Opportunities and Challenges

Social business has increased the importance of economic and social development in emerging economies. But research on this subject is still in a very nascent stage.

Recently, Wahiduddin Mahmud, a well-reputed economist, critically viewed the concept proposed by Nobel Laureate Muhammad Yunus in his op-ed "Is social business the way forward?" published in The Daily Star on July 29, 2015. More specifically, he opines that the working of the market economy coupled with social objectives has been in existence since long and thus, socially oriented business is not a new concept. Moreover, no-dividend policy might discourage the potential investors in investing in a social business. In contrast to these arguments, in his op-ed "The emergence of social business" published on August 16, 2015, M. Jahangir Alam Chowdhury, a respected professor of finance, argues that the concept of Professor Muhammad Yunus is new and its necessity is immense for addressing social problems. This brief note will hopefully be a new addition to the ongoing debates.

The conventional business suggests that maximising profit or self-interest behaviour in turn benefits the whole society. In contrast, Muhammad Yunus calls for addressing social problems at the expense of profits. He argues that capitalism has created poverty by exclusively focusing on profits. He proposed another business model called "Social Business." He described social business as "selfless" business whose purpose is to bring an end to social problems, such as education, health, technology access and environment. He developed seven principles of social business at the 2009 World Economic Forum in Davos.

A comparison between social business and other business models leads us to believe that social businesses has more potential than other business models in addressing the problems of poverty of those who live at the bottom of the pyramid (BOP). Addressing social problems is the desirable bi-product of a conventional business, whereas it is the main activity of a social business. Corporate Social Responsibility (CSR) is a long practiced popular method of addressing social problems by conventional business models. CSR, however, devotes a small portion of profits which is insufficient to address social problems. Moreover, CSR is constrained by company's budget limitations. Conversely, the target of social business is unreached poor people.

Of note, social business is not without its limits. It sacrifices profit on one hand and seeks financial sustainability on the other. For the sake of financial sustainability, social businesses might increase the price of its product or service which might lower its social impact, thus making the business self-defeating. As mentioned by Chowdhury, Grameen Danone Foods Limited, the first social business joint venture, charges a higher price for the same product in urban areas than in rural areas to earn profits. Similarly, the Grameen Veolia Water finds it difficult to survive because revenue earned from rural sales was too small to recover the expenses. Later, they started selling water in 20 Liter jars in urban areas at higher prices. It means that the expandability of the project is confined by the profit earned in urban areas and they look more like CSR than social business in the sense that they depend on the profit earned from someplace else.

Social business is fundamentally a non-loss, non-dividend business devoted to solving a social problem. The investors or owners don't earn profits but they can get returns of the original investment.

This principle seems too restrictive and might be harmful for social business. Needless to say, not all the social business can succeed and some businesses will eventually incur losses. In that case, the investors will lose their money. If no-dividend is allowed, then expected benefits from investing in social business will be negative which will discourage potential investors in investing in social business. Nevertheless, investment in social business by big companies and foundations will have little impact on their capital or business if their social businesses disappear from the market. But a marginal company will be driven out from the society if the investment in social business falls at risk because equity injection for the company will not be possible for a long time. It is noteworthy that a conventional small firm might be stuck in incurring losses, thus encountering the problem of financial sustainability. As it is a profit maximising business, the owner has the opportunity to regain it by earning profits in the near future. But this case is not possible in a social business because the prices are too low to recover the expenses or loss.  

With the requirement of no-dividends, social businesses would be much like other social enterprises and for-profit conventional business models. Social Enterprise Alliance (SEA) defines social enterprises as those that "encompass for-profit organisations whose driving purpose is to address social needs and services." Unfortunately, Yunus's definition of social business disqualifies these activities as social business. Furthermore, in his book Building Social Business: The New Kind of Capitalism that Serves Humanity's Most Pressing Needs, Yunus argues that ownership is what makes social business special. Due to this feature, many socially oriented NGO activities that address social problems will be excluded from social business. Said another way, Yunus's definition is narrow and it is very difficult to identify which is a social business and which is not.

Suffice to say, there is a long history of argument of social enterprises that delve into the social and economic well-being rather than maximising profits. For example, the International Development Enterprise (IDE), founded by Paul Polak in 1982, facilitated low-cost farming instruments for small farmers to the developing world at an affordable price. Arong Rural Handicrafts, established in 1978 in Bangladesh by BRAC, created income opportunities for disadvantaged artisans. However, Yunus's social business is different from these socially oriented businesses because he is the first economist to speak about a no-loss, no-dividend business model. But, we should no longer debate whether Yunus is the pioneer of social business as he set aside the issue by echoing, "Invention is not mine, I have branded it," in a seminar held at the Chittagong Club on December 25, 2014.

To sum up, Muhammad Yunus delved into alternative business solutions to the existing social problems and put emphasis on social business which commits to address poverty or one or more social problems. Said another way, business is motivated by maximising social welfare at the expense of profits. While the model appears to be a promising solution to social problems, meeting its promises seems challenging.  

The writer is an International Research Fellow of the Japan Society for the Promotion of Science (JSPS) at the Faculty of Economics, Kyoto University, Japan.