Determinants of the development of social enterprises in the lagging region of Warmia and Mazury

Olinski, Marian; Mioduszewski, Jarosław; Krištofík, Peter Article Determinants of the development of social enterprises in the lagging region of Warmia and Mazury Amfiteatru Economic Journal Provided in Cooperation with: The Bucharest University of Economic Studies Suggested Citation: Olinski, Marian; Mioduszewski, Jarosław; Krištofík, Peter (2024) : Determinants of the development of social enterprises in the lagging region of Warmia and Mazury, Amfiteatru Economic Journal, ISSN 2247-9104, The Bucharest University of Economic Studies, Bucharest, Vol. 26, Iss. 66, pp. 568-588, https://doi.org/10.24818/EA/2024/66/568 This Version is available at: https://hdl.handle.net/10419/300610 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ AE Determinants of the Development of Social Enterprises in the Lagging Region of Warmia and Mazury 568 Amfiteatru Economic DETERMINANTS OF THE DEVELOPMENT OF SOCIAL ENTERPRISES IN THE LAGGING REGION OF WARMIA AND MAZURY Marian Olinski1 * , Jarosław Mioduszewski2 and Peter Krištofík3 1)2) University of Warmia and Mazury in Olsztyn, Olsztyn, Poland. 3) Matej Bel University in Banská Bystrica, Banská Bystrica, Slovakia. Please cite this article as: Olinski, M., Mioduszewski, J. and Kristofik., P., 2024. Determinants of the Development of Social Enterprises in the Lagging Region of Warmia and Mazury. Amfiteatru Economic, 26(66), pp. 568-588. DOI: https://doi.org/10.24818/EA/2024/66/568 Article History Received: 12 November 2023 Revised: 10 February 2024 Accepted: 15 April 2024 Abstract Social enterprises in Europe are increasingly evolving into hybrid entities, simultaneously striving to attain both social and economic objectives. This transformation aligns them uniquely with the EU's Cohesion Policy, which seeks to reduce disparities and promote harmonious development across its regions. These hybrid enterprises can play a central role in this policy framework, particularly in regions marked by economic and social challenges. The main objective of the paper is to explore potential strategies to improve the performance of social enterprises operating in economically disadvantaged regions. The Warmia and Mazury region in Poland serves as a pertinent example in this context, marked by the highest unemployment rate in the nation alongside other notably weak economic indicators. These factors contribute to its designation as a “lagging region” by the European Union, thus making it a focal point for intervention under the Cohesion Policy. A key strategy suggested for regions facing these challenges involves fostering the growth of social enterprises, which are dedicated to addressing social issues through market-driven approaches. This study presents findings derived from a survey-based methodology. A comprehensive analysis was conducted on data sourced from 104 social enterprises in the Warmia and Mazury region, employing univariate descriptive statistical techniques. These techniques included the evaluation of frequency distributions, the calculation of percentages, means, standard deviations, and the application of nonparametric tests. The analysis provided insights that indicated that social enterprises that engaged in diversified business practices exhibited superior effectiveness compared to those with a narrower scope of activities. Furthermore, the perspectives of managers of these social enterprises were scrutinised, revealing a significant trend. The managers of diversified companies possessed a markedly optimistic outlook for future financial performance. However, it is important to note a critical limitation observed in the study – even the enterprises that * Corresponding author, Marian Olinski – e-mail: [email protected] This is an Open Access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. © 2023 The Author(s). Economic Interferences AE Vol. 26 • No. 66 • May 2024 569 demonstrated success within their local region faced challenges in replicating this success in other areas, suggesting a potential constraint in the scalability of their business models. Keywords: lagging region, social enterprise, diversification of activity. JEL Classification: L31, M10, O10. Introduction The European Union's Cohesion Policy has demonstrated greater efficiency in diminishing disparities at the inter-country level as compared to the intra-regional level (Ganau and Kilroy, 2022). Economic developers are progressively focussing on cultivating entrepreneurial communities as a strategy to stimulate growth in underperforming regions, owing to the prevalent anticipation that new businesses will contribute to local development (Goetz et al., 2010; Stephens and Partridge, 2011) and job creation (Shrestha, Goetz and Rupasingha, 2007; Mueller, van Stel and Storey, 2008). Establishing regional benefits, particularly in underdeveloped areas, presents significant challenges. There is a pronounced desire for knowledge and a highly skilled workforce to cluster in central areas. This uneven allocation of knowledge-intensive economic activities consistently exacerbates the disparity between prosperous and underdeveloped regions. Moreover, the absence of a substantial aggregation of enterprises and consequently employment opportunities, particularly in contexts of low diversity, leads to economic imbalances in these lagging regions (Asadi and Jafari-Samimi, 2023). Clearly, lag regions exhibit