SU+ @ Strathmore University Library Electronic Theses and Dissertations This work is availed for free and open access by Strathmore University Library. It has been accepted for digital distribution by an authorized administrator of SU+ @Strathmore University. For more information, please contact library@strathmore.edu 2021 An Assessment of the efficacy of public policy frameworks on social enterprises in Kenya: challenges and opportunities for growth Damar Akinyi Padwa Strathmore Business School Strathmore University Recommended Citation Padwa, D. A. (2021). An Assessment of the efficacy of public policy frameworks on social enterprises in Kenya: Challenges and opportunities for growth [Thesis, Strathmore University]. http://hdl.handle/11071/12574 Follow this and additional works at: http://hdl.handle.net/11071/12574 https://su-plus.strathmore.edu/ https://su-plus.strathmore.edu/ http://hdl.handle.net/11071/2474 mailto:library@strathmore.edu http://hdl.handle/11071/12574 http://hdl.handle.net/11071/12574 Title Page AN ASSESSMENT OF THE EFFICACY OF PUBLIC POLICY FRAMEWORKS ON SOCIAL ENTERPRISES IN KENYA: CHALLENGES AND OPPORTUNITIES FOR GROWTH PADWA DAMAR AKINYI 007995 Submitted in partial fulfilment of the requirements for the degree of Master in Public Policy and Management of Strathmore University Strathmore University Business School Nairobi, Kenya. DECEMBER 2021 This dissertation is available for Library use on the understanding that it is copyright material and that no quotation from the thesis may be published without proper acknowledgement. ii Declaration I declare that this work has not been previously submitted and approved for the award of a degree by this or any other University. To the best of my knowledge and belief, the thesis/dissertation (use as appropriate) contains no material previously published or written by another person except where due reference is made in the thesis/dissertation itself. © No part of this thesis/dissertation may be reproduced without the permission of the author and Strathmore University Padwa Damar Akinyi DECEMBER, 2021 Approval The dissertation of Padwa Damar Akinyi was reviewed and approved for examination by the following: Prof. Ruth Kiraka Strathmore University Business School Dr. George Njenga Executive Dean Strathmore University Business School Dr. Bernard Shibwabo Director, Office of Graduate Studies iii Abstract The social enterprise phenomenon has become notable in stature as a public policy agenda globally and nationally as a new model for responding to failures in market and public service delivery. Kenya and South Africa are at the forefront of this phenomenon in Africa but little is known on the influence of policy frameworks on the growth of social enterprises in Kenya. The study considers policy frameworks as the current legal forms and structures in which social enterprises operate. The main objective of this study is to assess the efficacy of public policy frameworks on social enterprises in Kenya. The specific objectives are to examine how the current policy frameworks influence the growth of social enterprises in Kenya; assess the challenges affecting the growth of social enterprises in Kenya; and explore the policy interventions that could provide opportunities for growth of social enterprises in Kenya. This study adopted a qualitative approach as it focused on selecting information rich cases who gave in-depth insights on the subject at hand. The study used an interview guide for data collection. Content and thematic analysis was used to analyze the data collected, with the results being presented in a narrative report with context description and themes taken from the respondents. The findings from this study show that the current policy frameworks do not have specific social enterprise policy domains that would promote the growth of social enterprises in Kenya. The study found a myriad of challenges affecting the growth of social enterprises, notably: lack of awareness and availability of public funding opportunities, lack of access to private investment funds, inappropriate taxation mechanisms, inadequate business support and knowledge share, and limited access to markets. The study recommends that the existing frameworks and structures should be expanded to define social enterprises and strengthened with policy domains that would promote the growth of social enterprises. The study also recommends that within the existing frameworks, a social enterprise entity under the auspices of a coordinating ministry, with actors drawn from intersecting government agencies and the social enterprise sector would adequately support the growth of social enterprises. iv Table of Contents Title Page ......................................................................................................................................... i Declaration ...................................................................................................................................... ii Abstract .......................................................................................................................................... iii Table of Contents ........................................................................................................................... iv List of Figures ............................................................................................................................... vii List of Tables ............................................................................................................................... viii List of Abbreviations ..................................................................................................................... ix Acknowledgments........................................................................................................................... x Dedication ...................................................................................................................................... xi CHAPTER 1 ................................................................................................................................... 1 INTRODUCTION .......................................................................................................................... 1 1.1 Introduction to the Study ................................................................................................... 1 1.2 Background of the Study .................................................................................................... 1 1.3 Social enterprise sector in Kenya ....................................................................................... 4 1.4 Problem Statement .............................................................................................................. 5 1.5 Research Purpose ................................................................................................................ 6 1.6 Research Objectives ............................................................................................................ 7 1.7 Research Questions ............................................................................................................. 7 1.8 Scope of the Study ............................................................................................................... 7 1.9 Significance of the Study .................................................................................................... 8 LITERATURE REVIEW ............................................................................................................... 9 2.1 Introduction ......................................................................................................................... 9 2.2 Theoretical Review .............................................................................................................. 9 2.2.1 Social Entrepreneurship Theory ................................................................................. 9 2.3 Empirical Review .............................................................................................................. 10 2.3.1 Policy frameworks for social enterprises.................................................................. 10 2.3.2 Challenges facing Social Enterprises ........................................................................ 20 2.3.3 Policy Incentives for social enterprises ..................................................................... 22 2.3.4 Measures of Growth of social enterprises ................................................................ 25 v 2.3.5 Social Enterprises: The Kenyan context .................................................................. 26 2.4 Research Gap ..................................................................................................................... 29 2.5 Conceptual Framework .................................................................................................... 29 2.5.1 Measurement of the Study Variables ........................................................................ 31 CHAPTER 3 ................................................................................................................................. 34 RESEARCH METHODOLOGY.................................................................................................. 34 3.1 Introduction ....................................................................................................................... 34 3.2 Research Design................................................................................................................. 34 3.3 Population and Sampling ................................................................................................. 34 3.3.1 Population.................................................................................................................... 34 3.3.2 Sampling ...................................................................................................................... 35 3.4 Data Collection Methods .................................................................................................. 35 3.5 Data Analysis ..................................................................................................................... 36 3.6 Research Quality ............................................................................................................... 37 3.7 Ethical Considerations ...................................................................................................... 38 CHAPTER 4 ................................................................................................................................. 39 PRESENTATION OF RESEARCH FINDINGS ......................................................................... 39 4.1 Introduction ....................................................................................................................... 39 4.2 Data Analysis ..................................................................................................................... 39 4.3 Response Rate .................................................................................................................... 39 4.4 Demographic Characteristics of Respondents ................................................................ 40 4.5 Analysis of the growth of social enterprises .................................................................... 41 4.6 Current policy frameworks and growth of social enterprises ...................................... 43 4.6.1 Access to public finance instruments ........................................................................ 43 4.6.2 Access to private investment funds ........................................................................... 45 4.6.3 Current Tax Mechanism ............................................................................................ 