Encouraging Business

As encouraging a movement as social enterprise is, there is probably just so much that social entrepreneurs can do to improve the daily lives of the people with whom they work. What do I mean? Social entrepreneurs can start businesses that, hopefully, will provide long-term jobs to people in the developing world. In turn, people with these jobs are better able to take care of their families and they can, and do, learn new skills which increase their human capital.

But, can enterprise change the institutional environment in a country? What I mean by "institutional environment" is the rules and norms that structure how people interact with other people and how government officials treat people. These rules and norms create a set of incentives that (among other things) encourage people to create more, better, bigger businesses OR that stifle legitimate business creation.

When governments create complicated, multi-step administrative procedures to open a business, this tends to limit the number of small businesses that get registered in a country. All those steps are time consuming and provide opportunities for government officials to ask for (or wait for) bribes. The process becomes too costly for a small business person and so that person either gives up the idea of running his or her own company or they do start their business, but in the informal sector.

When governments make it easier and less costly for their citizens to open legitimate businesses local entrepreneurs and investors do just that. A number of African countries have been working to reduce the costly, complicated procedures needed to start, run, and close businesses. An interesting discussion of how this reform process has worked in one of the most economically successful African countries, Mauritius, can be found here.

One of the lessons of the Mauritian experience is this: unless someone in government is willing to supply institutional reforms that encourages people to do business, social enterprise and local enterprenership will have a limited -- albeit positive -- impact.