 2006).

Kirzner (1985) was the first that used the term alertness in entrepreneurship literature. In his article it is defined as the “alertness to changed conditions or to overlooked possibilities”. Alertness is partly based on cognitive capacities possessed by individuals, such as high intelligence and creativity (Kirzner, 1985). Alertness for opportunities can also be achieved by prior knowledge, and in particular knowledge that is derived from life experience, either from business or work. This greatly enhances the ability of the entrepreneur to provide innovative solutions to problems or opportunities (Baron, 2006).

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23 Another aspect of opportunity recognition is pattern recognition. This is a process by which cognitive frameworks acquired through experience also play a central role. These frameworks provide individuals with a certain basis for noticing links and connections between seemingly independent events or trends, and detecting meaningful patterns in these connections (Baron & Ensley, 2006). These connections and trends can consist of, for example, advances in technology, changes in government policies or shifts in markets. This process involves linking changes, unrelated trends, and events, and connecting them to identify an opportunity, which is termed ‘connecting the dots’ (Baron & Ensley, 2006).

Apart from the cognitive framework of the social entrepreneurs, there are also other factors that affect the opportunity recognition process of organizations. For instance, the opportunity recognition perspective states that different opportunities can arise by information asymmetries that exist in the economy. However, Dutta and Crossan (2005) state that opportunity recognition cannot occur in the absence of an entrepreneur’s day-to-day knowledge. As a result, day-to-day knowledge and alertness go hand in hand since opportunity recognition is more complex than simply identifying knowledge gaps in particular markets by entrepreneurs (Dutta & Crossan, 2005).

As these examples show, the literature on social entrepreneurship can benefit from more research on the nature of the opportunities that are recognized, created or exploited by social enterprises. In addition, Mair and Marti (2006) also suggest that social enterprises should be researched separate from the general entrepreneurship theory. One of the questions they propose is: how do institutional factors explain the emergence of social enterprises and what theoretical lenses may help to understand these factors? This question addresses to some extent the importance of researching what effect the institutional factors have on social enterprises, and specifically, the opportunity recognition process of social enterprises. In the following section, the relevance and the contribution of this research to the current academic literature are further elaborated.

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3.7 Gap in the literature

Research on social entrepreneurship focuses to a large extent on the motivation, characteristics, abilities and attitudes of social entrepreneurs. Case studies regarding social enterprises and social entrepreneurs have indicated that they fulfil a need that is left unattended by either the public or the private sector, or both. The institutional factors that affect the external environment in which these social enterprises operate is categorized by the political, technological, sociocultural and economic trends that influence social entrepreneurship (Haugh, 2005). Researchers as well as policy-makers realize the potential benefit that social enterprises can have in their external environment, such as, disadvantaged and welfare dependent communities, or in areas with low economic activity. As a result of market failure, poor economic conditions, and the inability of the state to attend to these areas and take their social responsibility, ‘gaps’ in the market have emerged for or are created by social entrepreneurs to make a difference.

As these examples show, the institutional environment and institutional factors can have a direct impact on the opportunity recognition and creation of social enterprises. Although research has been conducted on the origins of national and international social entrepreneurship, an exploratory research on how institutional factors affect the opportunity recognition process of social enterprises has not been conducted (Haugh, 2005). In addition, the effect that these institutional factors can have on the competitive environment of social enterprises remains an avenue for further research. As a consequence, the increase of academic interest in how institutional arrangements shape (social) entrepreneurship points out the promising research options in the way entrepreneurs can shape these arrangements. Do institutional conditions shape entrepreneurial activity, which might, in turn, shape the institutional conditions (Battilana, Leca, and Boxenbaum, 2009)?

These questions justify the research objective of this research, which aims to contribute to the academic literature by analysing the interaction between these constructs. This leads to the

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25 following conceptual model regarding the constructs of this research. As stated in the literature review, the institutional factors that can influence the opportunity recognition process of social enterprises are subdivided on the macro-institutional level, the organizational level, and the individual level. The conceptual model is displayed in Figure 1.

Figure 1.

4. Methodology

4.1 Research design

In order to find answers to the research question, a qualitative method of semi-structured interviews was found to be the most feasible option for obtaining information. A quantitative method was ruled out because of the descriptive and exploratory nature of the research and because extensive access to the identified sample group was not possible. Another reason for adopting a qualitative research method was because it is to a large degree dependent on the

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26 researcher's flexibility. This characteristic can provide room for and play a significant role during the data analysis section.

