Theoretical Overview

Entrepreneurship for public benefit is being pursued in all three sectors. Public sector approaches have, however, developed largely independent of those in the private sector. This is unfortunate, since the goals and many of the techniques of both are similar. In addition, this is confusing because the labels applied to entrepreneurship for public benefit differ between the public and private sectors. When referring to both approaches, I will use the term public-benefit entrepreneurship.

The notion of entrepreneurship in the public sector dates back to at least 1960 (Ostrom, 1964; Wagner, 1966). It has been conceptualized in a number of ways in the public policy and public administration literature. For example, public sector entrepreneurship refers to exemplary administrators who made dramatic changes in public organizations; founders of new and influential political movements, public policies, or public organizations; entrepreneurship in the management and operations of public organizations; public sector reforms and experiments designed to make public organizations more responsive and efficient; and privatization and other ways to encourage entrepreneurship in private sector organizations (Morris, Kuratko, & Covin, 2011). This chapter focuses on entrepreneurship in the operations, outputs, and outcomes of public sector organizations. Public sector entrepreneurship can be defined as the process of creating value for citizens by bringing together unique combinations of public or private resources, or both, to exploit social opportunities (Morris et al., 2011).

The term social entrepreneurship started appearing in the 1990s to refer to the development of new and innovative nonprofit programs relying to a large degree on social enterprise, part of a trend toward third-sector marketization (Emerson & Twersky, 1996; Leadbeater, 1997). Around the same time, academics were developing theories of nonprofits as innovative deliverers of both public and private goods (Bielefeld, 2007). Social entrepreneurship can be defined as the pursuit of social objectives with innovative methods, through the creation of products, organizations, and practices that yield and sustain social benefits (Guo & Bielefeld, 2014). This approach has been used recently to develop ideas about how for-profits can adopt an activist approach to their social responsibility and integrate social responsibility into their corporate commercial strategy. Porter and Kramer (2006, p. 84) contend, “An affirmative corporate social agenda moves from mitigating harm to reinforcing corporate strategy through social progress.”

Conceptual Foundations

Theories of public-benefit entrepreneurship both rely on and move beyond the principles of entrepreneurship for commercial gain in for-profits. Two general orientations toward commercial entrepreneurship have been pursued over the years. One focuses on the actions of individuals in the market economy. The current form of this approach (Kirzner, 1999) holds that an individual entrepreneur is motivated by profit and seeks to recognize and act on market opportunities to make more of a profit than others. Public-benefit entrepreneurship can also involve market orientation as a key element. It is carried out through social enterprise, an approach that combines social impact with commercial income.

A more macro orientation to entrepreneurship was put forth by Joseph Schumpeter in the 1930s (1994), who focused on the entrepreneur as an innovator, the creative drive itself, and the impacts of entrepreneurship on industries and the economy. The entrepreneur develops new combinations of goods, services, and organizational forms in the service of a relentless drive to create. This orientation has been linked historically to the birth of new industries and the concomitant death of existing ones through a process of creative destruction. This perspective leads to a view of public-benefit entrepreneurship as a process aimed at entrepreneurial innovations and their potential to address significant and widespread social problems.

Public-benefit entrepreneurship is distinctive in that it primarily seeks to advance social objectives. While conceptually clear, this brings up a number of issues that managers may have to confront. Social interests are heterogeneous and based on potentially incompatible values and goals. This can result in fundamentally different and conflicting social objectives. The question can become, whose social interests end up being pursued, and at whose expense? And as a result of this, what are the implications of any changes produced? This is especially problematic at the macrolevel of social entrepreneurship, where there may clearly be some who benefit more from large-scale changes than others.

In addition, Austin, Stevenson, and Wei-Skillern (2006) discuss four other factors that make nonprofit entrepreneurship different from commercial entrepreneurship. Nonprofits (as well as government agencies) operate in areas where markets have failed, have social missions, face more obstacles in resource mobilization, and have more complex performance assessment.

Entrepreneurial Practice

The entrepreneurial process can be summarized as beginning with the existence and discovery of an entrepreneurial opportunity. This is followed by the entrepreneur's decision to exploit that opportunity and the subsequent establishment of the organizational means to do so, including the establishment of organizational form and design, resource assembly, and environmental transactions.

