Institutional Approach For Resolving Social Entrepreneurship Contradictions

Anna Veretennikova ,
Ksenia Kozinskaya ,
Jol Stoffers

Abstract

Social entrepreneurship is a relatively new phenomenon for the national and the world economy. This study aims to systematize the contradictions of social entrepreneurship and their solution by applying the provisions of institutional economic theories. As a result of the study, all contradictions were divided into two blocks: related to the need to form social entrepreneurship, arising in social entrepreneurship development. In the first block, national and individual contradictions were highlighted. When analyzing the second block of contradictions, elements of the process approach to management were used. Institutional economic theory was considered as a source of resolution of the indicated contradictions. The analysis showed that research in this area contains answers to emerging contradictions due to their concentration on the study of norms and rules of behavior and contains ways to resolve these contradictions. Of particular importance in resolving the identified contradictions are the theories of rational choice of collective action, state regulation of industries, institutional traps, institutional dysfunctions, the economic theory of informal institutions, research on socially significant benefits. The significance of the results obtained is to substantiate the institutional theory's potential for resolving the contradictions of social entrepreneurship.

Keywords:

Introduction

At the end of the 20th century and the beginning of the 21st century, the economic systems of local, regional, national, and also world levels, faced with new challenges in solving social problems of society, are forced to look for new ways to solve them, including using forms of economic interactions alternative to market ones. Simultaneously, through the development of technologies and new production models, economic structures are rapidly changing, new forms of organizations appear that meet the 21st century's challenges. Social entrepreneurship is one of the new forms of economic interactions that can stimulate the solution of social problems, eliminate the public sector's failures, and contribute to the sustainable development of society. Since social entrepreneurship is a hybrid form of economic relations, neoclassical economic theory cannot adequately describe the processes in social entrepreneurship. Therefore, in studying new economic phenomena, an important role plays modern theoretical concepts that describe, model, and predict their development. The irrational behavior of a social entrepreneur for neoclassical theories and his limited rationality in terms of orientation towards achieving social goals and solving social problems determines the potential of institutional economic theory to resolve social entrepreneurship's contradictions. In economic theory, there are several approaches to the analysis of economic behavior: classical, neoclassical, institutional, behavioral, evolutionary. The usual neoclassical economic analysis is based on the principle of stability of individual preferences. The economic behavior, motivated by the orientation towards maximizing utility, is achieved by choosing based on a balanced analysis of information and a carefully built system of priorities, which indicates its rationality. Also, the entrepreneur carries out his activities to make a profit. Thus, the emerging contradictions between the creation of social values, the cooperation of social entrepreneurs and the state to solve social problems on the one hand, and to make a profit, meeting personal interests on the other, poses new challenges for researchers in the field of studying the actions of social entrepreneurs.

