How financial constraints impede growth of social enterprises in China

While the social entrepreneurship field has been around for several decades in some countries, social entrepreneurship in China has only just begun to emerge in the last decade with social entrepreneurs beginning to tackle diverse social and environmental issues, while redefining the role of business in society.

Looking at the statistics alone, the potential of Chinese social enterprises for job creation, scale as well as individual motivation are similar to social entrepreneurs in other countries including the United Kingdom or India.  54% of Chinese social enterprises are less than 3 years old and the number of mature social enterprises who were older than 5 years rose from 15% in 2011 to 38% in 2012.

Notwithstanding the perception of China as serious economic competitor, social enterprises are still limited in scale and economic impact, mainly due to their youthfulness. 71% of them generate less than 500,000RMB in annual revenues and created a median of 7 jobs. Furthermore, compared to internationally expanding Chinese enterprises such as Haier, Lenovo and Sinopec, social enterprises are limited in geographic scope with 63% operating on a city or village level and only 8% operating on an international level, whereby this usually constitutes the sales of products to an international market (with the beneficiaries of those sales still being in China) rather then serving beneficiaries internationally. 

Financial constraints that impact growth

Many social enterprises struggle to survive and to grow due to inadequate business and market expertise, an unclear business model and inefficient income generating strategies. Yet, these are common challenges faced alike by their global counterparts in India, Hong Kong and the United Kingdom.

The unique challenge for social entrepreneurs in China is an immature entrepreneurial ecosystem, including resources such as financial, human, social/political, and intellectual capital, as well as institutional challenges. Just like the social entrepreneurs themselves, actors within the entrepreneurial ecosystem are only emerging and piloting their approaches, so that supporting structures for social entrepreneurs are very nascent.

So social enterprises are, as with SME’s and NGOs, confronted with a challenge of accessing sufficient financial resources to start and scale their organizations. In China most social entrepreneurs face difficulty accessing bank loans, as banks are not providing capital to SME’s but focus on large loans mostly to state owned enterprises. Other financees such as private and public foundations, corporations and impact investors who could play a crucial role in supplying social entrepreneurs with the necessary capital are not yet filling the void.  For example, the vast majority of foundations are operational foundations, fundraising for and implementing their own programs, instead of granting to NGOs and social enterprises.  The uncertain regulatory environment also pushes foundations to fund projects and organizations in less risky sectors such as education, poverty relief, and environmental protection, and to stay away from more sensitive areas such as HIV/ AIDS or human rights.  Furthermore the Ministry of Civil Affairs recently issued the draft “Regulations Concerning the Standardization of Foundation Behavior (Trial Implementation)”, with one of the key clauses stating that foundations should not fund for-profit organizations, which would create difficulties for social enterprises as well as a number of NGOs that are registered as businesses.

Yet conversely, often social entrepreneurs are unclear about which types of funding and how much funding they need, what funding opportunities are available to them and how to negotiate with funders, and few social enterprises possess a sound business model which can demonstrate an understanding of their market, and therefore struggle to attract legitimate investment.

How can the barriers to growth be overcome?

Our ‘China Social Enterprise Report (2012)’ contains 15 recommendations on how social enterprise growth can be stimulated and the barriers to growth overcome.  Just like facilitating the growth of other key sectors in China, the entrepreneurial ecosystem can be purposely supported by the government and facilitated by a growing support network of incubators, nonprofits, universities and investors.

3 key recommendations include:

Consider funding social enterprises and not only NGOs registered with the Ministry of Civil Affairs.

Funders including the government, foundations and impact investors should focus on impact and change/innovation and less on the form/approach/status of the organization being funded. This also includes considering providing funding to organizations that have the capacity and history to deliver results, regardless of registration. Consider piloting payment-based-on-results not based on organization type (NGO) to achieve impact with limited funding available.

Provide seed funding to support social enterprises to pilot and prove their models.

In order to be able to benefit from a large pool of social enterprises with a proven business model and in need of mezzanine funding, more funders need to fill the niche and focus on financially supporting early-stage social enterprises, including providing grant funding where necessary. Sustainable social enterprises will only emerge if more early-stage ventures are financially supported to pilot and prove their models.

Stop capping operational expenditure at 10%.

Recognize the contradiction in reducing operational expenditure and the need for increased capacity. Expand operational expenditure so organizations can invest in people, leadership, systems, professionalism, measurement, R&D, collaboration, advocacy, market research, fundraising etc.

 

To learn more get in touch with the author: Andrea Lane at andrea(at)fyse.org