46 4.6.4 Knowledge share and business support .................................................................... 48 4.6.5 Access to markets ........................................................................................................ 49 4.7 Challenges affecting the growth of social enterprises in Kenya.................................... 50 4.7.1 Challenges in accessing public finance instruments ................................................ 51 4.7.2 Challenges in accessing private investment funds ................................................... 53 vi 4.7.3 Challenges with the current tax mechanism ............................................................ 56 4.7.4 Knowledge share and business support .................................................................... 58 4.7.5 Access to markets ........................................................................................................ 61 4.8 Policy interventions that provide opportunities for the growth of social enterprises . 63 CHAPTER 5 ................................................................................................................................. 70 DISCUSSIONS, CONCLUSIONS AND RECOMMENDATIONS ........................................... 70 5.1 Introduction ....................................................................................................................... 70 5.2 Discussions ......................................................................................................................... 70 5.2.1 The growth of social enterprises in Kenya ............................................................... 70 5.2.2 The influence of current policy frameworks on the growth of social enterprises in Kenya .................................................................................................................................... 71 5.2.3 The challenges affecting the growth of social enterprises in Kenya ...................... 73 5.2.4 The policy interventions that provide opportunities for growth of social enterprises in Kenya ............................................................................................................ 75 5.3 Conclusion .......................................................................................................................... 78 5.4 Recommendations ............................................................................................................. 79 5.5 Limitations of the study .................................................................................................... 80 5.6 Suggestions for further research ...................................................................................... 80 REFERENCES ............................................................................................................................. 81 APPENDICES .............................................................................................................................. 86 Appendix I: Ethical Review Approval letter ........................................................................ 86 Appendix II: NACOSTI License ............................................................................................ 87 Appendix III: Introductory and Consent Letter .................................................................. 89 Appendix IV: Interview Guide............................................................................................... 90 vii List of Figures Figure 1. 1: Hybrid spectrum of activities within the social enterprise sector. .............................. 2 Figure 1. 2: Cross-Sectional view of social enterprise ................................................................... 3 Figure 1. 3: Social enterprise sector space ...................................................................................... 3 viii List of Tables Table 2. 1 : A summary of Early Policy Stage and Emerging Policy stages showing the salient features, growth indicators and social enterprise outcomes .......................................................... 18 Table 2. 2: A summary of Growing Policy Stage and Mature Policy stages showing the salient features, growth indicators and social enterprise outcomes .......................................................... 19 Table 2. 3: Operationalization of the study variables ................................................................... 31 Table 3. 1: Minimum non-probability sample size ....................................................................... 35 Table 4. 1: Summary of the demographic data ............................................................................. 41 Table 4. 2: Growth of social enterprises ....................................................................................... 42 Table 4. 3 : Access to public finance instruments ........................................................................ 44 Table 4. 4: Access to private investment funds ............................................................................ 45 Table 4. 5: Current tax mechanisms ............................................................................................. 47 Table 4. 6: Knowledge share and business support ...................................................................... 48 Table 4. 7: Access to markets ....................................................................................................... 50 Table 4. 8: Challenges in accessing public finance instruments ................................................... 52 Table 4. 9: Challenges in accessing private finance instruments.................................................. 54 Table 4. 10: Challenges with the current tax mechanism ............................................................. 57 Table 4. 11: Challenges in accessing knowledge share and business support .............................. 59 Table 4. 12: Challenges in accessing markets .............................................................................. 62 Table 4. 13: Policy recommendation: Establishment of a Social Enterprises Act ........................ 64 Table 4. 14: Policy recommendation: Establishment of a Social Enterprises Regulatory Entity . 65 ix List of Abbreviations AGOA - African Growth and Opportunity Act AGPO - Access to Government Procurement Opportunities BoP - Bottom of Pyramid CIC - Community Interest Company CSR - Corporate Social Responsibility EPZ - Export Processing Zone SEZ - Special Economic Zone EU - European Union Eur.1 - movement certificate form used in international commodity traffic GDP - Gross Domestic Product GSP - Generalized System of Preferences (US trade preference program for poor countries) ICDC - Industrial and Commercial Development Corporation KENSUP - Kenya Slum Upgrading Programme KRA - Kenya Revenue Authority L3C - Low-profit Limited Liability Company LDC - Least Developed Country MSMEs - Micro, Small and Medium Enterprises NGOs - Non Governmental Organizations NPO - Non Profit Organizations PAYE - Pay As You Earn PBO - Public Benefit Organizations PPPs - Public Private Partnerships SDGs - Sustainable Development Goals SEs - Social Enterprises SMEs - Small and Medium Enterprises SPVs - Special Purpose Vehicles TSEO - Thai Social Enterprise Office UN - United Nations US - United States USD - United States Dollar VAT - Value Added Tax x Acknowledgments To my supervisor Professor Ruth Kiraka, thank you for your profound input, rigor and guidance with this dissertation. It has been a journey and I forever remain indebted to you, thank you for your brilliance and encouragement, you are one in a million. To Bildad Nyongesa who believed in my Strathmore dream, thank you. To the entire Strathmore University Business School fraternity, you tirelessly imagine and work towards an Africa that is possible, thank you for the Strathmore way. To the MPPM class year 2014, I became because of you lot. Thank you, comrades, for the magical debates, insights, encouragement and endless laughter. My special appreciation goes to Anne Gitimu, Alex Njeru, Mary Apondi, Eliud Njogu, Emma Mareri and Major Sheila Kurui, epic trailblazers who showed me that it is possible. I admire you greatly. To my sisterhood, Dr. Sarah Murabula for being my sounding board, Dr. Valerie Baumeister, JT and Mrs. Yvonne Ayuak, thank you for always raising the bar and teaching me not to settle for less. My girls you are such a fine addition to my life, I love you forever. Thank you Jochen Baumeister for introducing me to the concept of social enterprises. To Phillip, Eve and Lucas, thank you for cheerleading the final lap! To Lillian Kwamboka for the excellent transcription. To all my friends, associates, key respondents and family who played very important roles, I am eternally grateful. And finally, to Mr. Hamed Ehsani, I will never forget your kind heart. xi Dedication To my mother, Jenipher Milka Awuor for her endless sacrifices and teaching me that one is never too late or too old for academic pursuits. To my late father Paul Padwa, who loved books and laid a firm foundation in my education. Chubba! “Deo, non Fortuna.” (unknown) 1 CHAPTER 1 INTRODUCTION 1.1 Introduction to the Study Chapter one introduces the concept and definition of social enterprise, including its intersection with policy frameworks and the sector in Kenya; the rest of the chapters include: the problem definition; research purpose; research objectives; the scope and significance of the study. 1.2 Background of the Study Social enterprises play a fundamental role in inclusive economic growth and development as they implement new ideas or adopt existing ideas to local contexts (Hein and Kappel, 2015). Chung (2015) advances that the social economy started as an anti-poverty and co-operative movement to solve the problems of housing, education, unemployment and welfare. Santos (2012) finds that social enterprises start with small initiatives which target problems with local expressions but global relevance. Popoviciu and Popoviciu (2011) observe that social enterprise lies at the center of traditional non-profits and traditional market economy continuum. The concept is a rapidly emerging and complex phenomenon faced with literature in its infancy making it difficult to specify its conceptual boundaries. According to the World Bank Group (2017) social enterprises are privately owned organizations which play a special role in helping developing countries achieve the Sustainable Development Goals (SDGs). Agapitova, Sanchez and Tinsley (2017) define social enterprises as private for profit, non-profit or hybrid organizations with a social mission that serves the Bottom of the Pyramid (BoP) using business approaches to provide life changing services in a cost efficient manner. Dees (1994) defines social enterprise as organizations that are private in nature and are dedicated to solving social problems, serving the disadvantaged and providing social goods that are not adequately provided by public agencies or private markets. Yunus (2008) describes a social enterprise as an organization that is similar to a profit maximizing business as it employs workers, creates goods or services and provides these services at a price that is consistent with its social objective while recovering its full costs. The entity may earn profits, but the investors do not earn 2 dividends except to recoup the original investment over a period of time making it cause-driven rather than profit-driven. Community Action Partnership (2011) asserts that social enterprises are hybrid models that encompass diverse players such as socially responsible investors, for-benefit ventures, corporate social responsibility efforts, social innovators and others leading to value accruing to society as a whole rather than private individuals. Figure 1.1 highlights the spectrum of activities and players within the social enterprise sector. Source: Alter (2007: 14) Figure 1. 