both economic and social problems. Poorly developed infrastructure and little purchasing power in the local community are accompanied by lack of education, and weak pro-entrepreneurial attitude. In Europe, social enterprises are recognised for their ability to foster inclusive growth and social cohesion, especially in regions that have not benefited equally from economic development (Defourny and Nyssens, 2017; Olmedo et al., 2019; Borzaga et al., 2020). The European Union has acknowledged its role in promoting social inclusion, job creation, and local development, particularly in areas struggling to recover from economic downturns (European Commission, 2016; Steiner and Teasdale, 2019; Slitine and Chabaud, 2023). In Poland, the backdrop for social enterprises is moulded by the nation's shift from a centrally planned economy to market-orientated one (Jokiel and Jokiel, 2021). This transition has created regions with varying levels of economic development, where lag areas are characterised by industrial decline and high unemployment. That is why social enterprises in Poland have been seen as instrumental in revitalising these regions by creating jobs, particularly for marginalised groups, and by offering services that address local needs (Frączak and Wygnański, 2008; Ciepielewska-Kowalik et al., 2021). Although social enterprises could be one of the elements counteracting negative characteristics in lagging regions, naturally, they will not eliminate all negative characteristics of lagging regions. But because they can help realise both economic and social goals, they could be an important aspect of a successful cohesion policy. However, social enterprises, just as private or state-owned 'purely commercial' companies, face many functional barriers in lagging regions. AE Determinants of the Development of Social Enterprises in the Lagging Region of Warmia and Mazury 570 Amfiteatru Economic Social enterprises represent a distinct segment within the entrepreneurial landscape, playing a particularly vital role in underdeveloped regions. These regions are not only characterised by reduced gross domestic product, but also grapple with low levels of social capital and heightened unemployment rates, conditions where the impact of social enterprises is especially significant. In particular, these regions may require a comparatively higher proportion of skilled workers to achieve sustainable economic growth (Betz and Partridge, 2013). The World Bank Report indicates that, compared to their counterparts in non -lagging regions, businesses in lagging regions are typically smaller, exhibit lower productivity, and generate fewer jobs. Furthermore, they tend to underperform across all these metrics (Farole, Goga and Ionescu-Heroiu, 2018). Thus, the question that dominates this paper is: How can social enterprises operating in these regions perform better and achieve better results? This research uniquely focusses on the specific context of a lag region with distinct economic challenges, assessing how social enterprises operate within such an environment. It offers new insights into the strategies that enable these companies to thrive despite high unemployment and economic lag. This phenomenon has not been thoroughly explored in the existing literature, especially in the context of Polish lag regions, creating a research gap in this area. More and more small businesses believe that they can profit from international markets (Griffin, 2021). Social enterprises are mainly microand small businesses, but their small size does not prevent them from operating outside the local environment. Contemporary technologies and the global integration of the economy facilitate the entry of such enterprises into national and international markets. However, within the intensely competitive current business landscape, small enterprises face a myriad of internal and external challenges (Liñán, Paul and Fayolle, 2020). This is equally true for social enterprises – the applicability of resource dependency theory (RDT) mirrors its relevance to 'purely commercial' enterprises. RDT posits that resources are vital for organisational success (Pfeffer and Salancik, 2003). At the same time, possession of the resources is not necessary, because access and control over them are sufficient. However, they should be properly connected to and used within the enterprise to achieve the goals set. For example, expanding beyond the regional market of the social enterprise or maximising income. Assuming that the dual nature of a social enterprise is a starting point, stakeholder theory (Freeman and Reed) has even wider applications for the areas described as lagging regions. A social enterprise benefits from more accessible resources, including public funding such as regional programmes. In exchange, it is expected to enhance the lives of marginalised individuals in the labour market and to stimulate the broader local economy. Regions that are behind typically exhibit low per capita output and limited levels of financial capital. The introduction or growth of social enterprises can improve these conditions and outcomes, especially if they expand their activities to wider national or international markets. Hypothesis H1 therefore states: H1: Social enterprises from Warmia and Mazury that sell on national and/or international markets achieve higher incomes than their counterparts operating only on local or regional markets. Contrary to replication