Problem Statement

Since the early 1980s, scholars have adopted strategic management, entrepreneurship, marketing, organizational research, and non-profit management to study social entrepreneurship. The phenomenon of social entrepreneurship is studied by representatives of economic directions, sociology, anthropology, human geography, political science, public policy, history, legal sciences, psychology. In studying new economic phenomena, modern theoretical concepts play an essential role in describing, modeling, and predicting their development. Researchers of social entrepreneurship give different interpretations of this phenomenon, which explains the absence of its generally accepted definition. In our previous studies (Popov et al., 2019), the world's scientific schools describing and explaining this phenomenon's development were described in detail, in particular: the socially innovative school, the socially entrepreneurial school, the European School and the English School. Considerable attention in the study of this phenomenon is paid to the organization's role and place of social mission. In this regard, the analysis of social entrepreneurship, as a new phenomenon of socio-economic relationships, requires understanding from the point of view of various economic paradigms, which makes it possible to explain the contradictions of socially-oriented activities. The use of an institutional approach to the study of economic behavior is associated with the argumentation of the need to consider the economy in a broad social context and in interrelation with other social institutions since the behavior of an economic subject is the result of collective life. Institutional theory extensively studies the relationship between people, organizations, and institutions (government, market, culture, religion), which confirms its potential as a theoretical basis for the study of social entrepreneurship. In institutional economic theory, business entities' behavior is focused not on maximizing profits but on institutions' functioning. T. Veblen is considered to be one of the founders of institutional economic theory. The evolution of society, according to Veblen, is represented by the process of natural selection of institutions, which themselves became the results of processes occurring in the past. Another concept of Veblen refers to the way of thinking of people and the very man nature. Developing his idea, Kleiner (2004) distinguishes two types of individuals in a market society: one is focused on maximizing benefits, which the scientist understands as an increment of personally controlled material and financial values; the second type seeks to occupy a higher position in the structure of social institutions, to raise its social status. If the first type is the so-called homo economicus, the second type is designated "homo institutius" - human-institutional. While a model of egoistic behavior characterizes the first type, an institutional person can demonstrate the social commitment to society. North (2017), in turn, notes that institutions are the rules of the game in society or restrictions that determine the interaction of people. According to the theory of North (2017), institutions can be either formal, such as political and economic rules and contracts, or informal - rules of behavior, attitudes, values, norms, and conventions. From North's point of view, informal restrictions are norms of behavior, conventions, voluntary codes of conduct, and enforcement mechanisms. North's position is that formal institutions are subordinate to informal ones since they are a deliberate means used to structure the interaction of society in accordance with the norms and cultural guidelines that make up its informal institutions. While the governing body can directly influence the development of the formal institutions of society, informal institutions are much less tangible and can go beyond the direct influence of public policy. Thus, the authors of the institutional theory consider a person not just as a set of all social relations, but as a product of human nature, institutions that have developed in society (Shmerlina, 2017). Also, the authors of institutional theory emphasize the most important function of institutions in motivating people to take various actions and create social values and benefits. In particular, from an institutional point of view, people's behavior is mostly determined by the values and institutions of the society in which they live. Therefore, the decision to create a new enterprise is conditioned by the existing institutional structure, which determines the actions of various agents who participate in society's life, through the structure of incentives and opportunities. In social entrepreneurship, certain institutions and associated values encourage entrepreneurs to act in a way that is socially desirable behavior in society. Acemoglu and Robinson (2017) suggest that the institutional structure is a key factor determining the evolution of economic and political development. In work devoted to the study of institutional development in different regions of the world, Acemoglu and Robinson (2017) differentiate institutions into inclusive and extractive. In a society dominated by inclusive institutions, the development of social entrepreneurship and other forms of entrepreneurship are more favorable than in a society with extractive institutions. Thus, the established institutions of society in the countries of the world have a different impact on the ecosystem of social entrepreneurship at all its levels. Game theory authors Nash (2018), Dixit and Nalebuff (2018) draw attention to the interdependence of the individual economic decisions results. According to the provisions of this approach, the player's payoff depends not only on the strategy he prefers, but also on the choice of other "players" - the participants in the interaction. Subjects choose to cooperate with other players if this is conducive to their personal gain. However, behavior focused solely on achieving their own interest can lead to negative consequences. Thus, within the framework of game theory, an attempt is made to reveal the conditions of cooperation of "egoists" in the absence of control from formal organizations. The main provisions of game theories and new economic sociology allow us to conclude that the established stable networks of relations between people influence the adoption of economic decisions. As a consequence, economic behavior develops under the influence of social incentives and is not necessarily aimed at the realization of selfish interests, which is due to the variety of needs and motives underlying the player's actions. At the same time, one of the key grounds for the differentiation of motives is the orientation towards the satisfaction of the subject of economic activity with personal or public interests.

Research Questions

The study's central hypothesis is that institutional theories, the unit of analysis of which are formal and informal norms and rules of behavior, and the mechanisms of their compulsion, allow resolving contradictions arising in social entrepreneurship.

Purpose of the Study

The research purpose is to systematize social entrepreneurship's contradictions and their solution through institutional economic theories provisions. When identifying contradictions, a process approach to management was used, and the searching ways to resolve these contradictions made it possible to substantiate the role of institutional economic theory for social entrepreneurship development.

Research Methods

To test this hypothesis and achieve the study goal, the contradictions faced by social entrepreneur and social entrepreneurship as a type of activity were identified in general. The research's methodological basis was the methods of systematization, categorization, and the process approach to management. The study's information base was scientific articles presented in international and Russian scientific citation indices, in particular Scopus, WoS, eLIBRARY, and reports from international and Russian organizations engaged in the research and development of social entrepreneurship.