1: Hybrid spectrum of activities within the social enterprise sector. According to World Bank (2017) traditional actors such as governments, civil society and the private sector have been unable to fully resolve the challenges of providing quality services to essential social amenities. Tilakasiri (2012) posits that the divide between public sector and private sector has increasingly become blurred as a result of interruption of the classical divisions between their responsibilities. Hein and Kappel (2015) further extend this argument that traditionally the task of the state has been to pursue social and environmental goals. They assert that social enterprise has led to the rise of the Third Sector, a new model which is neither public nor private sector and applies business efficiency to social welfare. Figure 1.2 illustrates a cross-sectional view of social enterprises and how the responsibilities between the public and private sectors intersect. 3 Source: Seanor, Bull, and Ridley-Duff (2007: 4) Figure 1. 2: Cross-Sectional view of social enterprise Figure 1.3 illustrates the criteria for social enterprises and how it fits into the public and private spheres. Source: World Bank Group (2017: 8) Figure 1. 3: Social enterprise sector space Agapitova, Sanchez and Tinsley (2017) find that different levels of government develop context- specific rationales for engaging with the sector for instance: at the national level the rationale for social enterprise is supported by the highest level of leadership and is expressed in cross-cutting strategic documents; at sub-national levels the rationale is linked to the decentralization or devolution agenda and the integration of lagging or conflict prone parts of the country; and, at the sectoral levels the rationale is linked to specific development challenges. 4 Santos (2012) posits that the growth of social enterprises is defined by financial sustainability, the ability for social enterprises to maintain its operations for society’s welfare. He further proposes the Social Entrepreneurship Theory that proposes economic activity cannot operate in an institutional vaccum and hence legal and regulatory frameworks are created to ensure that competitive market conditions are maintained through mechanisms such as regulation, taxation and market creation. According to OECD (2010) a sound policy framework covers the legal, regulatory and market incentive aspects which provides the basis for an efficient and effective sector. 1.3 Social enterprise sector in Kenya The British Council (2017) found that the economic restructuring program in the 1980s reduced government expenditure on social services leading to the growth of non-state and commercial actors in social service provision. Kenya has been termed as the powerhouse of East Africa demonstrating a promising 4.4%-5.8% GDP growth translating to USD 55.24 billion. It also has relatively functional business support institutions and a dynamic private sector with many entrepreneurial firms. An increasing number of these firms self-define as social enterprises stretching across sectors like innovative agriculture, education, health and technology (Panum & Hansen, 2014; Hanley, Wachner & Weiss 2015). Despite this economic growth, The World Bank Group (2017) report states that 388 million people in Sub-Saharan Africa live below the poverty line on less than USD 1.90. In Kenya, one out of three of people lives below the international poverty line without access to amenities such as quality health care, quality education, clean water, sanitation and decent employment opportunities (World Bank Group, 2018). The United Nations Development Programme (2014) reported that rebasing the Kenyan economy sought to provide more accurate data on the size and structure of the economy for informed policy decisions and to attract foreign investments. However, with the new low-middle income status, the perception was that the country was wealthier and organizations within the hybrid spectrum had to adopt a revenue generating model (British Council, 2017). 5 Kanyinga and Mitullah (2007) observed global growth in number and activities of private non- governmental institutions in a phenomenon described as a ‘global associational revolution’. Gathee (2013) observed that the non-profit sector accounted for 5% of the country’s GDP. Kenya has a large non-profit sector at 2.1% of the economically active population in comparison to 1.9% of other developing and transitional countries. This compares to 43% of the size of the public sector providing essential services focused on economic empowerment, social development and societal needs to the Kenyan population. The World Bank Group (2017) found that social enterprises had emerged to address service delivery gaps for the poor, with Kenya and South Africa leading in the growth of the social enterprise sector. The British Council (2017) estimated that there were 44,000 social enterprises in Kenya with the number expected to increase. The World Bank Group (2017) noted that there was a high number of social enterprises operating in Kenya with at least 136 impact capital vehicles managed by 95 impact investors committing more than USD 240 million. The British Council (2017) study found that in the absence of policy frameworks specific to social enterprises, the Public Benefit Organizations (PBO) Act of 2013 or Companies Act of 2015 served as the main frameworks for social enterprises. Other policy frameworks with implications on social enterprises include: The Business Registration Service Act, No. 15 of 2015; The Small and Micro Enterprises Act, No. 55 of 2012; The Weights and Measures Act, Cap 513; Industrial Training Act, Cap 237; The Standards Act, Cap 496; The Co-operatives Societies Act, No. 12 of 1997; Movable Property Security Rights Act, No. 13 of 2017; Trustees Act, Cap 167 and Trustees (Perpetual Succession) Act, Cap 164; Technical, Vocation Education and Training Act, No. 29 of 2013; The Small and Micro Enterprises policy, 2005; The Kenya Vision 2030; The National Trade Policy, 2016; and The National Industrialization Policy, No.9 of 2012. While social enterprises in Africa are able to reach underserved populations due to their strong presence and understanding of local communities, they are yet to fully realize their potential as they struggle to scale and develop sustainable models (World Bank, 2017; Smith and Darko, 2014). 1.4 Problem Statement The British Council (2017) found no separate legal category existed for social enterprises in Kenya therefore social enterprises registered as either non-profit organizations, companies or both. The 6 characteristics and impact of social enterprises are not taken into account by existing policy frameworks, meaning social enterprises do not effectively benefit from business support providers for instance financiers who are unsure of the risk and appropriateness of lending to the sector. These include: lack of access to financing solutions, legal status, weak infrastructure, difficult markets, human capital, lack of information, low perception and understanding of social enterprises among policy makers, social enterprise stakeholders and the public who equate them with charitable organizations and networks (Smith and Darko, 2014). Similarly, the World Bank Group (2017) observed that unconducive policy and loose regulatory framework had led to social enterprises not being recognized as a sector making it difficult to align with nationally identified priorities, plan and provide appropriate government support for the growth of the sector. There is limited research on how the PBO Act of 2013 and the Companies Act of 2015 may or may not impact the growth of social enterprises in Kenya. In response to the dearth of information on the sector, the Social Enterprise World Forum (2019) initiated a global mapping information project that will report on the recognition of social enterprise, popular terms for social enterprise, number of social enterprises, and the formal networks, legal structures, and strategies that exist to support social enterprises around the world. The World Bank Group (2017) reported that where a mature policy framework specific to social enterprises existed, social enterprises were more established, achieved more growth in number, quality and impact of activities, as well as experienced fewer challenges in comparison to those with policy frameworks in the early and emerging stages. In summary, the absence of social enterprises specific policy in Kenya portends that social enterprises face unique challenges linked to their model. Additionally, limited research on the existing supporting factors, challenges and opportunities for social enterprises to grow presented a gap that the study sought to address. 1.5 Research Purpose This study sought to assess the efficacy of the current public policy frameworks on social enterprises, the challenges affecting the growth of social enterprises in Kenya, and opportunities that could lead to possible policy interventions. 7 1.6 Research Objectives i. To assess how the current policy frameworks influence the growth of social enterprises in Kenya. ii. To examine the challenges affecting the growth of social enterprises in Kenya. iii. To explore the policy interventions that provide opportunities for growth of social enterprises in Kenya. 1.7 Research Questions i. How have the current policy frameworks influenced the growth of social enterprises in Kenya? ii. What are the challenges affecting the growth of social enterprises in Kenya? iii. What are the policy interventions that provide opportunities for growth of social enterprises in Kenya? 1.8 Scope of the Study Pearl (2013) acknowledges the paucity of studies specific to social enterprises. Given the wide range of activities and concept of social enterprise, this study limited its scope to two activities, that is, the non-profit with income-generating activities, and the social enterprises as illustrated by Alter’s Hybrid spectrum in figure 1.1. Adapting from the World Bank Group (2017), the criteria for inclusion in the study included: organizations with a social mission of providing goods and services and reinvesting their profits in the community or organization’s own growth; organizations which operate under business principles with sound and sustainable financial model; organizations which generate revenues through provision of goods and services at a fee; and organizations which are privately or community owned. British Council (2017) found that sixty percent of social enterprises are headquartered in Nairobi County, Kenya making the geographical scope to Nairobi sufficient for this study. The study was limited to organizations with income generating activities as defined by Public Benefit Organizations Act of 2013 and the Company Act of 2015, and registered by the Public Benefit Organizations Regulatory Authority and/or the Registrar of Companies. It, 8 however, excluded corporate business organizations or entities whose primary focus is profit even though it creates social value. 