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Why the Turkish Government should promote social innovation (and build social impact markets)

The Turkish Ministry of Development and some representatives of the Regional Development Agencies formed an internal social entrepreneurship working group as early as 2009. The promotion of social innovation and the building of social impact (investment) markets should indeed be in the interest of the Turkish Government (and any other Government around the world). Furthermore, there is an economic rationale for government intervention to shape social impact markets as I argue here.

1. The Turkish Government's stake in social impact markets

In 2011, the Turkish economy has been one of the fastest growing economies worldwide ( Furthermore, Turkey’s human development index (HDI) increased sufficient between 2005 and 2011 for the country to move from the medium to the high development group within HDI’s classification of its 187 countries.

However, the country continues to face significant social challenges such as regional discrepancies in opportunities and economic development between the wealthier west and the poorer east and southeast of the country; environmental degradation; high unemployment especially amongst women and youth, low quality education and inequality in society. For example, Turkey’s inequality adjusted HDI – adjusting for inequalities in health, education and income measures – is 23 percent lower than its nominal HDI and is largely explained by factors outside of the individuals’ control (birth place, parental education). Another example is the performance of Turkey’s pupils: according to studies, the average 15 year-old in Turkey is still one full year behind the OECD average and 25 per cent of students are considered by the OECD as ‘functionally illiterate’.

Social value creation, innovation and flexibility

Social innovation through social entrepreneurship is not a panacea to resolve all of these problems. However, experience in many other countries demonstrates that social entrepreneurs have the ability to find innovative solutions where interventions by governments, aid agencies or civil society alone have failed. In doing so, they share government’s aims to improve public welfare since the concern for social value creation is at the core of social enterprises business models – in fact this is the justification for their very existence. In the past years efforts have been made to better analyse and report on the impact of social enterprises to demonstrate the organisations contribution to social change e.g. by Ashoka or members of the Global Impact Investment Network GIIN. Social entrepreneurs may be able to act more quickly than large public bureaucracies and may be closer and more responsive to local needs.

Increased capital for development

Compared to traditional charities social entrepreneurship models have the ability to attract new and different types of financial and non-financial resources to help resolve social problems, thus enhancing the entrepreneurs’ ability to address needs at a wider scale. Social entrepreneurs also shift costs from public budgets to private resources and thus freeing up government resources for other important areas. Finally, a strong social impact market will promote long term investment beyond the life of any political administration.

Economic impact

Recent data shows that there is also a significant economic impact of an expanded social economy. A social entrepreneurship survey carried in 2009 by the Global Entrepreneurship Monitor GEM found, for example, that (enterprising NGOs, hybrids and for profit) social enterprises in Western European countries employ over 3 per cent, in Finland and Iceland even 5 and 6 per cent respectively of the active workforce. According to this report, social enterprises constituted 1 out of 4 new enterprises set up every year in the European Union. Social entrepreneurs also support the labour market by operating in disadvantaged areas and offering employment opportunities to groups that have traditionally been excluded. The UK Government estimated based on a survey carried out in 2006 that social enterprises make an annual contribution of £24bn annual to the UK economy, i.e. an equivalent to 1.5% of GDP and employ more than 800,000 people often of disadvantaged communities (UK Government, 2011, p13). In fact, in the UK social businesses are by now surpassing SMEs in terms of growth and innovation: in a social enterprise survey carried out in 2011, 58% of social businesses reported that they grew last year compared to 28 % of SMEs and in innovation and 55% of social business launched new products and services as opposed to 47% of SMEs.

Creation of a new industry

Investors stated in a survey by JP Morgan, an investment firm, that in 2013 they will commit USD 9 billion worldwide for ‘impact investments’ i.e. investments that generate both social/environmental impact along financial returns. Beyond returns to beneficiaries and investors, this movement (which some define as a ‘new asset class’) has already led to the creation of new businesses, services and employment in particular in countries where condition for this industry are favourable such as the US and UK.

2. Government rationale for intervention

What could be arguments for the Turkish Government to intervene in social impact markets? From an economic perspective, the justification for government interventions in market activity is generally based on the imperfect performance of markets. In our case, social impact markets can be defined as a system of institutions, procedures, and social relations in which parties engage in monetary and non-monetary exchange of goods, services and information for social impact. There is a plurality of demand-supply relations that form social impact markets including those between beneficiaries and social enterprises or social enterprises and their suppliers of capital, goods and services.

Here we focus on the core of social impact markets as the relationship between social ventures (demand side), investors (supply side) and intermediaries (the market infrastructure) who contribute to the flow of capital for social impact and a strengthened demand. This relationship is influenced by the social impact markets framework (policies, legal and institutional framework) and the country specific context (level of economic development values, social cohesion, role of government, welfare system, philanthropy, and other drivers).

Figure 1: Social impact markets Framework

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Social Impact Markets (2013), based on Thornley, B. Wood, D. Grace, K. (2011) and Impact in Motion (2013)

Many of the challenges social enterprises face in Turkey are related to ‘market failures’ or ‘market imperfections’, including for example:

  • Positive externalities: With their activities, social impact enterprises create assets for society, such as health, social justice or environmental sustainability. However, these benefits are often not priced (or often not even probably identified and measured) resulting in an under-valuation of the organisation and its performance by potential funders and other stakeholder in society. Furthermore, as we argue in our blog on social investment, as pioneers social entrepreneurs create market level benefits beyond the direct impact of their organisations. However, ‘pioneering don’t pay’ as Andrew Carnigie rightly put it. Innovation is risky and social innovation is even more risky, which makes social enterprises, in particular early stage enterprises an unattractive investment target for funders and investors.
  • Under-provision of public goods: Public good are goods from which individuals cannot be effectively excluded from use and where use by one individual does not reduce availability to others. In social impact markets typical public goods are market infrastructure such as research, data but also sound business models, public awareness or talents and skills. In Turkey as most emerging social impact markets there is a clear under-provision of such public goods due to the lack of attention paid so far to this area.
  • Imperfect information and uncertainty: Potential investors and lenders may overestimate risk on the basis of poor information about social entrepreneurs’ performance, clients and its market environment as well as the lack of audited statements, a credit history, inability to provide collateral or third party ratings. On a macro level, there may also be additional uncertainty about how social impact markets in Turkey develop in the long term inhibiting the flow of private funding and discouraging intermediaries and market infrastructure providers to engage in this field.
  • High transaction costs: Many social entrepreneurs in Turkey are relatively small, with limited capacity to absorb large investments increasing transaction costs. Typically, for each lira of social investment provided, significant additional cost are required for selecting a grantee, making ventures ‘investment ready’, closing a deal and monitoring the investment. Furthermore, in Turkey an effective mechanism to match providers and recipient of funding does not (yet) exist thus increasing transaction costs and market inefficiencies.
  • Market distortions and inefficiencies: In some sectors that benefit from substantial donor finance for civil society organisations, demand of capital may be skewed towards fundraising and seeking funds from providers of ‘free’ capital.

If you are from a government agency, hopefully this helps you to make the case with your colleagues (and your superiors!) to develop a more strategic role for the Turkish government in shaping social impact markets. If you are from a foundation or another philanthropic organisation you may wonder to what extent these arguments apply to you as well. And you are right, many of them do!