Appendix C: Overview of Commercial and Social Entrepreneurship

Chapter Two

Review of the Literature

This research study, through an analysis of existing literature, seeks to provide an overview of commercial and social entrepreneurship, including (a) a recommended definition of social entrepreneurship, and an overview of (b) motivations and backgrounds of business or commercial entrepreneurs, (c) motivations and backgrounds of nonprofit founders, (d) motivations and backgrounds of the social entrepreneur (SE) as a means to provide a context for evaluating the thought process of the social entrepreneur, and (e) gaps in the literature.

Overview of Commercial and Social Entrepreneurship

The business literature research suggests that the business entrepreneur’s motivation for venture launch is primarily derived from his or her experience in a problem area or from industry tenure (Dorado, 2006). The research specific to SEs indicates that familiarity with a specific societal need through personal experience or volunteer work, for example, is the dominant factor related to SE background and motivation. SEs may lack the business experience and business education of their commercial counterparts. As a result, constructs that borrow from the business literature may need to be modified to fit the social entrepreneurial field. Therefore it is important to emphasize important business aspects rooted in commercial entrepreneurship and their relevance to the social entrepreneurship model. Thus, a brief discussion related to the commercial entrepreneurship elements of creative destruction, profit motive and risk is warranted. The foundation for this review is the premise that the commercial entrepreneur’s motivation is grounded in the potential to exploit a perceived market opportunity for a satisfactory tradeoff between risk and profit.

To illustrate, Martin and Osberg (2007) call for a more specific definition for social entrepreneurship that distinguishes itself from its commercial roots. They provide a concise history of the commercial entrepreneurship and stress the need to consider commercial entrepreneurship as a cornerstone for the development of the social entrepreneurship construct. Therefore, significant contributions from the literature that frame the model of commercial entrepreneurship are discussed next. Specifically, the concept of creative destruction and the elements of profit and risk are reviewed.

Schumpeter (2008) is credited with the concept of creative destruction and is one of the pioneering economists known for his economic theories detailing the entrepreneurial function and entrepreneurship. Schumpeter defined the function of entrepreneurship as follows:

…the function of entrepreneurs is to reform or revolutionize the pattern of production by exploiting the invention or, more generally, an untried technological possibility for producing a new commodity or producing an old one in a new way, by opening up a new source of supply of materials or a new outlet for products, by reorganizing an industry…(p. 132)

Schumpeter views entrepreneurship as vital to capitalism and addresses the constant destruction of existing structures and their replacement with new ones as paramount to a free market society. He links the process of how capitalism and free markets operate to the importance of business strategy and stresses the necessity by managers and entrepreneurs to understand the dynamic and ever-changing nature of industry. According to Schumpeter (2008), “…Creative Destruction is the essential fact about capitalism” (p. 83). Understanding this basic premise, in addition to the role and purpose of profits as a means to sustain the venture, is a fundamental element in the SEs formal educational needs. Another element of entrepreneurship that Schumpeter contributes to the literature is the concept of risk. While entrepreneurs exploit opportunities in new ways, they need not be inventors. Also, risk is not necessarily borne entirely by the entrepreneur. While risk is not a main topic for this review, it is relevant to acknowledge its significance as a key entrepreneurial element. Likewise, the concept of economic profit is important for the social entrepreneur to understand and identify and its relevance is addressed in the following discussion.

Formaini (2001), in his review of noted entrepreneurs in the economic theory literature, posits that the concept of entrepreneurship has significant relevance for the 21st century U.S. economy. He emphasizes that the disposition of entrepreneurs in the free market economy has a timely and far reaching impact on the overall macro economy.

            Specifically, entrepreneurs play a key role in the direction and pace of economic activity. He lists three primary elements related to economic performance as 1) the existence of profit, 2) causes of economic growth and 3) resource allocation in a market economy.

          Formaini alludes to risk as inherent in the entrepreneurial process. He credits Schumpeter (2008) with addressing the role of financial intermediaries and the flow of funds throughout the economy as a component of entrepreneurial activity. According to Formaini, “…entrepreneurs are rewarded by markets when they are right and show superior judgment, but punished when they are wrong, a process that rearranges resources continuously in search of greater use efficiency” (p. 7). He goes on to explain that the key to this premise is the uncertainty in the markets and the constant states of flux as firms strive for equilibrium. The SE is tasked with two missions: social benefit and profit.