1.9 Significance of the Study The linkage between social enterprise and public policy has significance to the following spheres: To the body of knowledge, the current literature on social enterprise is mostly centered on the business perspective which is more concerned with advocating the model of social enterprise as a business. This study will contribute to research on the public policy perspective with implications of policy frameworks on the social enterprises (Popoviciu and Popoviciu 2011; Newis and Hamlin 2008). To policy makers, as social enterprises gain traction in scope and breadth, the study of social enterprise and public policy within the Kenyan context will provide important insights for developing social enterprise specific policy frameworks. This will create an enabling environment to enhance the growth of social enterprises and “end poverty in all its forms everywhere” as envisioned in the United Nations 2030 Global Goals framework. To agents of change, poverty remains one of the most pressing social and moral challenge of our time and its alleviation has become a key sustainable development goal. Coupled with shifts in the external environments such as changing external funding priorities and government policy, there is need to examine this new field that seeks innovative solutions to poverty alleviation through enterprise. The study of social enterprise and public policy within the Kenyan context will provide important insights for practitioners to exploit the policy domains which will contribute to the growth of social enterprises. To the general public, the study will contribute to the awareness of the important role that the sector plays in social welfare and economic development. This should spur public participation in the formulation of social enterprise specific policy, as well as inspire well-intentioned citizens into providing innovative solutions to social problems using the social enterprise model that is recognized and supported by policy. 9 CHAPTER 2 LITERATURE REVIEW 2.1 Introduction This chapter introduces theoretical insights into the concept of social enterprises. The chapter examines literature to provide linkages to this study’s research objectives and highlights the gaps from the literature review. The chapter concludes by illustrating the conceptual framework and the variables of the study. 2.2 Theoretical Review The Social Entrepreneurship Theory provides an understanding of the convergence between social enterprise and public policy as it links the growth of social enterprises and the current policy frameworks. 2.2.1 Social Entrepreneurship Theory Santos (2012) puts forth a positive theory of social enterpreneurship which suggested that, “social entrepreneurship is the pursuit of sustainable solutions to neglected problems with positive externalities.” The theory propositions that: one, the distinctive domain of social entrepreneurship is in addressing neglected problems involving positive externalities in society. Positive externalities are the consequences that result from under provision of goods and services that create value for society much more than the recipient of those goods; two, social enterprises are likely to operate in areas with localized positive externalities that benefit powerless segments of the population; three, social enterpreneurs aim to achieve sustainable solutions to the problems they address; and four, social entrepreneurs seek solutions built on empowerment of others within and out of the organization. Ebrashi (2013) also noted that the social entrepreneurship theory introduces new typologies for social enterprises as it focuses on the conditions, motivations and contexts that bring about and create sustainable social change. In contextualizing the architecture of the economic system in which social enterprises operate and grow, Santos (2012) argued that economic activity cannot operate in an institutional vaccum and hence legal and regulatory frameworks are created to ensure that competitive market conditions are maintained through mechanisms such as regulation, 10 taxation and market creation. These government mechanisms created a system of incentives for private economic actors to achieve the propositions of the social entreprenuership theory. The theory on the other hand rejects the social and economic value dichotomy as it holds that economic value creation is inherently social as it improves society’s welfare via better allocation of resources, that is, social value and outcomes are the intangible benefits of economic value. Santos (2012) holds that social enterprises focus on value creation in order to create economic and social impact as an outcome. Santos borrows the World Bank (2009) definition which states that empowerment is “increasing the assets and capabilities of individuals or groups to make purposive choices and to transform those choices into desired actions and outcomes.” Growth thus occurs at the point of empowerment of actors. Drawing from the social entrepreneurship theory, Ebrashi (2013) further argues that social impact is “the process of assessing or estimating in advance the social consequences likely to follow from specific policy actions or project development…and these include any public or private actions that alter the way people live, and cope as members of society.” In relation to this study, the social entrepreneurship theory contributed in not only understanding the why but also how social enterprises grow. The theory enabled the study assess the extent to which policy frameworks enabled social enterprises to address neglected problems in society; how policy frameworks enabled social enterprises to benefit the powerless populations; how policy frameworks enabled social enterprises to provide sustainable solutions by creating value; and, how policy frameworks enabled social enterprises to identify opportunities that can empower society, translating to growth using various policy mechanisms and domains as incentives. 2.3 Empirical Review The empirical literature was based on the study’s research objectives: to examine how the current policy frameworks influenced the growth of social enterprises in Kenya; to assess the challenges affecting the growth of social enterprises in Kenya; and, to determine the policy interventions that provided opportunities for growth of social enterprises in Kenya. 2.3.1 Policy frameworks for social enterprises This section highlights the policy frameworks created to support the growth of social enterprises in various geographies. For the purposes of this study, the policy frameworks adopted from the 11 World Bank Group (2017) report illustrated how the salient policy features at every stage influenced the growth of the social enterprises. Within the early-mature stage continuum, the literature showed that in countries where a robust policy framework specific to social enterprises existed, social enterprises were more established, achieved more growth in number, quality and impact of activities, as well as experienced fewer challenges in comparison to those with policy frameworks in the early and emerging stages. 2.3.1.1 Early-Stage Policy Frameworks According to Agapitova, Sanchez, and Tinsley (2017) the level of social enterprise activity within this stage was indicated by presence of social enterprise as NGOs or companies in some locations or sectors. Early Stage frameworks were characterized by: absence of a specific legal form to recognize social enterprises as distinct entities as they register as either NPOs or for-profit companies; absence of specific policies or regulations to support social enterprises; presence of small and medium-sized enterprise (SMEs) policies; and, presence of enabling private organizations which were mostly foreign-owned and self-identify as social enterprises providing services and goods to BoP populations. Examples of countries within this stage were found to be Kenya, Rwanda and South Africa. The World Bank Group (2017) found that in Rwanda, the 2015 Law on Investment Promotion and Facilitiation improved business conditions, regulations and policies but did not have specific social enterprise policies. The private sector was considered as important for development with the government being open to civil society engagement. Social enterprises in Rwanda registered as foreign and rights-based NGOs permitted to conduct commercial activities, however the investment law does not apply to social enterprises registered as NGOs. Within the South African context, Steinman (2010) found that South Africa does not have a law or policy on social enterprises and thus the framework was fragmented with a complex registration process. The study highlighted several laws based on the Bill of Rights which created an enabling environment for social enterprises and sought to: enable organizations to establish themselves as legal structures; regulate the way in which the legal structures operate; and provide for the sector tax and other incentives towards sustainability. Social enterprises operated under fragmented legal and regulatory instruments each with its own requirements for registration and compliance, for 12 instance a section 21 company was required to register three times under the Registrar of Companies, NPO Directorate and Tax Exemption as well as comply with the requirements of three different regulatory entities. Stakeholders within the South African social enterprise space suggested for the social enterprise specific framework to be formalized. The empirical literature thus seemed to suggest that social enterprises within the early-stage policy frameworks faced more growth challenges as a result of lack of social enterprise specific policy. 2.3.1.2 Emerging Stage Policy Frameworks According to Agapitova, Sanchez, and Tinsley (2017) the level of social enterprise activity within this stage was indicated by the presence of social enterprises as NGOs or companies in multiple sectors and locations. Emerging Stage frameworks were characterized by: absence of a specific legal form to recognize social enterprises as distinct entities therefore social enterprises registered as either non-profit organizations or for-profit companies; presence of political will to support social enterprises or social innovation; presence of small and medium-sized enterprise policies; and, growing number and variety of organizations supporting and enabling social enterprises. Geographies within this category had initiated a policy dialogue around the social enterprise sector or adopted sections of policy that were providing platforms for engaging with social entrepreneurs. Examples of countries within this stage were found to be India and Egypt. The British Council (2016) study found that while holistic insights into government policies that sought to support the social enterprise sector in India was lacking, thirty nine central government policies relevant to social enterprises had been framed with the National Skill and Entrepreneurship Policy specifically aimed at fostering social enterpreneurship. The report found that India had witnessed notable growth in the number and quality of social enterprise activity, however quantitative data on its contribution to the country’s GDP and workforce was not clear. Social enterprises in India were largely registered as private limited companies, NGOs (society or trust) or sole ventures deeply rooted in Indian ethos. 58% of social enterprises were registered as private limited companies whereas the number of social enterprises operating as NGOs had declined. This was attributed to greater autonomy on the use of profits/surpluses for private limited companies as compared to the NGO model which required donation of surpluses to charity. The social enterprise ecosystem in India was found to be the most developed within the early and 13 emerging stages having evolved with support from domestic and international organizations providing capacity development, financial and advisory assistance to support seed-stage and early- stage social entrepreneurs looking to develop and pilot their social impact ideas. Agapitova, Sanchez and Tinsley (2017) found that there was no specific legal form in Egypt for social enterprises and they could register as non-profit organizations, private companies under the NGO or company law respectively. The social enterprise ecosystem in Egypt operated within a restrictive policy framework as the current capital market laws needed to be amended to encourage investments into the sector. NGOs on the other hand were not allowed to engage in commercial activities and therefore remained donor dependent. However, recent positive trends had emerged with organizations seeking to enable and support the sector for example civil society mobilizing the social enterprise sector, incubators, angel investor networks and replication funds that facilitate social enterprises to develop and scale (World Bank, 2011). The Sustainable Development Strategy is Egypt’s Vision 2030 aimed at creating a modern, open, democratic, productive and happy society. Social enterprises were not explicitly recognized as key actors or partners but the strategy presented an opportunity for collaboration. Through the ICT 2020 strategy, social enterprises have been recognized as a relevant actor. The empirical literature pointed that social enterprises operating within the emerging stage frameworks also faced restrictive or inadequate policy affecting their growth. 