Crowding-in or Crowding-out? How Subsidies Signal the Path to Financial Independence of Social Enterprises

Abstract

In today’s multisector configurations, there is little clarity about whether and how public and private subsidies influence social enterprises’ pursuit of financial stability. We address the strategic role of donors in the social-business life cycle whereby social enterprise start-ups rely on subsidies, while mature social enterprises strive for independence from donors. To address the “missing middle,” we develop a typology of subsidy instruments and an intermediary signaling model to clarify how subsidies shape the evolution of outcomes for social enterprises. We argue that source variation matters for certain instruments like corporate intangibles and governmentally subsidized credit guarantees, which trigger crowding-in effects and attract commercial partners, while preventing perverse crowding-out effects, such as soft budget constraints. To illustrate this commercialization story, we draw upon a microfinance case study, demonstrating how public and private donors can induce crowding-in and crowding-out effects. In short, our subsidy typology helps unpack the signals that public and private subsidies send to commercial funders of social enterprises and how they shape the path to future financial independence.

Subsidies to microfinance institutions: how do they affect cost efficiency and mission drift?

“…Microfinance institutions (MFIs) provide financial services to the unbanked poor while striving to cover their own costs (Armendáriz and Morduch, 2010;Battilana and Dorado, 2010). Many benefit from subsidies in various forms, such as grants, soft loans, and in-kind donations (Reichert et al, 2021). Yet subsidies entail the possibility of perverse effects (Deltas et al, 2013), such as a soft budget constraint (Kornai, 1986), dependence on donors' money, and lower productivity and efficiency 1 (Caudill et al, 2009(Caudill et al, , 2012.…”

Machinery Adoption and Its Effect on Maize Productivity among Smallholder Farmers in Western Kenya: Evidence from the Chisel Harrow Tillage Practice

“…The return of input subsidies has generated a range of studies supporting that their costs can be higher compared to the benefits [18][19][20][21] . that subsidies can crowd out the private sector [22] , and that they are often used for political purposes [23] .…”