PSC 335 – East Asian Governments and Politics
Term Paper
April 30, 2015

Social Enterprises in China’s Modern Society

Introduction The concept of social enterprises has been in existence and well adapted around the world for several decades. However, it was not until 2004 that social enterprise theory finally made its debut introduction in China’s society (FYSE 4). Over the following years, social entrepreneurship has gradually made its presence more apparent via direct contribution to the social-economic issues that the rapid-growing country has been facing. China’s phenomenal economic growth in such a short period of time has raised great concerns over sustainability and economic disparities. While the growth of social enterprises has helped addressing these concerns substantially as reported by many conducted studies, social enterprises remain as struggling entities in China due to complicated legal frameworks. The paper will deliberately discuss this social enterprise phenomenon on past successes, current challenges, and future potentials in its supporting role to an economically sustainable growth of China.
Understanding the Social Enterprise Initiative Social enterprise is still considered a relatively new concept in the modern society despite being around for around three decades. The theory of social enterprise is most well recognized and embraced by the United Kingdom and other Western nations. A social enterprise is understood to be the meeting ground for philanthropic and commercial initiatives, or dual-approach (Xu, Song, and Song 187). In other words, a social enterprise is distinguished from any other entities by its unique application of business power and tool sets to make positive impacts and changes to societal issues. Despite being well recognized and implemented worldwide, there is no commonly agreed-upon definition that can encompass social enterprise theory due to its flexible nature for customization to different societies’ needs. The lack of conceptual clarity creates blunders and accidentally provides ill-intentioned businesses without social purposes opportunities to take advantages of social enterprises’ non-profit benefits. Because of this, social entrepreneurs are required to clearly specify the social value formation from any financial approach as well as how revenues are generated and how profits are handled for reinvestment.
The populating demand for social enterprises in the recent decades has been identified to associate with the changes in social dynamics in the business world. In addition to favorable financial returns on investment, stakeholders are now also interested in corporate social responsibility. These stakeholders include but not limited to investors, employees, customers, government agencies, and community special interest groups (Xu et. al 188). More than ever, social-economic issues, such as poverty, income disparities, social welfare, education quality, cultural preservation, greatly concern and become appealing to stakeholders. As the result, social enterprise was gradually emerging as a more comprehensive and impactful system comparing to corporate social responsibility by implementing strategic solutions that address both social and commercial demands.
Despite inheriting from both philanthropic and commercial approaches, social enterprises are mainly driven by mission values rather than profit-generating. Indeed, the Department of Trade describes a social enterprise as the following: “a business with primarily social objectives whose surpluses area principally reinvested for that purpose in the business or in the community rather than being driven by the need to maximize profit for shareholder and owners.” Thus, a well-operated social enterprise must establish an action plan that continuously keep the balance of resources flow in place to fulfill both philanthropic and commercial objectives. Another aspect that distinguishes a social enterprise apart from a purely non-profit organization is the ability to support oneself financially over time from earned revenues and return on investment (Ko and Kong 171).
Early Stage of Social Enterprises in China
As the Western modernization swept across Southeast Asia towards the end of the 20th century, China got caught in the midst of the intensive industrialized growth. This movement contributed significantly to the nation’s drastic shift from a centrally-planned economy to a competitive market economy, resulting in the most remarkable record of poverty reduction in China’s history. According to World Bank’s 2009 data, between 1981 and 2004, the population in China that was below the defined poverty line dropped from 65% to 10% (Qingran 3). Unfortunately, even such striking reduction could not resolve the income disparities among different social classes. Social cost for the economic shift was poorly distributed across the population, worsening the existing income gaps and weakening social safety nets. By the early 2000s, it became obvious that corrective strategies were in high demand in order to respond to such situation effectively.
Social enterprise theory was first acknowledged in China through a translation of a paper in a volume of China Social Work Research in January 2004 (Defourny and Kim 9). The British Council-inspired concept continued to travel across the country through similar journal publications and well-organized networking conferences. According to the 2012 Report conducted by FYSE, asides from the external relationship-building and communicating efforts, the wide spread of social enterprise concept may have been also influenced by the growing socio-economic disparities, the lack of funding for non-profit, or non-governmental organizations, and the rise of social media. As mentioned above, although the economic transition significantly reduced the population living in poverty, by 2010, 128 million people, or approximately one-tenth of the total population were still living below the national poverty line. The rapid economic growth was considered to be not sustainable and efficient because of these disparities. At this point, competition among non-governmental organizations for international funding was at high stake due to scarce financial resources. Indeed, in 2008, the British Council released a research result indicating that 68% of their study subjects projected that most existing non-governmental organizations would convert to social enterprises. Field experts also predicted that promising social enterprises would most likely be from the business area. For example, when Beijing Landwasher Science & Technology Development produces toilets that are environmental-friendly and use water-free flushing system. This innovative invention helps preserving the scarce natural resources while accommodating sanitary standards for rural residents who do not have much access to modern public infrastructure. As reported by FYSE in 2012, Landwasher has sold over 2,200 toilets and has brought in annual revenues of US$8.8 million. Thanks to this tremendous success in sales, Landwasher has become one of the premiere examples for an environmental social enterprise in China. Other forces that supported the rise of social enterprise in China include public services’ privatizing and marketing financial needs. The emerging civil society remains to be the driving factor for social enterprise development over the years.