2.3.1.3 Growing Stage Policy Frameworks The level of social enterprise activity within this stage was indicated by widespread presence of social enterprises within the existent legal forms as NGOs or Companies in multiple sectors and locations. Growing policy frameworks had the following distinctive features: 1). There was recognition for the sector as the legal forms for social enterprises had been created or were in the process of creation; 2). Presence of supporting policies for social enterprises; and 3). Supporting organizations formed enabling networks for the sector to grow. Examples of countries within this stage were Canada, Thailand and Italy (Agapitova, Sanchez and Tinsley, 2017). Alexander (2016) found that distinct hybrid forms of social enterprise had not yet been established at the national level in Canada. However, provincial governments were moving towards entrenching social enterprises as distinct ventures for instance British Columbia had effected the 14 Community Contribution Company (C3) with an asset lock of 40% cap on dividends. Nova Scotia had also enacted the Community Interest Company (CIC) model of the UK, while Ontario had opened consultation on adopting a hybrid form. The legal forms currently in use for social enterprises included for profit entities registered as sole proprietorships, partnerships, corporations or business trusts; registered charities, NPOs and cooperatives. Agapitova, Sanchez, and Tinsley (2017) observed that Thailand’s social enterprise ecosystem was one of the most active in South East Asia. The National Social Enterprise Committee was created to facilitate access to finance and increase awareness of the sector. The Social Enterprise Master Plan Act 2555 for 2010 – 2014 defined the policy guidelines to include regulations, social and environmental indicators, intermediary organizations such as incubators, social enterprise educational curriculum, access to capital and markets. While there was no specific legal form for social enterprises in Thailand, the National Social Enterprise Act 2554 modelled after the CIC in the UK and L3C in the United States defined social enterprise as, “a private individual, group or community with the goal to address social issues and community development by following social or environmental principles and where the revenues are not aimed at maximizing the profit of the shareholders or owners”. The Thai Social Enterprise Office (TSEO) is an independent agency under the Prime Minister’s Office designated to formulate strategic policies and programs for the sector. The framework stated that profit sharing or dividends to shareholders must not exceed 20% of annual net profits and provided guidelines for the de-commission of assets when the social enterprise closed down. The social enterprise accreditation journey consisted of the label “Thai SE Good” similar to Fair Trade which ensured that the goods and services are sold better as well as state enterprises and government agencies giving priority to purchase goods with the Thai SE Good label. Finally, the Thai government further implemented the 2 Billion Euros Village Fund Program to encourage local communities create enterprises for public goods and community interest such as community banks, rice mills and pharmacies. The TSEO partnered with the Thai Stock Exchange and a socially enterprising university to create awareness and deliver capacity building programs on social impact investment. Alexander (2016) portended that the Italian Act on Social Cooperatives was passed in 1991 with the model allowing for entities to pursue profits alongside the mutual benefits defined by the company by-laws. The Law on Social Enterprises adopted in 2006 allowed for any legal form of 15 organizations meeting certain criterias to be considered as social enterprises known as social enterprise et lege. These requirements were: 1). An entity must be a private legal entity; 2). The entity must engage in the exchange of goods and services that have a social utility and seek to achieve a public benefit purpose rather than generate profits; and 3). The entity could make a profit but could not distribute profits and had to either re-invest those profits in public benefit or use them to increase assets. The social enterprise status subjected entities to an asset lock which limited claims on company assets and upon dissolution had to be transferred to a non profit entity. Social enterprises et lege had been less successful as the administrative process was lengthier, social reporting requirements and minimum capital requirements were burdensome and fiscal benefits available to social cooperatives were not extended to social enterprises. The literature indicated that social enterprises operating within policy frameworks at the growing stage were formally recognized and the presence of social enterprise specific policy structures had enabled more opportunities for growth. 2.3.1.4 Mature Stage Policy Frameworks According to Agapitova, Sanchez, and Tinsley (2017) the level of social enterprise activity operating within mature regulatory frameworks was extensive and organized. World Bank Group (2017) portended that mature frameworks which supported and promoted the growth of the social enterprises sector had two distinct features: one, through well-implemented policy frameworks the government recognized and promoted the special role of social enterprises, with sector-specific policies promoting social enterprise; and two, through regulatory frameworks, social enterprises benefitted from legal incentives such as tax waivers and preferential public procurement opportunities. They further observed distinctive features of mature regulatory frameworks as consisting of: the presence of legal forms specific to social enterprises provided formal recognition of the sector; national policy or strategy with large range of tools and programs supported the sector; and, the presence of enabling organizations such as public agencies formed ecosystems which supported the growth of the sector. Examples of countries with mature regulatory frameworks included United Kingdom, United States and South Korea. The United Kingdom provided an international benchmark for policy frameworks which had supported the emergence and maturity of the social enterprise sector. Seanor, Bull and Ridley-Duff 16 (2007) observed that the UK government promoted social enterprise as a means for delivering public goods using business solutions. Borzaga and Galera (2016) observed that recognition of social enterprises had taken place through: legislation designed specifically for social enterprises; creation of specific structures in charge of promoting social enterprises; reforms leading to direct or indirect recognition of the role of social enterprises as providers of specific types of essential services; adoption of specific national, regional or local policy strategies focused on the social economy or social enterprise; and explicit references to social enterprises made by official policy documents and operational programs. According to the Department of Trade and Industry (2002) the government set up the Social Enterprise Unit within the auspices of the Department of Trade and Industry to provide a coordinated point for strategic decision making across all departments. This entity built a culture of social enterprises and disseminated evidence based knowledge, enabled access to appropriate finance, supported social enterprises to grow and participated in government procurement options. The British Council (2015) further illustrated that a dedicated Office of the Third Sector with ministerial status and authority to work across departments raised the importance and influence of social enterprise and the social economy within and outside the government. The British Council (2015) report highlighted that the UK Social Value Act supported the social enterprise space by providing a range of options for legal registration of social enterprises. The Act built in social impact components which offered opportunities for social enterprises to access government contracts, and deliver goods and services to the public sector. The Community Interest Company (CIC) model featured an asset lock limiting the amount of dividend distribution to encourage a wide range of finance into social ventures without the risk of drifting social mission was significant in developing the social enterprise sector. The UK government consistently reviewed the Social Enterprise Action Plans inorder to create an enabling environment for social enterprises, make social enterprises better businesses and establish the value of social enterprise. For instance, the government having identified lack of access to appropriate finance as a barrier to the growth and scaling up of social enterprises adopted a number of policy options such as the risk capital fund with 50% government equity and 50% private sources; Community Investment Tax Relief of 5% p.a. of the amount invested available over five 17 years to individuals and corporate bodies investing in accredited Community Development Finance Institutions provided finance to qualifying profit-distributing enterprises, social enterprises or community projects (McNeil, 2008) and (Department of Trade and Industry, 2002). The British Council (2015) report stated that the social enterprise sector grew in the last ten years, with nearly a third of all social enterprises launched in the last three years of the study. The sector continued to grow rapidly with estimates showing 70,000 social enterprises in the UK contributed over £24 billion to the UK economy and employed over two million people, a phenomenon that was largely attributed to government policy which acted as a catalyst and facilitator. The report however contrasted that while the United Kingdom had a mature framework and had made great leaps in supporting the growth of the sector, it continued to grapple with balancing legislation to promote social investment to safeguard impact while at the same time attract investors. The report further found that the focus on public service delivery skewed the development of the social enterprise sector towards delivering services for government and not private businesses or the general public. The coalition government extended the social enterprise strategy to grow and take over government in running of public services through investments rather than grants. In comparison, Tremblay (2010) portended that in the United States the Low-profit Limited Liability Company (L3C) was a for-profit company organized to engage in socially beneficial activities. The L3C structure enabled social enterprises gain access to capital and was neither tax exempt nor registered as a charity. She further highlighted that the United States created a New Market Tax credit providing up to USD 15 billion worth of credit for community investments over a five year period. The Community Renewal Tax Relief Act of 2000 created pools of capital by way of obliging banks to invest in community initiatives and created tax incentives for private investors. The creation of loan guarantee programs, grants or fiscal measures enabled social enterprises and non-profits to access capital which would otherwise be inaccessible. Agapitova, Sanchez and Tinsley (2017) illustrated that South Korea passed the Law on the Promotion of Social Enterprises in 2006 seeking to contribute to its citizens’ quality of life by expanding social services, social integration and creating jobs. The law enabled cooperatives, public corporations, NPOs and social welfare corporations to be certified as social enterprises according to the definition provided in law. This certification provided benefits such as preferential 18 treatment on public procurement, payroll subsidies and tax exemptions. The Korean Social Enterprise Promotion Agency (KoSEA) supported the social enterprise ecosystem. Overall, these examples of policy frameworks for the social enterprise sector suggested that where a mature policy framework exists, there were greater opportunities for employment, social investments, tangible ways of measuring social impact and better government oversight. Table 2. 