Findings

The social function of the state VS the emergence of social problems

When this contradiction is revealed, the question arises of the expediency and legitimacy of concentrating social tasks exclusively in the government action field. The reasons for the described phenomenon lie, on the one hand, in the plane of a significant transformation of economic activity conditions, which is characteristic of the entire world socio-economic system, on the other hand, in the dysfunctionality of existing institutions, as well as in the formation of institutional traps (QWERTY effects). The institution's dysfunctionality is due to the discrepancy between the essence of the institution and external conditions. At the same time, the system's acquisition of new dynamics is possible only with the appropriate modifications of institutions and organizations (Sukharev, 2018).

The contradiction revealed in this paragraph consists of the inconsistency of existing institutions with the pace of socio-economic development.

The aggravation of social problems caused by the coronavirus pandemic also demonstrated the need for a radical transformation of existing institutions by developing effective models of interaction between government, business, and society. Thus, social entrepreneurship development as an alternative form of solving social problems is a promising area of institutional transformation, which confirms the close relationship between social entrepreneurship and research on institutional economics.

Commercial VS public function of social entrepreneurship

Although economic theories emphasize that making a profit is the driving force behind entrepreneurs' risk-taking, entrepreneurial motives are complex and ambiguous, since the implementation of ingrained values, social norms expressed in informal institutions, can also serve as an important, separate source of motivation.

Solving social problems of society and, consequently, creating socially-oriented organizations encourages entrepreneurs to take risks that are unacceptable for purely economic goals. At the same time, informal institutions may not directly impact social entrepreneurs, but they affect entrepreneurs' perception of the value of socially oriented activities.

According to researches of scientist Tambovtsev (2018), social norms are very close to the concept of informal institutions, since they do not imply the presence of a centralized mechanism for enforcing rules in ensuring behavior that corresponds to the norm. The difference between an internalized norm and a perceived one is that its adherence does not occur as a result of the expectation of external coercion or punishment as a result of its violation, but because the individual considers the behavior described by it as desirable and the best possible. The behavior fixed by the internalized norm is the behavior about which the individual thinks he or she should perform. Etzioni notes, that norms shape their preferences, people will strive to follow them because such adherence is a source of inner approval. (Etzioni, 2000).

Thus, the decision of entrepreneurs to organize a socially-oriented enterprise is determined by the norms of society and desirable behavior, which does not require external coercive mechanisms but is internalized by the entrepreneur. The substantiation of this contradiction by referring to the economic theory of informal institutions confirmed the hypothesis put forward.

Private good VS public good

Based on the contradictions about social entrepreneurship's goals - social or commercial - the result of socially-oriented activity follows, that is, what type of benefits are the result of social entrepreneurship. The result of social entrepreneurship can also relate to the social effect brought to society; this characterizes a slightly different section of the assessment of the product produced by an entrepreneur in the social sphere.

To identify the type of goods that social entrepreneurs are aimed at creating, we turned to the classification of Samuelson (1954), who divides public goods according to the degree of non-exclusion and non-rivalry in consumption. Rubinstein (2016) proposed a classification of economic benefits based on the following properties: individuality, social utility, and communality, thus highlighting private, mixed, communal, and social benefits.

In addition to the "patronized" goods, the demand for public goods must be constructed by society, and in this case, socially significant benefits arise. Socially significant goods (merit goods), according to Musgrave, are considered significant, and their satisfaction is ensured through the state budget and payments for private consumers. The scientist Tambovtsev (2018) shows the differences between public goods and socially significant. The border between private and public goods is not set by their properties, but" socially constructed" to the number of public goods, regardless of the preferences and values of individuals, due to their own properties. In turn, social entrepreneurship is becoming a special type of private initiative, the result of which is the creation of a socially significant benefit. The importance of motives and internal incentives for creating socially significant goods can also be explained by referring to the economic theory of informal institutions. Ultimately, the appeal in the system of institutions also allows us to confirm the indicated hypothesis.

