Tuesday, February 23, 2016

The power of social enterprise

Social enterprises can help enhance the role of small and medium enterprises (SME) in sustainable economic development, claims a recent study released by the Philippine Institute for Development Studies. Written by PIDS consultant Leonardo A. Lanzona, Jr. of the Ateneo de Manila University, “Enterprises and Employment: Mainstreaming SMEs and Employment Creation” explores the theory and recommends policies to empower both areas of enterprise.  

While there is strong belief on the ability of SMEs to sustain economic growth, Mr. Lanzona demonstrates the problem in focusing the breadth of policymaking on the three main arguments for SME empowerment: that they enhance competition and entrepreneurship; that their productivity is potentially bigger than large firms but is often held back by financial markets and institutional failures; and that their ability to increase employment and alleviate poverty is greater than that of larger firms.

Mr. Lanzona questions the wisdom of simplifying the arguments around firm size. Creating policies that are based on overstating the cause of SMEs and tailoring policymaking to decrease the costs of doing business solely for the sake of SMEs may “result in inefficiency”.

Mr. Lanzona argues that large exporting firms are “typically the primary mechanism” that brings in the technology and innovation that contribute to enhancing competition and entrepreneurship. Likewise, SME employment cannot outright compare to the quality and longevity of employment of larger firms, despite the aggregate employment numbers that SMEs contribute. Furthermore, market and institutional failures affect all businesses, and they must be corrected for a better business environment for all, not just SMEs.

If anything must be addressed, it is fundamental problems like poverty, and therein social enterprises can play a huge role.

“Poverty itself constrains these SMEs from achieving their full potential in terms of their access to better technology and quality of inputs,” Mr. Lanzona indicates in his paper. “Hence, direct interventions of poverty reduction in the form of public goods are expected to support SMEs and to raise growth.”

Social enterprises are inherently advantageous because they are able to generate employment, through nongovernment organizations and community institutions, for people in the most vulnerable positions. Social enterprises are organizations that employ commercial strategies to achieve ends of developing and improving human life and environmental well-being.

Some of these public goods include “social protection, business opportunities, education, electricity, health, sanitation, and water”. The common assumption is that these are the government’s responsibility to provide.

But, done right, Mr. Lanzona argues that allowing the privatization and use of market mechanisms could help improve these services.  He claims that “Social enterprises operate in markets in order to address social needs and reduce inequality, recognizing that this has value.”

Although there are many policies at both national government and APEC levels promoting SMEs and enhancing assistance to improve SME performance, Mr. Lanzona says that laws on recognizing the role of public goods in reducing poverty and freeing SMEs from its limitations are largely absent.


APEC must encourage and work to promote social enterprises by forming global value chains across its member economies. NGOs can also play a role by helping link social enterprises into these chains. The idea is to support social enterprises, move them out of poverty, and encourage them to provide public goods in the economic community, and thereby truly enhance SME performance. (PIDS)

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