Entrepreneurship theory as developed for for-profits conceives of entrepreneurship as being composed of three underlying dimensions: innovativeness, risk taking, and proactivity (Morris et al., 2011). Simply stated, an innovation refers to something that is novel, unique, or different from an existing state of affairs. In terms of entrepreneurship, it can involve products, services, or processes and range from modest modifications to developments that are new to the world. Risk taking entails a willingness to pursue opportunities that have a reasonable likelihood of producing losses or significant performance discrepancies. Entrepreneurship involves calculated risk taking—an awareness of risk and attempts to manage it. Proactiveness describes an orientation to taking action. It has been conceptualized as seeking new opportunities related or unrelated to the existing line of operations, introducing new products ahead of the competition, and strategically eliminating operations that are in the mature or decline stages of their life cycle (Venkatraman, 1989). These three dimensions are used to calculate an entrepreneurial orientation (EO), or the degree of entrepreneurship. This has been combined with the frequency of entrepreneurship to measure entrepreneurial intensity. Researchers examining entrepreneurship for public benefit have also used these variables and have modified them to one degree or another to account for differences between their research settings and the for-profit sector.

Entrepreneurship in Government

In general, the characteristics of government and bureaucracy can present obstacles for public sector entrepreneurship. Innovation, risk taking, and proactivity are likely to be negatively affected by a host of factors (Morris et al., 2011; Ramamurti, 1986), including these:

• Multiple, ambiguous, and hard-to-measure agency goals
• Limited managerial autonomy and high political interference
• Lack of accountability and incentives among managers for innovation and change
• Restrictive personnel policies
• Difficulties in segmenting or discriminating among users
• Need for consensus in decision making, voter approval, and equitable programs

A recent report by the Partnership for Public Service (2013) provides an analysis of data from 2010 to 2012 on federal government employees' attitudes about innovation in their agencies. The report noted that in 2012, a vast majority (91 percent) said they are always looking for ways to do their jobs better. But only slightly over half (57.2 percent) said they feel encouraged to do so, and only a third (36.3 percent) said that creativity and innovation were rewarded in their agency. Compared to 2010, the percentage seeking to do a better job remained the same, while the percentages who felt encouraged and rewarded dropped.

Morris et al. (2011) note, however, that many of the obstacles are similar to the obstacles to entrepreneurship cited by corporations. Some public sector characteristics, such as multiplicity of goals, high visibility, and difficulties in identifying customers, were not cited as particularly serious obstacles. In addition, Ramamurti (1986) observes that some obstacles could actually facilitate entrepreneurship. For example, potential public entrepreneurs could turn goal ambiguity into managerial discretion, the media could be used as a source of power, and outsiders could be co-opted to enable risk taking without personal risk.

Finally, in spite of the limitations, public managers in a cross-sectional survey saw a role for entrepreneurship in their organizations (Morris & Jones, 1999). Most managers had positive feelings about entrepreneurship. They felt that fostering entrepreneurship would have a positive impact on organizational performance, primarily by increasing efficiency, productivity, service delivery, cost reductions, and employee morale. They also felt that the environment in public sector organizations can be designed in ways that help employees develop entrepreneurial tendencies.

Enhancing government efficiency has been the goal of much public sector entrepreneurship. Recently public sector entrepreneurship has been pursued through a series of reforms that seek to create more effective and efficient services and empower citizens. These were launched in the late 1980s by the new public management (NPM) and reinventing government movements. NPM advocates that public managers serve as entrepreneurs and use business sector, market-oriented principles for improving efficiency in government agencies. This sparked ongoing debate about the appropriateness of these techniques to public agencies. For example, new public service (NPS) holds that innovation and entrepreneurship in public service should be based on and fully integrated with citizen discourse and the public interest (Denhardt & Denhardt, 2000). In addition, Moore (1997) has proposed an approach to conceptualizing and establishing the value that government provides to citizens. This public value should be at the heart of public sector entrepreneurship, comprising, in effect, the opportunity to be addressed.

The most market-related arena for public sector entrepreneurship would seem to be government-run businesses or enterprises. Government enterprises are governmental entities that receive payments for goods and services (e.g., the US Post Office, Amtrak). Data show that government at all levels earned $829 billion in revenue from “business and other” sources for fiscal year 2012 (usgovernmentrevenue.com), representing 16 percent of total direct revenue.

Laurent (2000) reports on a study of a dozen government businesses. Entrepreneurial organizations:

• Often rely on funds not directly controlled by legislatures, freeing them to a degree from legislative oversight.
• Work for entities other than their parent organizations and entities, releasing them from total dependence on and control by less innovative and more risk-averse headquarters.
• Bring managers face-to-face with the true cost of accomplishing projects, forcing them to acknowledge inefficiencies and reorder priorities.
• Raise questions about the best mix of regular full-time employees, government businesses, and private sector contractors.
• Demand better service and follow rules inventively, thereby pushing the agencies and organizations that house them to become more responsive and innovative.
• Market their services and compete, thereby compelling other organizations to improve their offerings and prices or lose customers.
• Are beholden primarily to customers for survival and therefore threaten the control of managers of functional silos.