Private VS state support for social entrepreneurship

In researches on social entrepreneurship, scholars tend to focus on the entrepreneur as the main actor in the person of the "individual hero" and do not pay enough attention to the collective action of social entrepreneurship. (Spear et al., 2017). Most social entrepreneurship is the result of collective rather than individual action, as it relies on a wide range of support, collaboration and alliances to obtain resources (Sud et al., 2009). Collaboration with other actors and organizations provides social entrepreneurs with the means to achieve social goals at different levels. The contradiction between collective and individual goals stems from the very meaning of entrepreneurship as individual decisions that change or transform value attitudes (Montgomery et al., 2012). However, according to scientists, the solution of social problems of society cannot be solved individually, therefore, despite the important role of an entrepreneur in solving social problems of society, social entrepreneurship is rather the result of collective actions. That collective action is effective in cases where resources are scarce and renewable, where members can not harm others, such as taking control of a market. At the same time, each member of this society has the opportunity to participate in making general decisions (Ostrom, 1998, p. 112 ). Collaboration is supported by monitoring and imposing agreed incentives or punishments. Self-organization requires an institutional system that supports (or does not hinder) collective action, administrative structures and mechanisms, and negotiators that are perceived as laws (Knoke, 2019). Given these demands, Ostrom (2017) argues that collective action and self-government is a successful way of conserving shared resources.

Thus, the contradictions in the question of organizing model the entrepreneurs' activities in solving a social problem find their solution precisely in the use of the model of collective actions.

Individual VS public support for social entrepreneurship

At the end of the XX century. Institutionalists formulated the theory of collective action. Collective action is a process based on the interaction of people who share a common interest in solving a problem. Olson (2019) described the logic of collective action to address group behavior issues. According to the scientist, people in small groups have close interpersonal ties and act with the intention of maintaining a common goal; however, in large groups, they are often driven by personal gain, in the absence of a coercive mechanism, such as by government. Olson's theory of collective action challenges neoclassical economics that presupposes selfish behavior and self-interest. Olson (2019) argues that people with a common interest in public goods can act altruistically and negotiate mutually beneficial agreements in which the benefit for all members is higher than the cost to the individual.

The traditional sources of funding for social constructivists are governments, non-governmental organizations, and foundations. They are not independent of external suppliers (Zahra et al., 2009). This type of social entrepreneurship is resource-dependent due to the scalability of the social mission (Smith & Stevens, 2010). Social Engineers operate on an enormous scale - nationally, transnationally, and globally - to systematically address social problems and implement lasting reforms in the system (Volkmann et al., 2017, p. 32). Unlike social bricoleurs, they are the main actors in social change, transforming entrenched institutions outside the existing system. Social engineers view Schumpeter's concept of creative destruction (Zahra et al., 2009) as a key aspect of their philosophy, as they act as innovators to destroy old and ineffective systems in order to increase influence. (Zahra et al., 2009). They meet social needs by creating systemic change that disrupts the entire existing system and use gradual and revolutionary social improvements to create lasting structures (Volkmann et al., 2017, p. 33).

The presented models of social entrepreneurship and mechanisms for their support demonstrate the importance of a formal institutional environment for social entrepreneurship development. Designing inclusive institutions that will take into account the diversity of participants' interests involved in solving social problems and aimed at supporting social entrepreneurship can be a way to resolve this contradiction.

Members of the society, interested or affected by any problem, independently develop effective ways to solve these problems within the framework of self-organizing enterprises. With regard to social entrepreneurship, the form of association of socially oriented entrepreneurs can be any, since self-organizing informal organizations can operate effectively within the framework of small associations.

This theory was developed by Ostrom (2017). In her opinion, collective action is a more effective way of managing public resources than a market system or a scheme designed and controlled by the state. For collective action to be effective, resources must be limited and renewable, and none of the resource users can harm others, for example, to seize control of the market, while each member of this society has the opportunity to participate in making collective decisions (Ostrom, 1998, p. 56).

Collaboration is supported by monitoring and imposing agreed incentives or punishments. Self-organization requires an institutional system that supports (or does not hinder) collective action, administrative structures and mechanisms, and negotiators that are perceived as law (Knoke, 2019, p. 113). Given these demands, Ostrom (2017) argues that collective action and self-government is a successful way of conserving shared resources. The solution to this contradiction can be the theory of social contract since the support of socially-oriented activities is a socially significant benefit and relieves part of the burden on the state system.

