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Youth Voice: Let’s Tighten the Definition of “Social Enterprise”

Ansh Prasad August 21, 2017

As it stands, the current definition of social enterprise is flawed. It states that social enterprises are organizations that seek to do societal good while earning a profit. For example, some enterprises may train Indian rural youth with construction skills so that they may earn a staple wage for their family and hopefully escape the poverty cycle. Others may be restaurants that donate a portion of their earnings to a local soup kitchen. Yet this definition is problematic in the 21st century and should be updated, because it allows for companies which are not true social enterprises to be considered social enterprises. Hence, I am proposing a new definition of social enterprise — one based around the opportunity cost of doing social good rather than simply doing social good.

For reference, opportunity cost is the amount of utility (in our case, profit) that an entity gives up in order to do something. For example, if I go to the movies today, I will lose two hours which I could have spent reading. Therefore, my opportunity cost of going to the movies would be two hours with a book. In the context of social enterprise, opportunity cost is no different. A construction company can choose to cherry-pick workers to contract for projects, or it can train the poor in order to increase employment. In this regard, a construction company incurs a high opportunity cost for its decision to train the poor, as money it spent for training the unemployed could have gone towards hiring skilled labor. High opportunity costs, of course, make a company more likely to be a social enterprise as they give up some of their earnings in order to do social good. For example, a multinational organization hiring disabled workers in just one of its outlets would not be giving up much, and therefore wouldn’t be classified a social enterprise. A small cafe, however, which only employs disabled workers would be considered one. Although they contribute to society in the exact same way, having a disabled workforce ultimately impacts a small cafe far more than a large multinational organization.

To understand why social enterprises should be defined as businesses with high opportunity cost rather than organizations which simply do good, I’ve prepared a little experiment. Here are two real-life examples of Singaporean businesses which have been dubbed “social enterprises” by a local government subsidiary known as RaiSE SG (raise.sg). On RaiSE’s website, these organizations are categorized as social enterprises due to their ability to “create social change in innovative ways”.

Organization 1: A restaurant which only employs people with disabilities, including people who are  deaf, the mentally challenged, and physically disabled.

Organization 2: A restaurant which uses organic produce and donates a portion of its money to charity.

Keep in mind that both these businesses are considered social enterprises by the old previous definition. Should they be? Organization 1 clearly has tangible social impact. It empowers those who may not be able to otherwise find work while making a profit. This organization is certainly a social enterprise with respect to the old definition. When keeping opportunity cost in mind, Organization 1 is also a social enterprise. It gives up a significant amount of profit to empower the disabled. Moreover, it needs to cater to the special needs of its workers while being limited in the type of people it can hire, and therefore has a high opportunity cost. By this definition, Organization 1 would be a social.

What about Organization 2? It’s classified as a social enterprise by the old definition, as it provides customers with environmentally-friendly produce and donates money for a good cause. But can we really consider this business to be a social enterprise? I’d argue that we can’t. The organization sacrifices very little in order to fulfil its social goal. Organization 1, relative to its size, gives up more than Organization 2 by having a less effective but more socially optimal workforce instead of opting to simply use healthy produce. Therefore, I consider Organization 1 a social enterprise, but not Organization 2.

By examining these businesses through their opportunity cost lens rather than their social impact, it’s easier for us to see what they give up to do good. This new definition of social enterprise — “organizations which incur a high opportunity cost in order to do social good” — helps narrow down the types of businesses which are true social enterprises.

Leadership / Social Entrepreneurship
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