In addition, initiatives consistent with NPM principles are presented and discussed by the IBM Center for the Business of Government, which sponsors research, disseminates findings, and creates opportunities for dialogue on a broad range of public management topics (http://www.businessofgovernment.org/). Since 1998 the center has awarded nearly three hundred research stipends to leading public management researchers in the academic and nonprofit communities. This has resulted in over two hundred reports, all available on the center's website.

Research has found multiple influences on entrepreneurial orientation in public organizations. Meynhardt and Diefenbach (2012) conducted a study of the antecedents of department-level EO in Germany's Federal Labor Agency. They examined a number of expectations drawn from private sector corporate entrepreneurship, NPM, and public value management. Researchers have argued that given its strong market focus, EO as measured by innovation, proactivity, and risk taking in for-profit settings is not appropriate for their sector. In this study, the authors derived new items for public sector innovation and proactiveness and adapted for-profit measures of risk taking. The study found weak support for the positive influence of corporate entrepreneurship variables on EO (management support, work discretion, and resource availability). The findings for NPM variables were mixed in that EO was not negatively affected by quantifiable objectives (support for NPM) but also not affected by goal ambiguity (lack of support for NPM). The findings supported public value management in that EO was positively fostered by a manager's active involvement in the immediate local environment (having a perception of a multitude of expectations and middle management localism).

Most research on public sector entrepreneurship has been on government innovation. Findings from several samples show that middle managers are clearly the driving force behind most innovations. Borins (2001) compared samples from the United States, the British Commonwealth, and developing nations. The US sample showed that slightly over 50 percent of the innovations originate from middle managers or frontline staff, 25 percent from agency heads, 21 percent from politicians, 13 percent from interest groups, and 10 percent from individuals outside government (citizens and program clients). In the British sample, the proportions from middle managers or frontline staff and agency heads were even higher—82 percent and 39 percent, respectively. The developing countries in the sample showed a similar pattern. These results are consistent with Bernier and Hafsi's (2007) description of middle managers as the main sources of creativity in public entrepreneurship.

Borins (2002) identifies three ideal types of innovation in the public sector, based on the systematic differences in the circumstances of innovations initiated by different levels of management:

• Politicians tend to be initiators of politically directed innovation in response to crisis, responding to the expectation that they exercise leadership in the face of large issues.
• Agency heads tend to lead organizational turnarounds when poor performance provides a rationale and momentum to initiate changes.
• Middle managers and frontline staff tend to initiate innovations in response to internal problems or in view of opportunities made available by new technology.

One element of the debate over NPM concerns public sector entrepreneurship. Critics see entrepreneurs as people prone to rule breaking, self-promotion, and unwarranted risk taking, while proponents view them as exercising leadership and taking astute initiatives. Borins (2000) used two samples of the best applications to the Ford Foundation–Kennedy School of Government innovation awards to examine this question. The evidence from both strongly supports the proponents' views. Innovators are creatively solving public sector problems and are usually proactive in that they deal with problems before they escalate to crises. They use appropriate organizational channels to build support for their ideas, take their opponents seriously, and attempt to win support for their ideas through persuasion or accommodation.

Eggers and Singh (2009) present a framework that lays out innovation tools and techniques for public sector agencies. Innovation can come from internal or external sources. Internal sources of innovation include public employees as well as internal partners such as other government agencies. External sources of innovation include citizens as well as external partners such as contractors, nonprofits, and other governments. Each of these sources can be strategically harnessed to contribute to the elements of the innovation process (idea generation, selection, implementation, and diffusion).

For each stage of the innovation process, the authors show how public organizations can use both internal and external participants to generate innovative ideas. For example, for idea generation, an agency could engage citizen-customers, create discovery studios, foster intrapreneurs, or source ideas from partners. These tools and techniques enhance internal efficiency as well as solicit citizen input. In this way, they integrate the NPM and NPS approaches. A similar approach is used to describe techniques for the other elements of the innovation process.

Private Sector Social Entrepreneurship

Nonprofit organizations respond to entrepreneurial opportunities (EO) to create new social value and do more with existing resources. Morris et al. (2011) observe that for nonprofits, however, the linkages between acting entrepreneurially and serving the core recipients, satisfying donors and other stakeholders, achieving the mission, and measuring financial and nonfinancial performance are either lacking of complex.

