Small and Medium Social Enterprises in Developing Countries

Poor people in developing countries overwhelmingly turn to the private sector for their vital services. They buy health services, education, finance and agricultural inputs from small and medium enterprises. Many of these enterprises have strong social ideals.

Yet, since SMSEs receive no external support now, they are not reaching their potential. SMSEs would benefit from both investment (loans, capital investment, consolidation funds and risk reduction funds) and grants (for training, entrepreneur development or subsidies). The right combination of investment and support can lead to rapid growth. It may now be possible to catalyse a step change in the provision of social services, creating more efficient mechanisms which learn and improve by themselves, as well as generating jobs. Working with SMSEs is a good strategy for a social investors or a foundation.

But investors and funders need to overcome two major obstacles. First, it is difficult to predict which SMSEs will be successful, since the market is complex. Customer decision making is communal. There is little information or communication, for enterprises or customers. Distribution channels are long and costly. Business is risky. As a result, social enterprises need to spend time making partnerships, educating customers, refining their business model. Secondly, transaction costs for investors are high as the enterprises are small.

The linked document investigates these issues and proposes solutions. It also gives a number of project ideas for investors and grant funders, drawing upon detailed investigation in a town in Sri Lanka.