1 : A summary of Early Policy Stage and Emerging Policy stages showing the salient features, growth indicators and social enterprise outcomes Policy Stage Salient Features Growth Indicators Outcome (successes and challenges) Early Stage (Kenya, Rwanda and South Africa) • Absence of a social enterprise specific policy to support social enterprises. • Absence of social enterprise specific legal form. • Operate under small and medium-sized enterprise (SMEs) policies. • Presence of social enterprise as NGOs or companies in some locations or sectors. • Presence of enabling private organizations mostly foreign-owned • Social enterprises providing services and goods to BoP populations. • Social enterprises operate under fragmented legal and regulatory instruments each with its own requirements for registration and compliance. Emerging Stage (India and Egypt) • Absence of a specific legal form to recognize social enterprises. • Operate under small or medium-sized enterprise policies. • Presence of social enterprises as NGOs or companies in multiple sectors and locations. • Presence of political will to support social enterprises or social innovation. • Growing number and variety of organizations supporting and enabling social enterprises (hubs, incubators). • Policy dialogue initiated around the social enterprise sector • Social enterprises register as either non- profit organizations or for-profit companies. • Notable growth in number and quality of social enterprise activity. • Social enterprises operate within a restrictive policy framework in need of amendment. • Sections of policy have been adopted providing platforms for engaging with social entrepreneurs. • Social enterprises are supported by domestic or international organizations at the seed and scale stage. Source: Researcher (2020) 19 Table 2. 2: A summary of Growing Policy Stage and Mature Policy stages showing the salient features, growth indicators and social enterprise outcomes Policy Stage Salient Features Growth Indicators Outcome (successes and challenges) Growing Stage (Canada, Thailand and Italy) • Recognition for the sector as the legal forms for social enterprises have been created or are in the process of creation. • Policy framework define social enterprises and the policy mechanisms for social enterprises to grow. • Widespread presence of social enterprises within the existent legal forms as NGOs or Companies in multiple sectors and locations. • Presence of supporting entities for social enterprises • Supporting organizations form enabling networks for the sector to grow. • Adequate awareness of social enterprises. • Hybrid models with asset and dividend locks. • Administrative compliance is lengthy because of social reporting requirements. • Limited fiscal benefits Mature Stage (United Kingdom, United States, South Korea) • Well-implemented policy frameworks that recognizes and promotes the special role of social enterprises. • Sector-specific policies promote social enterprises. • Regulatory frameworks benefitting social enterprises. • Presence of legal forms specific to social enterprises provide formal recognition of the sector. • National policy or strategy with large range of tools and programs to support the sector. • Level of social enterprise activity is extensive and organized. • Social enterprises benefit from legal incentives such as tax waivers and preferential public procurement opportunities. • Presence of enabling organizations such as public agencies form ecosystems which support the growth of the sector. • Exponential growth of number of social enterprises. • Measurable social and economic impact • Extensive fiscal benefits to social enterprises Source: Researcher (2020) 20 2.3.2 Challenges facing Social Enterprises Alexander (2016) portended that the lack of legal frameworks in most countries contributed to the inability to fully grasp the notion of social enterprise. Smith and Darko (2014) argued that the lack of definition and familiarity with the term social enterprise acted as a constraint to social enterprise development. They found evidence that the impact of legal status on the growth of social enterprises varied. For instance in Vietnam, while the NGO status was conducive as accounting requirements were straightforward and they were not subject to VAT or income tax, social enterprises were not able to bid for government opportunities. In addition, the confusion in legal status exposed social enterprises to constant harassment by tax officials who expected charities but found paying customers as the mainstay of social enterprise operations. Vietnamese social enterprises however felt that a new legal framework carried risk and uncertainty and thus preferred operating within the existing legal inconsistencies. Some divergent views in Kenya held that the legal blur allowed enterprise flexibility while others held that a new category specific to social enterprises would lead to recognition and preferential policies that would facilitate the growth of social enterprises (Smith & Darko, 2014). Without a social enterprise sector specific policy, Pearl (2013) found that the sector in Canada experienced significant challenges as the nature of non-profits revenue streams typically involved three primary sources, that is, government funding, charitable donations and earned income. The frameworks were not designed for organizations obtaining revenue from all three sources resulting to ‘regulation stranglehold’ which reduced the operating efficiency of non-profit entities. The complex set of regulations related to managing, reporting and accounting for the varied revenue streams led to over-burdened organizations being required to navigate complicated accountability policies, administrative procedures and regulations. The Department of Trade and Industry (2002) highlighted that the social enterprise sector in the UK faced challenges such as: poor understanding of the values and abilities of social enterprise; inadequate evidence on the impact and value of social enterprise; limited and fragmented access to advice and support; difficulty in accessing funding opportunities; limited understanding of the characteristics, needs and enabling environment for social enterprises; and, complexity and lack of coherence within the sector. 21 The World Bank Group (2017) report found that while social enterprises in Africa cut across various sectors and are on a positive trajectory, the main challenge was found to be in the high barriers, difficult markets, unconducive regulation and policy, poor and inadequate financing solutions, lack of access to information and networks, weak infrastructure and human capital. This meant that social enterprises struggled to realize their potential to scale and develop sustainable models. The report further revealed that social enterprises were not formalized as a sector as they tended to be a hybrid of public and private organizations. Additionally, the public sector in many of the developing countries under study did not create a conducive or have enabling regulatory environment to encourage the growth of social enterprises. Littlewood and Holt (2018) study found institutional imperfections were a recurrent problem in South Africa, as the implementation of existing government policy and legislation was weak in addressing social enterprise development. In contrast, various sources in this study have alluded that social enterprises in developed countries especially those in the European Union consisted of an intricate ecosystem of actors, institutions and networks that enabled social enterprises to contribute towards service delivery and the SDGs. Smith and Darko (2014) revealed that social enterprises in Kenya and Vietnam faced difficulties in accessing finance. The study found social enterprises in Kenya had limited access to commercial financing especially those registered as NGOs. Access to social forms of finance such as government funding, impact investments or donor finances was also a challenge. In Vietnam, access to social forms of financing was largely an issue of enterprise size and absorptive capacity. Challenges to access in finance was further attributed to lack of intermediaries between social investors and social enterprises, amplified by lack of skills and capacity of social enterprises to develop and present compelling business cases. Where impact investors existed, start-ups and smaller enterprises had difficulties in accessing capital. Likewise, social enterprises at the middle stage but not yet profitable faced similar challenges as there was preference for enterprises that were already established and commerically viable. The study further stated that lack of access to financing was as a result of information assymetry that would bring social enterprises and potential investors together. Other challenges included lack of skilled capacity as social enterprises were largely run by founders, lacked personnel with technical capacities in both social impact and business skills; limited access to markets since social enterprises focused on niche markets particularly BoP markets or where customers were not customed to paying for goods or services that were previously free or subsidized by government; lack of a centralized organization to 22 promote the needs of social enterprises was also found to be a constraint; and, sector specific constraints that tended to be more severe to social enterprises in general. The literature aforementioned suggests that lack of familiarity with social enterprises was a constraint to the growth of social enterprises as it inhibited access to government, private and public support. 2.3.3 Policy Incentives for social enterprises Tremblay (2010) observed that the policy domains for social enterprises presented tools for the growth of social enterprises, namely: financial policies, investment funds, taxation policies, knowledge sharing and business support, and access to markets and social procurement. 2.3.3.1 Financial policies Karaphilis, Asimakos, and Moore (2012) illustrated that enabling government financial policies such as creation of patient capital instruments which include direct government grants or subsidies; or indirect involvement attracted investment through financial institutions including conventional banks, credit unions, financial co-operatives and mutual societies as well as individual investors. Social impact investment programs provided capital and increased liquidity for intermediary social enterprises thus encouraging investments in the sector. Tremblay (2010) found that the public sector in Canada provided systematic financial support to address specific policy priorities for example, the co-operatives in Québec and Saskatchewan managed medical care, community health care and ambulance services; the social economy investment funds in Québec enabled The Investissement Québec to offer financing and support to all Social Economy enterprises and non-profits; and, in British Columbia, the Enterprising Non- Profits Program provided matching grants to non-profit organizations interested in starting or expanding revenue-generating enterprises as a means of diversifying their funding base, creating employment or training. The British Council (2012) reported that the British government had created opportunities for social enterprises to access capital and diversify forms of investments. Through the Social Enterprise Action Plan approximately £315 million was mobilized to support the sector of which 23 £215 million was used to build capacity for social enterprises to provide public services, and £10 million was used to establish venture capital funds. 