Nonprofits are likely to have a number of characteristics associated with higher levels of EO (Guo & Bielefeld, 2014). These include fewer layers or levels in the organizational structure, broader spans of management control, a general orientation toward a more horizontal and less vertical design, and a more active board of directors. In addition, they may have transformational leadership, a leadership style that transforms the organization and motivates followers by inspiring them with mission, vision, and identity. Finally, their organizational control systems may use more informal control, flexibility, and resource discretion.

Nonprofit studies drawing on EO have had mixed results. In particular, the strong association between EO and performance in for-profit research has not been found. This may be due in part to the fact that researchers have either used for-profit EO scales or made different scale adjustments to fit the nonprofit context. They have also used different subsets of nonprofits, geographical areas, and dependent variables. In addition to these methodological issues, nonprofits value both financial and social performance, and it is not clear if or how these are related. A review of studies by Morris et al. (2011) found that EO frequently led to better social performance and in some instances better financial performance.

In order to clarify the distinction between social and financial goals, researchers have proposed incorporating a mission focus more fully into nonprofit EO scales. Morris et al. (2011) modify each of the dimensions of EO and distinguish three subtypes of innovativeness: mission related, revenue related, and a hybrid type that aims at enhancing both social mission and financial viability. Similarly, they distinguish three subtypes of proactiveness: mission related, revenue related, and stakeholder based. Finally, they distinguish three subtypes of risk taking: mission related, revenue related, and stakeholder based. In an alternative approach (Guo & Bielefeld, 2014), mission is held to be a separate dimension of EO and assessed independent of the other EO dimensions.

Social enterprise is being used to create social value. As early as 1996, the Roberts Foundation Homeless Economic Development Fund defined social enterprise as a revenue-generating venture founded to create economic opportunities for very low-income individuals, while simultaneously operating with reference to the financial bottom line. By 2001, social enterprise had spread significantly, and a solid groundwork had been laid for its use (Massarsky, 2006). Earned income is now widespread in the nonprofit sector and comprises the majority of nonprofit income. According to the National Center for Charitable Statistics (http://nccs.urban.org/statistics/quickfacts.cfm), in 2011, public charities reported over $1.59 trillion in total revenues, of which 72 percent came from program service revenues (which include government fees and contracts). Of the remainder, 22 percent came from contributions, gifts, and government grants and 6 percent from other sources.

Since its inception, numerous definitions have been offered incorporating various elements of the function, funding, and ownership of social enterprises. A current definition that incorporates a number of the elements suggested and provides latitude for a broad range of practical applications is, “A social enterprise is any business venture created for a social purpose—mitigating/reducing a social problem or a market failure—and to generate social value while operating with the characteristics of a private sector business” (Virtue Ventures & Alter, 2014). Social enterprises may be structured as a department within an organization or as a separate legal entity. In all cases, business success and social impact are interdependent. Social enterprises, hence, are hybrid organizations, combining aspects of the for-profit and noncommercial sectors.

Doherty, Haugh, and Lyon (2014) review the research on social enterprises as hybrid organizational forms. While social enterprises can vary in the centrality of social goals, they all need to manage tensions between commercial opportunity exploitation and pursuit of social mission. The need to generate sufficient revenue to finance business activity and advance social projects will influence opportunity recognition and exploitation. A number of management implications follow. To create social value, social enterprises need to manage the demands of multiple stakeholders, combine resources in new ways, build social capital, find new ways to advance social change, and meet resource constraints. In response, they have developed innovative strategies, new resource configurations, and novel governance structures. Also, competing commercial and social logics may lead to mission drift and loss of legitimacy. Social enterprises deal with this by selectively coupling elements from each logic or strategically incorporating intact elements from both logics. Finally, same- and cross-sector partnerships have emerged as important vehicles for strategic management. Partnerships could be based on either or both the achievement of commercial or social goals. Given the dual missions of the organizations, partnerships may become complex. For example, in early stages of a social enterprise, partnerships are built with others who strongly share the social purpose. As the social enterprise grows and matures, partners with more diverse commercial or social purposes may be added.

Kim Alter (2006) distinguishes embedded, integrated, and external social enterprises models based on the level of integration between their social programs and business activities. In embedded social enterprises, the social mission is the central purpose of the business, and the relationships between the business activities and the social programs are comprehensive in that financial and social benefits are achieved simultaneously. In integrated and external models, the business activity is more or less separated from and used as a funding vehicle for the social program.

The framework is then used to describe a number of types of social enterprise operating models in use around the world. In these models, the social enterprise could:

• Sell products or services to an external market and use the income it generates to fund social programs.
• Sell business support and financial services to its target population or add value to client-made products, typically through assistance in product development, production or marketing assistance, or credit.
• Facilitate trade relationships between the target population and the external market by acting as a broker, connecting buyers to producers and vice versa, and charging fees for this service or selling market information and research services.
• Provide employment opportunities and job training to its target populations by employing them.
• Provide access to poor and low-income clients to products and services for which price, distribution, product features, and other factors have barred access to this market.