Models of Social Enterprises in China Up until today, social enterprise concept is still perceived as “new” even though it has been around since the 1970s. Especially in China, social enterprise is still at its stepping stone to maturity. FYSE reported that in 2012, 54% of the surveyed social enterprises were under three years old and only 38% of the same group had been active for more than five years. However, China did notice a 23% increasing rate for mature social enterprises in just one year. According to the same report, only 42% of Chinese social enterprises obtained financial sustainability, while 33% reached their break-even point. As anticipated, over 60% of social enterprises that were in business for less than one year suffered deficit. The second operational year seemed to be the standard time mark for social enterprises to start breaking even and making profits. Additionally, FYSE reminded readers to keep in mind the fact that since social enterprise was still an unfamiliar concept, social entrepreneurs might not even be aware of this, thus not properly identifying them in the proper category. Two-thirds of social enterprises reside in highly populated cities due to urban competitive advantages, such as more access to human resources and financial capitals. Contrast to the limit on physical location, social enterprises in China operate beyond the scope of urban regions by also providing extended services to the rural areas.
Social enterprises in China cover a very diverse range of industries focusing on various socio-economic issues. Sectors that seem to attract the most social entrepreneurs have to do with education, social services, and economic development. Despite having the British social enterprise influence from the beginning, China did not adhere to the Western social model. On the contrary, the Chinese social enterprise falls into the following five categories: trading non-profit organization, work integration social enterprise, non-profit co-operative enterprise, social enterprise stemming from non-profit/for-profit partnerships, and community development enterprise. According to a cross-country analysis conducted by Defourny and Kim, other Eastern Asia countries (Japan, Taiwan, South Korea) also pursue these five models.
A trading non-profit organization is classified as “civilian-run non-enterprise” entity that strives to provide cost-efficient services to address social issues in the Chinese dynamic and emerging civil society (Defourny et. al 13). Any individual, enterprise, social organization, or non-governmental agency can form a trading non-profit. This organization must not have state-owned assets. Most importantly, it cannot operate as a for-profit. Despite acquiring all the Western’s non-profit standards with a clear social-cause driven mission, a trading non-profit organization still has to register as a for-profit in accordance to the existing state’s legal framework. As the result, this type of social enterprise in China does not have tax exemption-related privileges. On the other hand, a work integration social enterprise serves a more specific group of target clients: the underrepresented individuals, especially those with physical or mental disabilities, who wish to enter the workforce. Organizations in this category work to assist these clienteles by preparing them for the labor market through training and development programs. Contrast to a trading non-profit organization, this unique social enterprise model is tax-exempt despite its for-profit status. As a result of the Chinese’s Interim Regulation on Employment of the Handicapped by the Social Welfare Enterprise, 35% of workplace vacancies should be offered to the disabled (Quingran 5). According to the latest data in 2010, China had approximately 22,200 active work integration social enterprises that had helped employing around 625,000 workers with disabilities. The non-profit co-operative enterprise describes the collaborative effort among founding members of the organization to work on a particular socio-economic issue. This type of social enterprise, arguably the largest sector in China, is most well-known to associate with agricultural supply and marketing services. Some might not consider this category as a true representative of social enterprise. However, one must also take into consideration the nature of co-operatives in China being unions for underprivileged communities (Ding 2007). Each co-operative works towards a common [social] goal as a collectivist body. Due to the country’s agriculture-based with over 25 million registered farmers by 2010, “farmers’ specialized co-operatives” have gained major impacts and overcome the state’s strict governance to meet their needs for survival and sustainability (Defourny et. al. 17). Social enterprise stemming from non-profit/for-profit partnerships has received growing governmental support more than ever before. China’s emerging civil society scene in the past decade has contributed tremendously as the driving force to companies’ focus on corporate social responsibility in hope to improve their publicity. This social enterprise model is developed upon partnerships between privately-owned companies and non-profit organizations. Such partnerships can resolve most of non-profit organizations’ financial challenges. Private companies can also arrange subsidiaries to directly work on certain social missions. Although this model might present interest conflicts for participating private companies in term of aligning their commercial goals with corporate social responsibility in the eye of the public (some can view such partnership as a company’s hidden agenda to gain economic advantages instead of having any genuine interest in social missions), the number of this social enterprise model has been on the rapid rising horizon since 2008 and has raised undeniably impactful social results. A prime example of such success is the China Social Entrepreneur Foundation. As China’s first established private foundation, it has successfully leveraged state and corporate funding to endorse non-profits that work on poverty disparities in a sustainable manner (Defourny et. al. 18). The last social enterprise model exists in China is the community development enterprise. Organizations follow this model share a mission to work on projects that have direct influence on community or local improvement. Their target community audiences often locate in rural regions with comparative economic disadvantages. Community development enterprises strive to equip these communities with the adequate knowledge and skillsets to enhance their self-reliance on underutilized local resources for sustainable and improving standards of living. This social enterprise model incorporates multi-stakeholder partnerships and develops collaborations among local non-profits, for-profits, and other public authorities.