2.3.3.2 Investments funds The International Labour Organization (2016) asserted that there had been a global increase in impact investing, for instance in South Africa funds that specifically target financial and social returns had emerged. In addition, intermediary organizations like business incubators and accelerators sought innovative social enterprises with the potential to scale and provide technical assistance and appropriate investments. The report however stated that these efforts were mainly sporadic and unable to attract sustainable investment. Tremblay (2010) noted that the Community Reinvestment Act, 1977 (CRA) obliged banks in the United States by way of enforcement to invest in community initiatives, and the New Markets Tax Credit Program launched in 2000 created tax incentives for private investors thus providing significant capital for social enterprises. 2.3.3.3 Taxation policies Tremblay (2010) observed that social enterprises in the Western European Union enjoyed specific tax treatment through the four main legal forms taken, for instance the Community Investment Tax Relief was a tax credit available to a company or individual investing for at least five years in an accredited Community Development Finance Institution. Countries which passed new legislation or modified existing laws to strengthen social enterprises included: Spain with its NPO taxation system, Italy with the ONLUS act, Germany with the Social Law Code; Act of 2003 in Finland, Act of 2004 in Lithuania and Act 118/2005 in Italy specific to social enterprises facilitated the emerging ‘New Social Economy’. In Canada, the Quebec government recognized social enterprise in policy through provision of tax credits to investments in agricultural and employee-owned co- operatives. 2.3.3.4 Knowledge share and business support British Council (2012) report found that the social enterprises sector in the UK was promoted and supported in scaling up its activities through capacity building, strengthening networks and 24 expanding their model using the licensing approach. The government set up mediums to promote research on the impact of social enterprises, this continued to strengthen the social enterprise culture and subsequently the establishment and development of social enterprises. Through enterprise mapping, the government identified sectors that social enterprises could best contribute to, for example the health sector, business development in disadvantaged areas, community development and prisoner rehabilitation. The government-led action plan provided for financial management courses and facilitated opportunities for cooperation between itself and social enterprises. The report further noted that the British government committed £6 million to business development, £6 million to building consultative skills and providing intensive support and £8 million to support modernization of social enterprises in times of crisis. Tremblay (2010) noted that the Québec government established an agency Comité sectoriel de la main-d’oeuvre de l’économie which provided training and needs analysis for the social enterprise sector in addition to tracking the employment creation progress and enterprise development. Everett (2009) found that through institutions, there was increased recognition of social enterprises which increased their value to the local economy. An enabling and supportive environment created a strong social enterprise culture, for instance in the UK the Social Economy Network with a growing membership of over one hundred members became a key institution in driving the implementation of the social enterprise strategy. It provided a united and representative voice for the sector as it engaged with government in policy development and other stakeholders in contributing to socio-economic development. 2.3.3.5 Access to markets and social procurement Tremblay (2010) found that procurement also known as purchasing, public service delivery and frontline services referred to the ways in which the public sector obtains goods and services. Within the context of social enterprises, Tremblay observed that there is an emerging model in purchasing and procurement which blended the financial return on investment and social impact decisions traditionally held as separate and non-intersecting. For instance, in the EU the National Procurement Strategy called on the use of procurement to deliver socio-economic and environmental objectives set out in the community plan; encouraged existing and new suppliers to enter a new market by working with the voluntary or community sector; and, diversified 25 competitive sources of supply from small businesses, ethnic minority businesses, social enterprises and community organizations. The International Labour Organization (2016) reported that access to markets was a far more pressing concern than access to finance as it guaranteed growth of enterprises. The lack of access to markets was a major constraint to the growth of social enterprises, provincial governments in South Africa established targets for a certain level of procurement spending to be directed to SMEs. Everett (2009) portended that the importance of public procurement was greater than direct funding through grants. Tremblay (2010) found that the incubation project by Genesis Social Enterprise Center invested £160,000 to set up five social enterprises which secured £1.6 million contracts from the public sector while operating in diverse fields and creating quality inclusive employment. In Canada, the Social Purchasing Portal, a web-based information resource promoted and expanded sales opportunities for social enterprises and social purchasing. In Germany, there was concern by policy makers who held the view that social public procurement was not an appropriate instrument due to the threat to transparency and corruption. To overcome this possibility, public procurement was promoted through the splitting of contracts into lots allowing social enterprises to bid fairly and, contract conditions requiring main contractors to include social enterprises as sub-contractors. Similarly, in Australia, the Finance and Administration’s Commonwealth Guidelines enabled SMEs to engage in fair competition for government business. Social coalitions enabled enterprises to partner with government thus providing opportunities for socio-economic participation by diverse minorities and communities (Tremblay, 2010). 2.3.4 Measures of Growth of social enterprises The measures of growth of social enterprises detailed social enterprises engaging in production and/or provision of welfare goods and services at a fee; limited in profit distribution; adopting a financial model that was sustainable as resources were dependent on a significant level of economic risk from the efforts of its members; and, enterprise turnover and surplus (OECD, Undated; British Council, 2017). 26 British Council (2017) report found that 85% of social enterprises in Kenya made a financial surplus, with 69% of the surplus being ploughed back for growth and development activities, 13% was spent towards financing third party social and environmental activities, 7% was set aside for emergency reserves, 6% rewarded staff and beneficiaries, and 5% was shared as profits among shareholders and owners. 2.3.5 Social Enterprises: The Kenyan context World Bank Group (2017) observed that there was generally a hands-off policy with no specific registration category for social enterprises in Kenya. In the absence of a social enterprise specific policy framework, social enterprises operate under the provisions of the Public Benefits Organizations Act, 2013 or The Company’s Act, 2015. 2.3.5.1 Public Benefits Organizations Act, 2013 Social enterprises registered as not for profits as per the Public Benefits Organizations Act, 2013. The provisions of the PBO Act provided for a legal, regulatory and institutional framework for non-profits. The Act focuses on issues of registration, governance, revenue generation, self- regulation, access to information and training for PBOs to contribute to the policy processes and coordination mechanisms including hybrid forms of organizations. The Act enabled PBOs to engage in issues of public interest including the formulation of policies or activities of the state and/or its officers. PBOs derived benefits and incentives such as: tax exemption on donations or grants, income received from the active conduct of legal income-generating activities and wholly dedicated to support the public benefit purposes for which the organization was established; tax exemptions on interest and dividends on investments and gains earned on assets, stamp duty and court fees; preferential treatment for VAT and custom duties for certain imported goods or services used to further public benefit; exemption from employment tax, preferences and special tax incentives for donations to form endowments; government financing for PBOs through budget subsidies, grants for specific purposes and contracts to perform certain works; preferential treatment in public procurement procedures and contract bidding. The rules on registering as a not-for-profit entity were increasingly tightened, which partially explains the low rate of 14% of social enterprises 27 registered as non-profits under the Public Benefits Organizations Act, 2013. In addition, registering as a non-profit undermined the commercial viability and financial sustainability of social enterprises (British Council, 2017). 2.3.5.2 The Company’s Act, 2015 The Company’s Act, 2015 is the main legal instrument set for doing business in Kenya by ensuring that processes are not only efficient and effective but also corporate governance principles are instituted. The British Council (2017) report suggested that 23% of social enterprises preferred the Limited Liability Company (LLC) structure. This legal form enabled enterprises to scale their activities as opposed to Non-Profits, for example an LLC structure enabled social enterprises to list on the Nairobi Stock Exchange through the Growth Enterprise Market Segment (GEMS) tailored for smaller companies. An LLC structure enabled an enterprise to live beyond its owners, founders and allowed for social enterprises to be passed down the family line given that 80% of Kenyan businesses are family-owned. However, the process of registering an LLC was complex not mentioning the burdensome double taxation that demanded an obligation of 30% corporate income tax as well as a 5% dividend tax. Given the social or environmental mission of social enterprises, double tax obligations impeded the growth of social enterprises. Sole proprietorships accounted for 20% of social enterprises as they tended to be entities with permanent staff of more than one and less than ten. Other legal forms used by social enterprises were: unspecified legal forms at 14%, Not yet registered or in the process of registration at 10%, partnerships at 9%, Low Profit Limited Liability Companies at 2%, Flexible or Social Purpose Corporations at 2%; Corporations at 2%, Trustees at 1% and Benefit Corporations at 1% (British Council, 2017). 2.3.5.3 Other Policy Frameworks Kenya Vision 2030 is a government strategy currently being implemented by the Vision 2030 secretariat. It was founded on three key principles, that is, Economic, Social and Political Governance to ensure the country maintains 10% growth rate per year. Social enterprises via their potential to create jobs and resolve social challenges were considered critical to attaining this vision (British Council, 2017). 