This research adopts an inductive, ‘bottom up’ approach towards theory development. Inductive reasoning follows a method of beginning with specific measures and observations that eventually lead towards broader theories and generalizations (Saunders, Lewis & Thornhill, 2009). This line of reasoning is most appropriate for answering questions as how and why. With induction, the focus is to a large extent on the research context, which fits well with the context of this research. Based on these premises, it is an accepted strategy to conduct exploratory research (Saunders, Lewis & Thornhill, 2009). As stated by Yin (2008), using a case study approach to gather data is both a useful practice as well as a widely accepted approach for answering questions such as how and why.

A case study is the empirical method of systematic, in-depth data collection through detailed examination of a particular event, setting, person, or organization aimed at understanding a particular phenomenon, subject, or function (Berg, 2009). Simons (2009) argues that a case study can be seen as an in-depth exploration from multiple perspectives of the complexity and uniqueness of a particular project, policy, program, institution, or system in a ‘real-life’ context. The nature of case study research can be either quantitative, qualitative or a combination of both (Yin, 2008). There are different types of case studies, which can be used depending on the different research needs. Berg (2009) identifies these different case studies as either intrinsic, instrumental, or collective case studies. Intrinsic case studies are generally used to research a particular case, or a certain peculiarity. Instrumental case studies are best suited to offer an additional insight into a certain phenomenon or for making generalizations regarding a theoretical development. Finally, collective case studies use several different ‘sub-cases’ that all aim to provide insights into a broad context. Within these premises the collective case study method is proposed, which is referred to by Yin (2003) as the multiple-case study method.

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27 In this research, the case studies are performed using a qualitative method due to the descriptive nature of the central research question. Since this research inquires in the contextual factors that influence the opportunity recognition process of social enterprises, interviews are the main instrument used for the collection of data. Because the number of case studies that can be performed is limited, this research is supported by the academic literature on the different constructs under investigation. Since the possibility exists that the case studies do not comprehend all the vital intricacies of the context that is researched, theoretical assumptions are drawn from the academic literature to complement the collected data.

In this section the following subjects are presented: sample, research instruments and procedures, data collection, interview procedure, and data analysis. These are the subsequent steps that are further described regarding the data collection and methodology section.

4.2 Sample

The sample group of this research is social enterprises. Social enterprises are defined as organizations that create or deliver social value to a certain community, a group of people, or the world in general, whether they aim for profit or not. This means that NGOs and non-profit organizations, as well as commercial social enterprises are all included in the sample size. The size of the group of social enterprises that is used for this research is seven companies that either operate or are located the Netherlands. This increased access and proximity. Since this exploratory research is amongst the first to be conducted on how institutional factors influence the opportunity recognition process of social enterprises, no conditions are set regarding the market in which these enterprises operate. This would decrease the size and the potential access to the group of social enterprises, which would be disadvantageous for the diversity of the results of the research. Because this research is theory building rather than theory testing, the case selection procedure is focused on samples that are suitable for extending and illuminating relationships and

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28 logic among constructs (Eisenhardt & Graebner, 2007). Therefore, the cases are selected using theoretical sampling, which means that they are selected on the likelihood that they provide theoretical insights, alternative explanations, and produce either similar replicative or contra-replicative findings (Eisenhardt & Graebner, 2007). However, when using the theoretical sampling technique, the emphasis should be on selecting a case where consistency and variation is balanced. For this particular research that means that the social enterprises selected encounter a similar degree of institutional factors, even though they have different balances regarding their economic and social value creation. As a result, the institutional factors that influence the opportunity recognition process of the selected social enterprises should, at a bare minimum, provide some degree of theory building results regarding the central research question.

The sample size was approached using personal networking, the Internet, and social entrepreneurship communities. After the first interviews were completed, mouth-to-mouth referrals were another potential source of sample identification.

4.3 Research instruments and procedures

The primary research instrument for the gathering data is semi-structured interviews. In addition, these interviews follow the qualitative method, as explained in the previous section, due to the exploratory nature of the thesis. By conducting an exploratory research, the gap in the existing academic literature regarding the relationships between the constructs of institutional factors, opportunity recognition processes, and social entrepreneurship can be explored, described, and complemented. Since the semi-structured interviews do not provide conclusive material regarding the mutual effect that these constructs have on each other, the existing literature is used to support the findings.

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4.4 Data collection

As stated by Yin (2003), there are three principles when it comes down to data collection. The first principle is to use multiple sources of evidence. In this research, primary data is collected by semi-structured interviews. However, other data collection methods are also used. After confirmation of respondents regarding the interviews, secondary data, which can be derived from the Internet, journal articles, magazines or other sources of information, was used to analyse the market in which the respondents operate. The secondary data was also helpful in tailoring the interview questions of each specific social enterprise sample. These two forms of data provide the background on which the theory is built. An additional goal is, of which Yin (2003) argued to be the second principle of data collection, to create a case study database. This database will consist of all the additional material related to the interviews, including notes, case study documents, narratives, and creating or collecting tabular material (Yin, 2003). Finally, the last data collection principle, maintaining a chain of evidence, is important for establishing the link between initial study questions and case study procedures. This provides a foundation for the case study protocol and records the circumstances of the data collection (Yin, 2003).