The social contract theory was formulated in the twentieth century and became the focus of the developing institutional economy. Among Western economists who have turned to research and modern interpretation of social contract theory are North (2017) and De Soto (2000). Among domestic researchers – Auzan (2017), Nureyev, and others. Within the framework of the social contract, social problems of society are provided by state social services. However, according to scientists, the state cannot cope with the solution of social problems effectively. The provision of public services, including in the health sector, is bureaucratic, ineffective, and runs counter to new challenges. Bureaucracy has become the dominant method of organizing state bodies' activities and cannot be an organizational regime that contributes to the solution of serious problems.

Such restrictions are ubiquitous in government organizations, so it is necessary to recognize the potential value of attracting private initiative that can quickly adapt to the existing challenges of social problems in society.

Since the solution of social problems is effective with the help of social entrepreneurs, the state has the opportunity to delegate the solution of these issues to social entrepreneurship, through the support of socially-oriented activities. Partnerships with the state have the potential to replicate the products and services of social entrepreneurs, as national, regional, and local governments are important actors in economic ecosystems. There are several options for the relationship between the state and social entrepreneurs, including a principal-agent relationship, where the state acts on the part of the principal, and social entrepreneurs are the agent. The author of the theory of state contracts, Tyrol, does not directly support or oppose government regulation, since the regulator does not have data on each participant's real situation - what opportunities they have to reduce the price or improve the quality of products and services. Regulation is carried out with asymmetric information; each company knows more about itself than the regulator (Tirole, 2018, p. 35). Therefore, concerning social entrepreneurs, the theory of incomplete contracts is more likely to be applicable (Grossman & Hart, 1983). It is difficult to verify the fulfillment of the agreed conditions because of the problematic measurement of the social effect. The fundamental element of an incomplete contract's theory is the delegation of the decision-making right when it is impossible to describe all the permissible actions of an agent.

The study confirms the promise of the institutional analysis toolkit and the provisions of the institutional economic theory for social entrepreneurship development, as well as the search for possible directions for the development of this type of activity directly in the institutional theory. The development of social entrepreneurship is also facilitated by the formation of the author's concept of econotronics, which studies the dynamics of economic institutions' development of interaction between actors and society in the digital economy.

Conclusion

In this study, in order to systematize the contradictions of social entrepreneurship and their solution through the application of the provisions of institutional economic theories, the following results were obtained. First, the contradictions in the formation and development of social entrepreneurship were systematized. All contradictions were divided into two blocks: 1) related to the need to form social entrepreneurship as such; 2) arising in the development of this type of detail. With the further division of contradictions, national and individual contradictions were identified in the first block. When analyzing the second block of contradictions, the elements of the process approach to management were used, allowing to consider the variety of contradictions that arise in the development of this type of activity. Secondly, institutional economic theories were considered as a source of resolution of the indicated contradictions. The analysis showed that research in this area contains answers to emerging contradictions due to their concentration on the study of norms and rules in a particular issue and contains ways to resolve these contradictions.

Acknowledgments

The article was prepared with the support of the Russian Foundation for Basic Research in the framework of scientific project No. 20-011-31271

