The Role of Social Enterprise and Hybrid Organizations

Abstract: Recent years have brought remarkable growth in hybrid organizations that combine profit-seeking and social missions. Despite popular enthusiasm for such organizations, legal reforms to facilitate their formation and growth – including, in particular, legal forms for hybrid firms – have largely been ineffective. This shortcoming stems in large part from the lack of a theory that identifies the structural and functional elements that make some types of hybrid organizations more effective than others. In pursuit of such a theory, this article focuses on a large class of hybrid organizations that has been effective in addressing development problems, such as increasing access to capital and improving employment opportunities. These organizations, which are commonly referred to as “social enterprises,” include microfinance institutions, firms that sell fair trade products, work integration firms, and low-cost sellers of essential goods and services such as eyeglasses, bed-nets and healthcare. The common characteristic of social enterprises is that they have a transactional relationship with their beneficiaries, who are either purchasers of the firms’ goods or services or suppliers of input (including labor) to the firm. The essence of the theory is that through these transactions, social enterprises gather information on their patron-beneficiaries’ ability to transact with commercial firms (e.g., workers’ skills, borrowers’ creditworthiness and consumers’ ability to pay). That information permits social enterprises to tailor the form and amount of subsidies to the specific needs of individual beneficiaries. This “measurement” function makes social enterprises relatively efficient vehicles for allocating subsidies as compared with more traditional donative organizations and with other forms of hybrid organization, in particular firms that pursue corporate social responsibility policies.