The results are generated by seven semi-structured interviews with a wide variety of social enterprises. The difference between these enterprises should ensure a balanced variation of samples and confer adequate results on the research topic. The interviews were conducted with one respondent at a time. In addition, the interviews were recorded using a voice recorder for the complete transcript, while notes were taken of the non-verbal remarks and other thoughts that arose during the interview. The transcripts were produced as soon as possible after the interviews to prevent the loss of information or details.

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4.5 Interview procedure

The procedure for conducting and collecting the interviews follows several steps in order to receive consistent findings. The first step is to test the interviews. Initially, three interviews are conducted with the goal of testing the questions and analysing the consistency and relevance of the survey and consequently, the results. The second step is the selection of the different case samples. This step is accompanied by the initial secondary data collection.

The third step is to establish preliminary contact with the potential social enterprises or respondents. When the interviewee’s response was affirmative, the initial contact was followed by the interview confirmation, date, duration, and contemplated procedure.

The fourth step is primary data collection. As stated in the previous paragraphs, this was done using semi-structured interviews. The final step was to collect and organize the data, notes, and transcripts. After proceeding through all these steps, the data collection is finalized and the results were ready for analysis.

4.6 Data analysis

The data analysis process consisted of the reading, coding, and interpreting the information that came from the primary data sources, supported and complemented by relevant secondary data. In the transition from the raw data that came from the interviews, the process of coding all the different interviews was key. This process was based on the interpretive skills of the researcher, and eventually led to the organization of the whole data set. During the coding process, the collected data was subdivided in manageable segments, which were categorized on interpretative grounds,

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31 and afterwards compared with the different interviews. Finally, the different segments were labelled by a specific code. This structure of codes was necessary to manage all the information. Hereafter, the codes were analysed, theory was built, and eventually conclusions were drawn.

5. Results

This study researched how institutional factors influenced the opportunity recognition process of several different social enterprises. The data that has been generated conducting the interviews has been coded and analysed. By ensuring a great diversity in the sample population, the range, extent and the influence of institutional factors on the different opportunity recognition processes of these enterprises could be extensively documented. The following table provides an overview of the respondents and social enterprises that were interviewed.

Case

No. # Name of the respondent Company Operating sector Product focus

#1 Titiaan Zwart Mantelaar Healthcare Caregiving support provided by students #2 Claire Schrama Company supporting clean water projects Beauty & beverages Selling of beauty products and water for the hospitality business #3 Maartje Maas Konnektid Education Online knowledge _{sharing platform}

#4 _HoekstraMenno De Lokatie Retail Selling used products by employees with a psychological history #5 Caroline van _Dullemen WorldGranny Retail/production Selling locally produced _{knitted products}

#6 Tom Niekamp KRNWTR Water accessories Promoting the use of tap water with accessories #7 Anonymous _respondent Public real estate _enterprise Housing

Local construction of affordable houses in

Africa

Table 1.

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32 The data is provided in a structured and objective manner in order to present the results as objectively as possible without showing the full interview transcripts in the report. Therefore, the data analysis codes and the result section are structured in the same way as the conceptual model. The three levels of analysis are used to provide the main structure, and all the factors that make up these categories are discussed separately.

5.1 Macro-institutional factors

It is inevitable that every social enterprise is influenced by macro-institutional factors since these factors make up the external environment of companies in general, and thus also that of social enterprises. As stated by DiMaggio (1988), the availability of technology, the cultural, legal, economic and demographic institutional factors all affect the entrepreneurial success of social enterprises in different countries. The following subcategories elaborate more on the effect of these different factors on the opportunity recognition process of social enterprises.

5.1.1 Legal/Political

The formal sets of rules and interaction sequences as discussed by North (1990) originated from governmental agencies, regulatory structures, laws, and courts that in some way exert conformity. These are the institutional factors of which the legal/political framework in this research consists. When asked about the role of the legal/political framework in the opportunity recognition process of the social enterprises, several respondents named legal or political factors that were either constraining or creating opportunities for them. In the conducted interviews, changes in legislation provided opportunities for some social enterprises that were alert to these changes as emerging opportunities, or for social enterprises that know the market, industry or customers from prior experiences, as stated in the article by Baron (2006).

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33 One example of a social enterprise that was alert for an opportunity, when in the Netherlands in 1994 a new legislation was implemented by the Dutch government to subsidize employers for hiring people with a distance to the labour market (NRC, 1995), was ‘De Lokatie’.