Corporate social entrepreneurship is increasingly being incorporated into corporate strategic focus. Corporations are being subject to push and pull factors regarding their corporate social responsibility (CSR). Global survey data show that 30 to 45 percent of the public (depending on country) feel that corporations should be held very or completely responsible to help solve major social problems (Austin et al., 2006). For problems in education, the percentages rise to 53 to 62 percent, and for socially and environmentally responsible production, the percentages rise again, to 76 to 84 percent. Moreover, between 40 and 64 percent report that they have considered punishing a company they did not see acting socially responsibly. Internal pressures are also being felt, as evidenced by the 360 CSR-related shareholder resolutions filed in 2005 (Porter & Kramer, 2006).

In his evaluation of CSR, however, Vogel (2005, p. 3) states: “We can conclude that there is a market for virtue . . . But, there are important limits to the market for virtue . . . CSR is best understood as a niche rather than a generic strategy: it makes business sense for some firms in some areas under some circumstances . . . Because CSR is voluntary and market driven, companies will engage in CSR only to the extent that it makes business sense for them to do so.” In consequence, a corporation should incorporate its CSR into its strategic orientation and, in the words of Porter and Kramer (p. 84), integrate “a social perspective into the core frameworks it already uses to understand completion and guide its business strategy.”

Porter and Kramer (2006) distinguish three types of social issues affecting business:

• Generic social issues are important to society but do not significantly affect company operations or long-term competitiveness.
• Value chain social impacts are significant effects on the company's activities in the ordinary course of business.
• Social dimensions of the competitive context are factors in the external environment that significantly affect the underlying drivers of competitiveness.

These can be used to categorize and rank the social issues facing a corporation and help generate a corporate social agenda that provides opportunities for strategic CSR, which simultaneously achieves social and corporate economic benefits. This can be distinguished from responsive CSR, which entails behaving as a good corporate citizen or addressing the social risks of its operations by adopting industry best practices.

Porter and Kramer present a number of examples of strategic CSR. The most strategic CSR is adding a social dimension to the company's value proposition. For example, Whole Foods Market's value proposition to sell organic, natural, and healthy food products has provided quality products to customers who share a commitment to both natural food and the environment. This is assured through Whole Foods suppliers, internal production, store construction, energy use, composting of waste, use of biofuels by company vehicles, and support of humane ways to raise farm animals.

Several new corporate forms have recently been developed to encourage the production of social benefits. A low-profit limited liability company (L3C) must operate with a stated goal of achieving a social goal; making a profit is a secondary goal. According to interSector Partners, L3C, as of July 1, 2012, this corporate status was available in nine states. In addition, there were 825 active L3Cs nationwide(http://www.intersectorl3c.com/l3c_tally.html).

L3Cs are encouraged to act in a manner consistent with nonprofit law. For example, the model state law providing for the establishment of the L3C states that the organization (http://www.americansforcommunitydevelopment.org/):

• Significantly furthers the accomplishment of one or more charitable or educational purposes within the meaning of section 170(c)(2)(B) of the Internal Revenue Code of 1986, as amended
• Would not have been formed but for the organization's relationship to the accomplishment of charitable or educational purposes

Unlike a nonprofit, an L3C can distribute profit to owners or investors. Returns, however, may be lower than other for-profit investments given the nature of its social mission. L3C was developed to attract private investments and philanthropic capital in ventures designed to provide social benefit. For example, it is easier for foundations to make program-related investments (PRI) in L3Cs. A PRI is an investment with a socially beneficial purpose that is consistent with and furthers a foundation's mission. PRIs must be approved by the Internal Revenue Service (IRS). However, by using an L3C, with its explicit social mission, foundations do not need a special ruling by the IRS that the investment qualifies as a PRI.

Similar goals are behind benefit corporations, a new class of corporation required to create a material positive impact on society and the environment and to meet higher standards of accountability and transparency (http://benefitcorp.net/). As of this writing, this new legal form is available in twenty states, and legislation has been introduced in sixteen others (http://benefitcorp.net/). The major characteristics of the benefit corporation form are these (Clark & Vranka, 2013):

• A requirement that a benefit corporation must have a corporate purpose to create a material positive impact on society and the environment
• An expansion of the duties of directors to require consideration of nonfinancial stakeholders as well as the financial interests of shareholders
• An obligation to report on its overall social and environmental performance using a comprehensive, credible, independent, and transparent third-party standard