Social enterprises: how the choice of business model can impact international expansion
06/07/2024
5 min
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The number of social enterprises (SE) has risen rapidly in recent years in response to a range of socio-economic and environmental challenges. To tackle problems including poverty, labor and living conditions, social exclusion, and climate change, a variety of business models (including profit and non profit) have emerged. To increase their impact and ensure they are financially sustainable, many experts have argued that it is crucial for such organizations to scale up their activities. One way of doing this is by expanding their services or products internationally, notably in countries where the problems are unaddressed by local policy or market forces.
However, social entrepreneurs leading such organizations face distinct challenges when looking to expand outside of their country. In contrast to commercial companies, they focus primarily on creating social value by addressing social or environmental needs rather than generating economic gains. As recent *research highlights, this distinctive characteristic translates into a variety of business models that aim to create social and economic value simultaneously.
A variety of models for creating and delivering value
Some social enterprises decide to create social value directly through the products or services they offer or sell to their customers. This means their customers overlap with the populations or causes they are looking to help (beneficiaries). For example, Nuru Energy, a SE in Africa, commercializes renewable energy lamps for low-income populations. It realizes its social mission of contributing to reducing carbon emissions, lowering healthcare costs, and improving child education. Social value creation is embedded in the provision of the solution.
However, in some cases SEs also develop additional activities or products to fulfil their social mission. One example is microfinance initiatives. These traditionally create more social value when the recipients are trained and educated to use these loans for entrepreneurial activities. Thus, microfinance institutions must provide additional educational and training activities for their clients to help them develop successful entrepreneurial activities.
Differentiating clients and the beneficiaries
Furthermore, some SEs develop business models where there is no overlap between their clients and the beneficiaries of their social mission. For example, Mobile School, a SE founded in Belgium, provides educational materials to street children (internationally). In parallel it offers corporate training programs to companies. In this case, the beneficiaries are the children who receive free educational material, while the clients are the companies who pay for the executive training programs.
Another variable in terms of business models relates to revenue sources of social enterprises. Unlike commercial ventures, many are reliant on different types of revenue. These can include subsidies, grants and donations, in addition to the revenue gained from their activities/services.
How do different models impact the capacity of social enterprises to develop internationally?
In their recent research professors at IÉSEG, KU Leuven and an expert from S&P Global studied the business models of 175 social enterprises in India to gain insights on this question for social entrepreneurs everywhere. India has a history of activism and private-sector participation in social welfare activities, which have proven to be important in driving a strong social entrepreneurship sector.
“We found that around one third of the SEs we studied had developed internationally. Importantly, social enterprises which had developed additional activities beyond the initial provision of goods or services were less likely to have expanded activities abroad,” explains Professor BRUNEEL from IESEG, one of the authors of the study.
This is because it’s sometimes necessary to provide additional activities such as education and training next to the core product or service to clients to create the intended social value.
The researchers also found that social enterprises that had developed a business model which differentiated their clients, and their beneficiaries (like the case of Mobile School) were slightly more likely to internationalize than those that had an integrated model – where the populations they are serving are also their clients.
“SEs with integrated models can classically be more embedded in their local community. This may motivate them to focus more on local growth opportunities, rather than scaling up by pursuing international growth opportunities”, explains Professor BRUNEEL.
The impact of revenue sources on international expansion
Finally, the researchers also found that that SEs that rely heavily on contributed or external income sources (donations, funding, philanthropy) rather than self-generated income were significantly less likely to internationalize.
“This is because SEs that generate revenues internally by selling products and services will be more likely to look internationally for growth opportunities. “These revenues will give them independence and freedom from donor-driven agendas, and their lower levels of lock-in with the local community will provide them with more freedom to expand to new geographical areas”, adds Professor BRUNEEL.
“Our results provide interesting insights on the combinations of business model factors that either facilitate or inhibit internationalization. These insights are also extremely relevant for social entrepreneurs in Europe and internationally”.
Social entrepreneurs should weigh up costs and benefits
Managers of SEs considering internationalization should therefore address the relative costs and benefits of integrating clients as beneficiaries, creating social innovations that can be replicated, creating value contingent on additional activities, and relying on external sources of income.
The authors also argue that social entrepreneurs must also be aware of short-term considerations versus longer-term implications when making business model choices. For example, social entrepreneurs are typically motivated to address the social needs and problems of people in their local communities (i.e., beneficiaries).
From the entrepreneur’s perspective, it may be an obvious strategy to explore how these beneficiaries can be turned into paying customers (integrated), rather than searching for another paying customer segment (differentiated). While the latter option may be less attractive because it renders the business model more complex and challenging to manage, our study shows that differentiated SEs are more likely to internationalize.
Similarly, social entrepreneurs must pay sufficient attention to developing a diversified stream of income beyond donations and subsidies to avoid being locally “locked-in.” While they may need to rely on the latter in the short-term, generating income from selling products and services is important if social entrepreneurs want to scale up their businesses and grow internationally. In fact, social entrepreneurs might even consider these characteristics in devising their business plans, given that SEs with business models that differentiate clients and beneficiaries, that do not rely on contingent activities to create social value, and that generate most of their revenues internally are more likely to be able to expand internationally.
This research highlights that social entrepreneurs have a variety of paths for scaling up – either nationally or internationally.
Therefore, social entrepreneurs need to think carefully about their business model configuration along the dimensions of value creation, delivery, and capturing and its impact on the scalability of activities.
*”The internationalization of social enterprises: The impact of business model characteristics”; The International Business Review, Volume 32, Issue 6, December 2023, Filip De Beule (KU Leuven), Johan Bruneel (IESEG School of Management, Univ. Lille, CNRS, UMR 9221 – LEM + KU Leuven), Kieran Dobson (Sustainable1, S&P Global).