“In that time (1995) we still had what we called the Melkert legislation. The Melkert legislation was, for our company, a perfect way to start our business since we could hire employees from our target audience (people with a psychological history). Our company was established as collaboration between the different city districts mental health care institutions. There was a need for this group of people to get some experience in the labour market because in that time these people were primarily kept busy at day-care centres where they could do some crafts and painting, nothing more. All the social employment companies were not interested in our target audience. However, the Melkert legislation was a good point for our social enterprise to start. This legislation entailed that we could hire employees that have a distance to the labour market, and we would receive a maximum of 120% of the minimum wage at that time in labour costs-subsidy from the government. That was the reason we were established” – Respondent ‘De

Lokatie’, Case #4

In this case the change of legislation created a window of opportunity for the mental health care institutions, and they consequently established the social enterprise “de Lokatie”. Because of experience with the needs of these employees with psychological backgrounds, the social enterprise recognized this institutional change as an opportunity, and acted on it.

However, later in this interview the negative effect of legal/political factors on the social enterprise became clear. After the Melkert legislation ended in 2004, the subsidies for these employees came to a halt, and ‘De Lokatie’ had to reinvent itself and their employee base as a social enterprise. When asked about the possible negative legal effects on the social enterprise’s opportunity recognition process, the respondent answered in the following manner:

“Well yes, we do experience negative effects of the legal framework. For example, our social enterprise also offers labour focused daytime activities. However, two years ago the legislation

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regarding the responsibility for these activities changed from the central government to the municipalities. So before, we could deal directly with the government, but now we have to deal with the municipality of Amsterdam. They (the municipality) follow a tender procedure. In the past we have participated in these tender procedures. But nowadays this has been made too difficult for us because of all their entry criteria, and as a result we had to let nine employees go because they did not match the new criteria” – Respondent ‘De Lokatie’, Case #4 This example represents how changes in the legal and political framework repress opportunities for social enterprises. When the legislation on the responsibility of the labour focused daytime activities for employees was relocated, this social enterprise had to deal with different authorities than before, which changed their way of doing business. First they could directly arrange their labour focused daytime activities with the central government, but since the reallocation of the responsible players the company had to engage in far more devious practices to retain their employees, and even had to let nine employees go that did not match the criteria. In an interview with the social enterprise ‘Mantelaar’, the influence of the legal framework on the opportunity recognition process was considerably different. ‘Mantelaar’ focuses on providing caregiving support that is done by a large pool of students with experience in the necessary field or specific form of caregiving. This social enterprise can therefore offer relatively low priced caregiving support, from vacuum cleaning and mopping the floors, to drinking a cup of coffee with the client, as a complementary service to professional caregivers, such as licensed therapists and the client’s general practitioner.

Changes in the legal framework provided an opportunity for a differentiated product offering, namely, low priced caregiving support. When asked about how the company was established the social entrepreneur stated:

“We started our social enterprise in 2012, because an acquainted general practitioner had told us that there were several things not going well in the caregiving market. In 2013 we started our operations, which were lean and mean, so the first six months it was a lot of adjusting and

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improving. But we wanted to be ready by 2015, because the government had stated that they wanted to decentralize and at the same time continue making cost reductions in the healthcare sector. This development would make Mantelaar an additional option in the caregiver market. When the government declared to change the legislation, in a sense the caregiver industry would be privately managed. This cannot be done one-on-one (decentralization and cost reductions). After this development Mantelaar grew very rapidly from 2015 onwards, first in Amsterdam and now we also expanded to Amersfoort, Utrecht and Rotterdam.” – Respondent

‘Mantelaar’, Case #1

As this example indicates, the changes that can be created from a political level can create significant opportunities for social enterprises. In this case the decentralization and costs reductions that were pursued in the caregiver industry created an opportunity that was recognized, and eagerly anticipated on by this social enterprise. This case of opportunity recognition has great resemblances with the example of Haugh (2005) of the healthcare industry in the United Kingdom, where changes in the legislation led to the privatization and decentralization of the healthcare sector, providing opportunities for social enterprises.

The social enterprise of ‘WorldGranny’, that supports elderly people in Peru, referred to how the legal/political system was one of the main elements for changing their business model to a social enterprise when stating:

“One important change was that the multiple-year subsidies changed towards a strategic partnership with the department of foreign affairs in which 25 companies could participate. And it was impossible for us to participate in that program…” – Respondent ‘WorldGranny’, Case #5

“… Since the subsidies were diminishing, we started thinking about a different model. That’s when we established a social enterprise, so that we could optimize, with the sales of products, our financing. Because grannies can do something, we now have products that people want to buy. So actually we achieved the same goal with a detour, and now we still support elderly people but with a different kind of business model.” – Respondent ‘WorldGranny’, Case #5

How do institutional factors influence the opportunity recognition process of social enterprises?