References

  1. Acemoglu, D., & Robinson, A. (2017). Why nations fail: The origins of power, prosperity and poverty. London: Clays, Bungay, Suffolk.
  2. Auzan, A. (2017). Sotsiokul'turnaya ekonomika [Social and Cultural Economy]. Science and innovation, 2(168), 4-10.
  3. De Soto, Hernando. (2000). The mystery of capital: why capitalism triumphs in the west and fails everywhere else. New York: Basic Books.
  4. Dixit, A., & Nalebuff, B. (2018). Thinking Strategically. New York: Viva Books.
  5. Etzioni, A. (2000). Social Norms: Internalization, Persuasion, and History. Law and Society Review, 34(1), 157-178.
  6. Grossman, S., & Hart, O. (1983). Implicit Contracts Under Asymmetric Information. Quarterly Journal of Economics, 98, 123–156.
  7. Kleiner, G. B. (2004). Evolution of Institutional Systems. Moscow. Science.
  8. Knoke, D. (2019). Organizing for Collective Action : The Political Economies of Associations. New York: Routledge.
  9. Montgomery, A. W., Dacin, P. A., & Dacin, M. T. (2012). Collective Social Entrepreneurship: Collaboratively Shaping Social Good. Journal of Business Ethics, 111, 375–388.
  10. Nash, J. (2018). Game theorhy. London: Palgrave Macmillan.
  11. North, D. (2017). Institutions, institutional change, and economic performance. Cambridge, New York: Cambridge University Press.
  12. Olson, M. (2019). The Logic of Collective Action: Public Goods and the Theory of Groups. Harvard: Harvard University Press.
  13. Ostrom, E. (2017). Governing the Commons: The Evolution of Institutions for Collective Action. New York: Cambridge University Press.
  14. Ostrom, E. (1998). A behavioral approach to the rational choice theory of collective action. American Political Science Review, 92(1), 1–22.
  15. Popov, E. V., Veretennikova, A. Y., & Kozinskaya, K. M. (2019). Research schools and stages of social entrepreneurship development in the global space. Proceedings of the 14th European Conference on Innovation and Entrepreneurship, ECIE, 814-822.
  16. Rubinstein, A. (2016). Theory of Patronized Goods. Liberal Evolution of Paternalism. International Journal of Entrepreneurial Knowledge, 1(4), 6-29.
  17. Samuelson, P. A. (1954). The pure theory of public. The review of economics and statistics, 26(4), 387-389.
  18. Shmerlina, I. A. (2017). Metaphor as a cognitive obstacle. Sociological Studie, 10, 15-25.
  19. Smith, B., & Stevens, C. (2010). Different types of social entrepreneurship: The role of geography and embeddedness on the measurement and scaling of social value. Entrepreneurship & Regional Development, 22(6), 575-598.
  20. Spear, R., Teasdale, S., Lyon, F., Hazenberg, R., Aiken, M., Bull, & Kopec, A. (2017). Social Enterprise in the UK: Models and Trajectories. The International Comparative Social Enterprise Models (ICSEM) Project, 40, 301-321.
  21. Sud, M., VanSandt, C. V., & Baugous, A. M. (2009). Social entrepreneurship: The role of institutions. Journal of Business Ethics, 85, 201-216.
  22. Sukharev, O. (2018). Economic Theory of Institutional Changes: Approaches to Modeling Corrections and Dysfunctions of Institutions. Zhurnal Economicheskoj Teorii, 15, 276-290. DOI:
  23. Tambovtsev, V. (2018). Public goods and public interests: is there a connection? Issues of Economics, 11, 25-40. DOI:
  24. Tirole, J. (2018). Market Power and Regulation. Stockholm: Royal Swedish Academy of Sciences.
  25. Volkmann, C. K., Tokarski, K. O., & Ernst, K. (2017). Background, characteristics and context of social entrepreneurship. Wiesbaden: Springer Gabler.
  26. Zahra, S., Gedajlovic, E., Neubaum, D., & Shulman, J. (2009). A Typology of Social Entrepreneurs: Motives, Search Processes and Ethical Challenges. Journal of Business Venturing, 24(5), 19-532.

Copyright information

Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

About this article

Publication Date

16 April 2021

Article Doi

https://doi.org/10.15405/epsbs.2021.04.17

eBook ISBN

978-1-80296-104-1

Publisher

European Publisher

Volume

105

Print ISBN (optional)

-

Edition Number

1st Edition

Pages

1-1250

Subjects

Sustainable Development, Socio-Economic Systems, Competitiveness, Economy of Region, Human Development

Cite this article as:

Veretennikova, A., Kozinskaya, K., & Stoffers, J. (2021). Institutional Approach For Resolving Social Entrepreneurship Contradictions. In E. Popov, V. Barkhatov, V. D. Pham, & D. Pletnev (Eds.), Competitiveness and the Development of Socio-Economic Systems, vol 105. European Proceedings of Social and Behavioural Sciences (pp. 158-167). European Publisher. https://doi.org/10.15405/epsbs.2021.04.17

Copy citation text