Pathways to sector selection: A conceptual framework for social enterprises

• Published date: 01 March 2018
• Author: Angela E. Addae
• Date: 01 March 2018
• DOI: http://doi.org/10.1002/nml.21297

RESEARCH ARTICLE

Pathways to sector selection: A conceptual

framework for social enterprises

Angela E. Addae

University of Arizona

Correspondence

AngelaE. Addae, School of Sociology, University

of Arizona,P.O. Box 210027, Tucson,AZ 85721-

0027.

Email:aeaddae@email.arizona.edu

As hybrid organizations with financial and social objec-

tives, social enterprises must balance competing logics for

governance, stakeholders, and outcomes when considering

organizational design and structure. The existing legal

landscape for organizations exacerbates this dilemma by

forcing social enterprises to incorporate as either a non-

profit or for-profit organization. This research examines

the entity formation process for social enterprises by pre-

senting sector choice as an interaction among four factors:

equity financing, organizational lineage, human capital,

and funding environment. Using a qualitative comparative

case analysis, this research demonstrates that contingent

factors drive sector choice when legal incentives and insti-

tutional pressures are unclear. For those choosing nonprofit

forms, the status of the parent organization—the organiza-

tional lineage—is determinative. For those operating in the

for-profit context, human capital is predictive. The result-

ing conceptual framework contributes to existing organiza-

tional theory on hybrid organizations by presenting the

sector selection process as independent of the motives or

legal incentives typically associated with sector choice.

This research concludes with a discussion on the advan-

tages of delaying the formal sector declaration process.

KEYWORDS

legal issues, sector selection, social entrepreneurship,

organizational structure, organizational theory

1|INTRODUCTION

Social enterprises have emerged as hybrid organizations that utilize market strategies to enact social

change (Dees, 1998). By combining the structural elements of nonprofit and for-profit organizations,

Received: 4 March 2016 Revised: 12 October 2017 Accepted: 23 October 2017

DOI: 10.1002/nml.21297

Nonprofit Management and Leadership. 2018;28:349–365.wileyonlinelibrary.com/journal/nml © 2018 WileyPeriodicals, Inc. 349

social enterprises seek to fill gaps left by the public, private, and nonprofit sectors. Social enter-

prises generate financial profit while “doing good.”To do so, social enterprises must balance com-

peting pressures from the business and service sectors, which offer contradicting strategies for

governance, stakeholders, and outcomes (Garrow & Hasenfield, 2012). For nascent social enter-

prises, that tension greatly manifests during the sector selection process. While conventional entities

are afforded legal and institutional pathways that provide guidance for sector selection, social enter-

prises cannot rely on traditional legal and institutional indicators to select an organizational form.

For these hybrid entities, organizational motives are not clearly defined as either profit-oriented or

altruistic—rather, they are both—rendering traditional institutional triggers unclear. Because the

existing legal framework does not provide a clear avenue for organizations whose motives exist out-

side of the “pure”nonprofit or for-profit forms, social enterprises must “box”themselves into tradi-

tional legal forms that do not fully accommodate organizational goals and needs (Borzaga & Solari,

2001). To maneuver through the sector selection process, social enterprises must weigh other

factors—resulting in a sector selection process that is inconsistent and uncertain. Such outcomes are

problematic in two ways. First, organizations with similar characteristics, motives, and goals occupy

different legal sectors. Second, organizational forms serve as categories that enable audiences to

predict organizational behavior (Hsu & Hannan, 2005). A capricious sector selection process results

in ambiguous organizations whose behaviors and motives counter sectoral norms. The implications

of these wide-ranging complexities invite the question: Given that there is no clear legal space,

what factors determine whether social enterprises incorpor ate as a nonprofit or for-profit

organization?

Organizational scholars have studied the field and structure of hybrid organizations broadly

(Battilana & Dorado, 2010; Billis, 2010), but few have explored the strategies adopted by social

enterprises to become formal legal entities (Child, Witesman, & Braudt, 2015). To understand

how legal forms are determined, this research examines the sector selection process of four

social enterprises that share organizational characteristics but are legally distinctive. The author

employs institutional and organizational theory to highlight the factors shaping the sector selec-

tion process and to explore the interactions between legal and lay considerations. While legal

incentives and the organization’s purpose typically drive sector choice, the findings suggest fac-

tors such as equity financing, the parent organization’s legal form (organizational lineage),

human capital, and funding environment are relevant to establishing a legal “home”for hybrid

organizations.

Traditional

Charity

Non-Profit

with

Commercial

Income

Blended/

Hybrid

Form

Business

with Social

Purpose

Traditional

Business

Social Enterprises

FIGURE 1 Types of social enterprises

350 ADDAE