Social Businesses in China

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March 10, 2008

Muhammad Yunnus’ book Banker to the Poor opened my mind to a new type of philanthropy – venture philanthropy – where donations to a Microfinance Institution are loaned out, repaid at an extremely high rate, and then reinvested. The thought that my small donation not only made a significant impact to the loan recipient but also was recycled appealed greatly to my entrepreneurial bent. After all, I wanted my hard-earned cash to be well-spent.

Now the Nobel Laureate has written a new book – Creating a World Without Poverty – which I hope will open the minds of business people around the world as his first book had done for me.

In the United States particularly, we have come to assume that a business’ mission must be to “maximize shareholder value”. Yunus defines these as PMBs, or Profit-Maximizing Businesses. In his new book, he shows us there can be another way, “Social Businesses” which are “cause-driven” instead of profit-driven.

This concept may be seen as radical, or even heretical, because it conflicts with our US point-of-view favoring free market capitalism. In a Stanford VTSS (Values, Technology, Science and Society) class, I learned that changing society’s values is perhaps the hardest and slowest thing of all, often lagging science and technology advancements by 10 or more years. We cling to our values and customs, not necessarily because they are right or the best, but because we are afraid of change; we are comfortable with the status quo.

However, in China, this concept of Social Business is not so radical because the relics of the Communist infrastructure, the State-Owned Enterprises (SOEs), are similar in result, though not in purpose. In other words, SOEs were not created for a socially-minded cause, but they were one of the last social safety nets, the “iron rice bowl.” But due to foreign competitive pressures from China joining the WTO (World Trade Organization), these inefficient dinosaurs are being dismantled and/or restructured, causing millions of workers to be laid off. Currently, China has an estimated 220-300 million people under the poverty line. The poor people are a powerful destabilizing force, and thus the Chinese government strongly supports, and sometimes even demands, businesses to accept social responsibility.

I hope Social Businesses can inherit the mantle from SOEs to help the poor, but in a much more efficient and productive structure, one which combines the rigor of a capitalistic, incentive-driven structure with a socially-minded cause. I was inspired by the Skoll Foundation and the Omidyar Foundation before I first heard of microfinance. These two foundations decided to form as a for-profit corporation, forgoing the benefits of a non-profit legal status in favor of the disciplined, for-profit model.

I wish local Chinese entrepreneurs would be the founders of these Social Businesses in China, but frankly I think in the short term, the Chinese are enjoying their freedom to pursue capitalism without restraint; as Deng Xiaoping said, “To be rich is glorious.” It’s understandable because they do not have the feeling of security yet, so they spend all their energy building their own safety net.

Thus, I see the Western companies seeking to build their business in China as the most likely candidates to create these Social Businesses. In a few cases, the companies will do so to “support the personal goals or values of a powerful or respected corporate leader,” as Yunus explains. But I think Yunus raises 2 other reasons that make perfect business sense for China:

1. To win the friendship and support of government regulators or legislators who are considering laws that might affect the company
2. To gain a foothold in a new market that holds promise for the future but is currently unprofitable – while also earning points in the court of public opinion

As most successful CEOs in China are aware, GR (Government Relations) is critical to the success of the company. Foreign companies are often at a disadvantage to local Chinese companies because the local executives have much better “guanxi,” loosely translated as relationships and influence, with the government officials, cutting through the endless red tape. However, aligning a company’s business objectives with the government’s social mandates, such as the Central Committee’s Five-Year Plan, could help the company gain much guanxi. For example, the 11th Five-Year Plan for National Economy and Social Development decided “to get rich first, will give way to "common prosperity" in a bid to bridge the growing gap between the rich and the poor, and to avoid polarization of society.” A company that created a social business focused programs on the poor would be helping the government fulfill its publicly-stated goals, tremendously helping that company in its GR and thus could benefit its PMB-side of the business by securing licenses that otherwise were elusive.

Dr. Yunus’ second reason is also extremely relevant for China. Most MNCs (Multi-National Corporations) attempt to enter China via the “tier 1 cities/provinces” such as Beijing, Shanghai, and Guangdong. These provinces represent the greatest concentration of wealth and sophistication, but they are also the most costly to penetrate because of the competition. Social Businesses that help the poor will be targeting the forgotten or ignored provinces, and thus creating a flanking strategy by gaining market share around the tier 1 regions. Furthermore, it will help burnish the image of an MNC, distinguishing it from the typical foreign “invader.”

In summary, I love Dr. Yunus’ vision for the “Future of Capitalism.” I believe the concept will actually be more acceptable in China than in the US because of China’s socialistic government. For China, the question isn’t whether companies should have social missions along with their profit goals, but how should they be structured to be more efficient and productive than their horribly outdated SOEs. While I can dream of a day when Chinese companies and entrepreneurs will form Social Businesses, I believe in the near term, Western MNCs will lead the charge, not necessarily out of altruism but for solid business reasons.

Alan Tien is COO of PayPal China and a lead for the Steering Committee of the Shanghai Volunteer Group, a group dedicated to raising awareness of microfinance and Grameen Foundation in China.

Comments

Alan,

This was a fascinating post. I had not thought of the fact that social business is a variation on China's state owned enterprises in some respects and thus might resonate in some sectors of society. It is also a positive and credible way for multi-national corporations to enter in a business-like but also socially responsible way -- that is a very powerful point that you have made. I hope people heed it! -- Alex Counts

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