            Reinforcing the business foundations of economic principles such as profit and risk, with regard to the market, will aid the SE in his/her goal of achieving a social benefit. SEs must also identify the risks inherent in their endeavors given the potential societal impact and repercussions to individuals they are attempting to help.

Montanye (2006), surveyed entrepreneurship definitions from the economic literature and derived his own definition: “Entrepreneurship is the process by which individuals acquire ownership [property rights] in economic rents of their creation” (p. 549). This definition echoes Sowell’s (2004) and reinforces the role of profits in the entrepreneurial construct. According to Montayne, “Pure profit is the accounting residual that remains after payment is made to all production factors…” (p. 552). Sowell and Montanye provide a foundation from which the SE can identify the commercial aspect of their endeavors as they build their businesses. The SE must understand the complexities of incorporating the business components of profit and loss into the social benefit mission. How much profit is acceptable for a business known as a social entrepreneurship while competing in the commercial sector is an example of the challenges that the entrepreneur must be prepared to address. What are the quantifiable and non-quantifiablerisks to stakeholders if the venture fails? A core understanding of the entrepreneurial function in a market economy will prepare the SE to address this type of unique paradox.

Entrepreneurial orientation (EO) is a construct prevalent in the business literature and one that provides a model for analyzing an entrepreneurial firm’s strategic path (Lumpkin & Dess, 1996). By assessing the processes, actions and bureaucratic activities of such a firm, EO encapsulates the ability of firms to operate entrepreneurially (Dess & Lumpkin, 2005). Therefore, case study profiles of commercial entrepreneurial organizations and founders are a necessary component to include in academic research (and course curriculums specific to social entrepreneurs). How do entrepreneurs get started? What are their backgrounds? How do they select their businesses? Next, an overview and definition of social entrepreneurship is provided.

Social Entrepreneurship

The term social entrepreneurship is often credited to William Drayton, who founded Ashoka in 1980, an organization dedicated to promoting the field (Barendsen & Gardner, 2004). This literature review supports the premise that original research dedicated to the field is within the timeframe of 1980 to present. Moreover, as noted above, there has yet to be an overarching definition of social entrepreneurship common among researchers or a consensus in the current literature regarding an accepted industry construct.

As stated previously, social entrepreneurship is a form of entrepreneurship differentiated by its overarching commitment to achieving a social benefit or purpose in conjunction with generating profit (Austin, et al., 2006). Light (2008) distinguishes social entrepreneurship from social enterprise by designating the attributes of systemic alterations to the social equilibrium as the overarching goal pertaining to social entrepreneurship. Also, distribution of profit is not solely limited to reinvestment in the entity as is the case with social enterprise. It is the combination of the two elements of social benefit and profit generation that distinguishes social entrepreneurship from other constructs. The identification of social benefit, or purpose, over profit will be adhered to in this study and be used as a starting point to identify social entrepreneurship in the interview process. This review will define social entrepreneurship in the context of both the need for addressing a societal problem and the designation of profit. Institutions relying solely on donations or grants are not included in the construct of social entrepreneurship. While this review addresses the topic of social entrepreneurism as opposed to social enterprise, it bears noting that a social enterprise organization may also achieve the status of social entrepreneurism depending upon the interpretation of revenue generation and profit distribution.

While there is some definitional consistency regarding the desired outcome of social entrepreneurship as benefiting society through systemic change, the process itself is where academics and practitioners have yet to reach an overarching agreement. This lack of a consensus among academics and practitioners about what social entrepreneurship is, and what constitutes a social entrepreneur, supports a need for further research. The need for a more unified definition related to the process of social entrepreneurship is exemplified by Roberts and Woods’ (2005) review of the literature.

           They identify social entrepreneurship as a practitioner-led field of study still in its infancy. They also recognize a need for a practical definition that both increases awareness and credibility of the field for research purposes in addition to promoting the practice. Much of the existing research regarding SEs is within the past twenty years and is limited due to the fact that it either borrows from studies pertaining to business entrepreneurs, or consists of cross sectional studies focused primarily on successful enterprises (Dorado, 2006; Light, 2008; Roberts & Woods).