28 The Cooperative Societies Act, 1968 was an enterprise and NGO legislation which stipulated that any society which has the objective of promoting the economic interest of its members in accordance with cooperative principles may be registered with or without limited liability. Five percent of the social enterprises that were surveyed by the British Council (2017) study were registered as societies or cooperative societies. According to British Council (2017) Access to Government Procurement Opportunities (AGPO) policy came up as a presidential directive in 2013 to ensure that 30% of all government contracts were earmarked for youth (aged 18 to 35), women and those with disabilities. The report found that youth led social enterprises accounted for 37% of overall social enterprises in the country which portends that the AGPO policy directive had significant impact on the growth of social enterprises. The Kenya Slum Upgrading Program (KENSUP) was a government strategy which sought to improve the living standards of Kenyans by 2020. KENSUP was a mega USD 13 billion project consisting of community projects, town planning, housing, waste management, peace-building and HIV/AIDS care. KENSUP presented opportunities for social enterprises operating within the health and social care space (British Council, 2017). Under the Big 4 Agenda, the Biashara Fund was a newly enacted fund instituted in 2018 under the Public Finance Management (Biashara Kenya Fund) Regulations, 2018 that merged the Uwezo Fund, Youth Enterprise Development Fund, Women Enterprise Development Fund, and Micro and Small Enterprise Authority. The purpose of the merger was to streamline financing for sufficient scale, scope and resources for Kenya’s economic development. Biashara fund has the potential for social enterprises especially those that suffer from insufficient financial capacity, to emerge, scale and grow (Office of the President, Republic of Kenya, 2018). However, the disbursement of funds separately to the Uwezo Fund, Youth Enterprise Development Fund and Women Enterprise Development Fund in the 2019/20 Financial Year (Kenya National Bureau of Statistics, 2020) suggested that the Biashara Fund is yet to be created. To conclude, the current frameworks described policy for economic investments, regulation and governance mechanisms under the Company’s Act, 2015 and regulatory frameworks for NPO’s under the Public Benefits Organization’s Act, 2013. Other instruments intended to provide an 29 enabling environment for social enterprises were also discussed, they are however not social enterprise sector specific and their efficacy on the growth of social enterprises remains largely unknown. 2.4 Research Gap Despite the rapid growth of the sector in Kenya estimated at 44,000 by the British Council (2017), the literature review revealed that there was no specific policy framework relating to social enterprises in Kenya. Given this absence, it was not known how the current policy structures impact the growth of social enterprises. Studies by British Council (2015) showed that in countries with social enterprise specific legislation such as The United Kingdom, the sector grew and numerous benefits accrued to the enterprises. Such benefits included: access to public financing and private investment funds, availability and access to knowledge share and business support opportunities, access to markets, preferential taxation and fiscal mechanisms that enabled social enterprises to grow. In Kenya where such a policy framework did not exist, the challenges that affected the growth of social enterprises and the opportunities available to spur the growth of social enterprises from a policy perspective remained largely unexplored. As an important and growing sector of the economy, there was value in establishing the extent to which the current policy frameworks provided an enabling environment for social enterprise growth. The findings were useful in making policy recommendations aimed at establishing sector- specific policies for social enterprises. The study also sought to advance the academic debate on social entrepreneurship within the Kenyan and African context. 2.5 Conceptual Framework Adom, Joe and Hussein (2018) found that a conceptual framework enabled researchers to specify and define concepts of a study, the key variables and presumed relationships between them. Based on the literature reviewed, the following propositions were made: 1. Policy frameworks provide an enabling environment for the growth of social enterprises. The study considered policy frameworks as current legal forms and structures in which social enterprises operate. The structures were evaluated to determine if the following domains enabled the growth of social enterprises: public financial policies, private 30 investment funds, taxation mechanisms, knowledge share and business support, and, access to markets. 2. Social enterprises face policy challenges that affect their growth. The study considered the challenges social enterprises face in relation to the policy domains under study. 3. Changes in the policy framework provide opportunities for social enterprises to grow. Growth in this study was limited to the financial sustainability of social enterprises based on an enabling policy framework. 33 2.5.1 Measurement of the Study Variables From the literature review and conceptual framework, the study variables were operationalized in Table 2.3. Table 2. 3: Operationalization of the study variables Proposition Variable How it will be measured Supporting sources Measurement Questions i. Policy frameworks provide an enabling environment for the growth of social enterprises. i. Policy frameworks • Identify the support structures under the current frameworks on social enterprises: o Public Finance instruments o Private Investments funds o Taxation mechanism o Knowledge share and business support o Access to markets (World Bank Group, 2017) 1. How does the legal structure your organization is registered under enable access to public finance instruments? 2. How does the legal structure your organization is registered under enable access to private investment funds? 3. How does the legal structure your organization is registered under enable tax exemptions or breaks? 4. How does your organization receive support in accessing knowledge share and business support 5. How does your organization receive support in accessing markets Source: Researcher (2020) 32 Table 2. 3 (contd): Operationalization of the study variables Proposition Variable How it will be measured Supporting sources Measurement Questions ii. Social enterprises face policy challenges that affect their growth ii. Policy domains • Discuss the challenges affecting the growth of social enterprises: o Public Finance instruments o Private Investments funds o Taxation mechanism o Knowledge share and business support o Access to markets (British Council, 2015) 1. Describe the challenges your organization faces in accessing public finance instruments 2. Describe the challenges your organization faces in accessing private investment funds 3. Describe the challenges your organization faces with the current tax mechanism 4. Describe the challenges your organization faces in accessing knowledge share and business support 5. Describe the challenges your organization faces in accessing markets Source: Researcher (2020) 33 Table 2. 3 (contd): Operationalization of the study variables Proposition Variable How it will be measured Supporting sources Measurement Questions iii. Changes in the policy framework provide opportunities for social enterprises to grow iii. Opportunities for policy frameworks • Discuss the policy interventions that encourage: o Public Finance instruments o Private Investments funds o Taxation mechanism o Knowledge share and business support o Access to markets (British Council, 2015) (Steinman, 2010) 1. Describe the policy interventions that you would recommend for the growth of social enterprises in Kenya iv. Growth • Ability for social enterprises to cover its operational costs and/or generate surplus/profits (British Council, 2017) How are you able to generate surplus/profits to cover your operational costs? Source: Researcher (2020) 34 CHAPTER 3 RESEARCH METHODOLOGY 3.1 Introduction This chapter presents the research design, population and sampling techniques, data collection methods, data analysis approaches, research qualities and ethical issues considered in the study. 3.2 Research Design Mohajan (2017) posited that research design constituted the conceptual structure within which research is conducted that is the blueprint for the collection, measurement and analysis of data to answer the research questions. The research design for this study adopts the social constructionism paradigm, which proposes that society is to be viewed as a product made by humans and humans by society (Steinman, 2010). Social reality is a product of the perceptions and consequent actions of people built up over time through shared history, experiences and communication. The study sought to understand the point of view of those who lived it (Holtze, 2014; Saunders, Lewis, & Thornhill, 2016). Data was therefore collected from these categories of respondents: social enterprise founders, investors, senior and mid-level executives, academia, and representatives of social enterprise associations An exploratory research design was adopted for this study. According to Gentles, et al (2015) an exploratory design is qualitative in nature and lies in selecting information-rich cases which yield in-depth understanding of the inquiry at hand. The qualitative research design was considered as the most appropriate one for answering ‘how’ questions (Saunders, Lewis, & Thornhill, 2016). The study sought to explain how existing policy frameworks influenced the growth of social enterprises, how policy challenges affected the growth of social enterprises, and how policy interventions could provide opportunities for growth of social enterprises in Kenya. 3.3 Population and Sampling 3.3.1 Population Kumar (2011) found that population was defined as a group of individuals, objects or items that share similarities. The British Council (2017) study estimated that there were 44,000 social enterprises in Kenya, constituting the population of this study. The study found that 60% of 35 social enterprises were headquartered in Nairobi making the geographical scope to Nairobi sufficient for this study. 3.3.2 Sampling According to Gentles, et al (2015) sampling broadly refers to the selection of data to address research objectives. Purposive sampling technique (non-probability sampling) was used to focus on information rich respondents who provided deeper insights to the study (Palys, 2008). This technique was preferred as it was convenient and best answered the questions of this study. Gentles, et al (2015) posited that qualitative samples were generally impossible to specify in advance of a study. Saunders, Lewis, and Thornhill (2016) further asserted that the issue of sample size for non-probability sampling was ambiguous. To address this issue, Saunders (2012) suggested a minimum sample size for qualitative studies that this study’s researcher adopted for the in-depth interviews as shown in Table 3.1. Table 3. 1: Minimum non-probability sample size Nature of Study Minimum Sample Size Semi-structured/In-depth interviews 5-25 Ethnographic 35-36 Grounded Theory 20-35 Considering a homogeneous population 4-12 Considering a heterogeneous population 12-30 Source: Saunders (2012) The study purposefuly identified nine key organizations who had an impact as social enterprises. They constituted the categories of respondents which included social enterprise forums and networks; tertiary education, research and ecosystem support organizations; incubators, accelerators and workspaces; impact i