Challenges
Despite its impressive impacts and proven business model to become an effective mean for addressing socio-economic issues, social enterprise concept still remains fairly young and hasn’t been widely-adopted in China. As any [new] field would expect to encounter, Chinese social enterprises often cross paths with multiple challenges. These challenges range from being regular obstacles as experienced by other social enterprises in foreign markets, to being extremely unique situations as only confronted in China. FYSE’s 2012 Report identified the most common challenges for Chinese social enterprises as limited financial resources, high turnover rate for human capitals, and burden from restricted governmental and state governance. Indeed, these issues are identified as the growth constraints for social enterprise in China. Access to funding maintains as the most challenging obstacle facing social enterprises, as indicated in FYSE’s 2012 survey results. There simply is not enough investor in the market to respond to the populating demand from social entrepreneurs. A noticeable trend of seeking out for funding from relatives and friends instead of taking bank loans has increasing among social entrepreneurs. In 2012, 77% of social enterprises used this practice. As mentioned above, due to social enterprise’s relatively newness, there has not been an established legal framework customized to best accommodate this concept. Rather, social enterprises in China are freely to pursue any model from the five categories as deemed fitting to their missions and objectives at the point of establishment. While the autonomy to do so allows social enterprises to inherit benefits of the existing legislative structure, it also has presented great challenges, such as unwilling compliance to non-fitting rules and loss of tax-exempt benefits, as experienced by the majority of Chinese social enterprises. The absence of necessary regulations from the non-existing legal framework also prevents social enterprises in China from fully carrying out their operations. The lack of effective governance structure throughout an organization has resulted in high turnover rate and low retention for the already-short human capitals. Low compensation is also to be blamed for this. The challenge of appealing suitable talents with qualified skills and shared mission values during recruitment hinder social enterprises’ advancement. Individuals in managerial roles can also slow down a social enterprise’s growth by being poorly trained and having no long-term strategic vision for the organization that can promise sustainability. Misaligned social goals and lack of accountability across board can truly hurt any organization if not corrected in a timely manner (FYSE 26).
Closing Remarks and Suggestions The concept and movement of social enterprise in China has come a long way to reach such milestone achievements in just a decade. Chinese social enterprises have a lot of potential to grow even larger in its operations and to make more meaningful impacts for the country’s emerging civil society. However, the future of social enterprise lays in a variety of crucial factors, one of which is the government’s role. Because of its bureaucracy and transitioning shift from centrally-planned to market-based economy, both local and state governments need to work closely with social enterprises in order to maximize this business model’s capability. Minimizing the system’s complications can initially increase the chance for social enterprises to start up. A well-established legislative framework must be in place to create such necessary platform for social enterprises to function upon. Social enterprises in the United Kingdom have had great funding successes with their government’s support. Unfortunately the similar tactic cannot be applied in China due to the current undefined legal structure that Chinese social enterprises are placed under. International organizations appear to be the most proper solution for this financial burden. The World Bank have initiated two China Development Marketplaces with the support of Chinese bureaus to help funding over $1.1 million in 2008 to 50 social-driven projects like those of social enterprises (Quingran 15). The lack of resources and not-well-known case studies of successful social enterprises can also discourage new start-ups and serve as a blockage for entrepreneurs who stumbled upon obstacles along the way. Creating a local or regional network of experienced social entrepreneurs can serve as a valuable resource for mentor-mentee or peer-to-peer learning and possible partnerships. Existing social enterprises can also help developing a pipeline of professional and like-minded entrepreneurs by targeting and educating this concept via collaboration with local universities.

Works Cited
Department of Trade and Industry (2002). Social enterprise: A strategy for success, Department of Trade and Industry. United Kingdom, London: pp. 1-81.
Ding, K. (2007). “Social Enterprise: Practice in China.” Social Enterprise Overview: A UK and China Perspective. British Council. Beijing.
FYSE (2012). “2012 China Social Enterprise Report.” Hong Kong.
Ko, S., and Kong, E. (2012). “Prospects of Social Enterprises from a Framing Perspective.” The International Journal of Interdisciplinary Social Sciences: Vol. 6, No. 4, pp. 169-186.
Qingran, L. “Emerging Social Enterprises in China: Innovative Approach Towards Poverty Alleviation and Social Fairness.”
Xu, H., Song X., and Song W. (2014). “Why Social Entrepreneurship? Public and Commercial, Dual-Approach for Social Enterprises with Chinese Cases.” International Journal of Management, Economics and Social Sciences: Vol. 3, No. 4, pp. 184-194.