Social Innovation: What It Is and What It Isn’t

Stanford Social Innovation Review recently launched a debate on impact investing, spurred by the question of whether investors can expect both market returns and social impact. While important for the field of impact investing, we can also read the central article—“When Can Impact Investing Create Real Impact?”—as part of a much larger debate about the nature of the free market and the nonprofit sector.

The authors, Paul Brest and Kelly Born, are quick to point out that impact investment is merely one instrument in the larger philanthropic family. I would like to expand this argument to a larger context, drawing on other important articles about social innovation. The question of the relationship between the social and for-profit sectors divides how many of us see the role of philanthropy in society, and the answers will surely shape the future of social innovation.

Six years ago, Roger Martin and Sally Osberg wrote a seminal article called “Social Entrepreneurship: The Case for a Definition,” which argues that social entrepreneurs are defined by an expectation of financial profit for investors. Brest and Born very closely echo Martin and Osberg’s skepticism of the market’s influence on charity and its implicit focus on additionality (which Brest and Born define as “producing beneficial social outcomes that would not occur but for our investment”). But both articles apply this philosophy to only their own limited spheres.

The time has come to expand Martin and Osberg’s definition of social entrepreneurship to include the flood of new impact instruments such as impact investing, B-corps, and shared value. My own distinctions also rely on traditional conceptions of capitalism. Pure social innovations are those that work around the market economy by compensating for market failures, whereas what I’ll call “market innovations” help by simply expanding capitalistic enterprises to underserved populations.

Given that Martin and Osberg’s distinction remains controversial, why should we bother widening its scope? There are three primary reasons to distinguish between “social” and “market” innovations:

1. The number of new and revisited ideas for social impact is exploding, and for funders and observers of the field, classification is necessary for comprehension.
2. As governments begin to debate support for new types of social innovation while dealing simultaneously with budget deficits, this distinction will help policymakers allocate scarce resources where they could be most impactful.
3. As the social sector continues to seek partnerships with the private sector, cognizance of shared methods and mission with their for-profit peers may spur collaboration.

So how, exactly, does this distinction between “market” and “social” innovations look when applied to several recent and celebrated ideas? First, let’s consider the notion of shared value, which Michael Porter and Mark Kramer define as “creating economic value in a way that also creates value for society by addressing its needs and challenges.” In their article “How to Fix Capitalism,” the two praise companies that have driven profits by slashing resource use, investing in employee wellness programs, and empowering rural suppliers. By touting this model, Porter and Kramer are essentially asking that business leaders be better capitalists, telling them: You've overlooked an opportunity for profit that also happens to help people. It can hardly be claimed, then, that Porter and Kramer are “fixing capitalism,” as their article title suggests; instead, they are highlighting a more sophisticated application of capitalism’s principles. Noticing a similar trend in impact investing, the authors of “Closing the Pioneer Gap” say, “Much of the capital that now qualifies as ‘impact investing’ is invested in more traditional businesses in developing markets … ” While both avenues can effectively address social problems, they are better defined as “market innovations” than “social innovations” because they follow the same rules and profit-centric ends as any conventional corporation. In fact, they are effective precisely because they so cleverly ride the market wave.

By contrast, pure social innovations produce value by filling gaps left by the market. Brest and Born identify many of these gaps (or “frictions,” to use their terminology): imperfect information, inflexible institutions, and so on; others, such as monopoly, can be borrowed from basic economic theory. Most of what we usually think of as nonprofits fit this “social innovation” mold: soup kitchens and homeless shelters, for instance, provide services that the normal market will not. Martin and Osberg’s definition of social enterprise also fits under this broader label, for in eschewing a private profit motive, social entrepreneurs are free to smooth over market failures that would otherwise be too costly to address. For instance, they profile Robert Redford and the Sundance Festival, which was founded to “take money out of” an increasingly blockbuster-centric Hollywood studio system. In this instance, it’s worth clarifying that the main distinction between a market innovation and a social innovation is not a revenue stream or the ability to turn a profit—Sundance, at this point, could likely have both. What makes Sundance a social innovation is instead it’s purposeful rejection of the greater profits it could have made by mimicking classic Hollywood film studios. Instead, it prioritized mission, just as the soup kitchen and homeless shelter did when choosing not to become a supermarket or hostel. The gap in the market that Sundance identified—a lack of indie films—was not a business opportunity in the classic sense, but a systematic market failure that required a social purpose to address.

A more sophisticated example of social innovation is the social impact bond. These instruments qualify as social innovation because they make possible the funding of large and risky public projects that the market would otherwise neglect. But they are exciting because, in a sense, they are transitional between the two systems, just as microfinance was before it. The irony and also the irresistible power of social impact bonds is that although they now exist outside of the market system, their promise lies in becoming part of it—in expanding our very conceptions of what capitalism can do.

None of this is meant to contend that either social innovations or market innovations, as defined here, is better than the other. Every transaction and every successful corporation necessarily generates value. Moreover, my armchair opinion is that piggybacking on the success of the for-profit sector—by championing shared value, emerging markets, and corporate citizenship—will be the most effective way to improve the lives of millions in the short term. But if we believe in economics, we must also accept two things: Given sufficient time, the profit motive will likely motivate many advances on its own, and the reality of externalities will prevent them from ever going far enough to relieve human suffering.

Pure social innovations represent a fundamentally different approach toward value creation. And in the long run, it’s the system that most dearly needs our support in the form of favorable public policy and philanthropy. The two approaches are symbiotic (and hopefully acknowledging this fact will motivate far more collaboration); the corporate power of scale and the nonprofit value of equality are essential compliments to one another, but too often pursued separately. Still there is a difference, and the future of both systems—and the humans who depend on them—requires its recognition.

Read more stories by Daniel Goldberg.