strategies that adopt a supply-side viewpoint, diversification adopts a demand-side perspective, addressing customer needs by providing new products (Jha, Bhawe and Satish, 2021). Within a market economy, the primary motives for enterprises to pursue diversification strategies include bolstering competitiveness through varied Economic Interferences AE Vol. 26 • No. 66 • May 2024 571 operations and attaining economies of scale and scope, thereby increasing market influence. Additionally, they may aim to diversify risk (Le, 2019). Finance theory (Chang, 2005) and resource dependence theory (Wan et al., 2011) have been referenced in studies indicating that product diversification and operating in multiple markets can mitigate bankruptcy risk and aid in combating business failure (Ohlson, 1980; Gilbert, Menon and Schwartz, 1990; Guan, Tian and Deng, 2021). In addition, diversification of economic activity by social enterprises can be another solution to the problems of low market absorption in lagging regions and the limited purchasing power of a local community. Therefore, it is plausible that social enterprises which can be flexible in adjusting to various needs of social communities can diversify their income sources and increase their sales. Thus, hypothesis H2 states: H2: The level of income achieved by social enterprises in Warmia and Mazury is related to the diversification of their economic activity. The structure of the paper is as follows: first, the theoretical background is established. This involves defining the concepts of lagging region and of social enterprise, to show the common area of these two concepts. Second, scientifically supported hypotheses are developed. Then the research methodology is laid out, involving topics, time frames, and locations. The results allow for the verification of the hypotheses put forward in the paper and drawing of conclusions, including how this paper impacts the existing literature. 1. Theoretical background 1.1. Lagging regions The EU's underdeveloped regions face substantial obstacles in addressing their economic underperformance. The current continuous transitions, including the movement toward a sustainable society and the impacts of the COVID-19 pandemic, are intensifying these challenges (Pilati and Hunter, 2020). The Cohesion Policy categorises NUTS-2 regions using their GDP per capita as a benchmark. This classification system identifies three distinct categories: 'more developed' regions, which have a GDP per capita above 90% of the EU average; 'in transition' regions, with a GDP per capita ranging from 75% to 90% of the EU average; and 'less developed' regions, where the GDP per capita falls below 75% of the EU average (Ganau and Kilroy, 2022). The 'Catching Up Initiative' of the European Commission, initially known as the 'Lagging Regions Initiative', introduced a more detailed system for classifying regions. This initiative represented a significant step towards pinpointing specific areas in need of support through customised interventions and investments. Under this initiative, catchingup (or lagging) regions are classified into two categories: 1) Low-income regions are those with a GDP per capita in Purchasing Power Standards (PPS) that was less than 50% of the EU average in 2013. 2) Low-growth regions are defined as either less developed or transition regions, which means that their GDP per capita in PPS was below 90% of the EU average in 2013. Furthermore, these regions did not show convergence towards the EU average GDP per AE Determinants of the Development of Social Enterprises in the Lagging Region of Warmia and Mazury 572 Amfiteatru Economic capita between 2000 and 2013 and were located in member states with a PPS GDP per capita below the EU average in 2013 (Pilati and Hunter, 2020). Based on these criteria, 47 regions within the European Union are identified. Low-growth regions appear mostly in Greece, Italy, Spain, and Portugal, while low-income regions cluster in Bulgaria, Romania, Hungary, and Poland. In Poland these regions are located in the eastern part of the country and include the regions of Warmia and Mazury, Podlaskie, Lubelskie, Podkarpackie, and Świętokrzyskie. The 47 regions differ from others in having lower productivity, educational attainment and employment rates (Commission Staff Working Document, 2017). Consequently, weak economic indicators, such as low GDP per capita, sluggish growth, and inadequate infrastructure, are evidently correlated with unfavourable social indicators, including high unemployment rates and a lower level of social capital. Therefore, most researchers studying lagging regions characterise them using both economic and social indicators (Figure no. 1). Various economic activity measures and social progress indicators underline that underdeveloped regions can be categorised based on a variety of indicators. GDP continues to be a significant source of information, recognised for its reliability, stability, and strong correlation with other metrics, and is used in all definitions. However, although GDP serves as an effective general proxy, the application of different and/or supplementary indicators can offer a more detailed understanding of particular challenges. The selection of indicators is contingent on the objective of identifying a specific cohort of regions (Pilati and Hunter, 2020). For instance, characterisation of the rural lagging regions in the EU can be achieved by using indicators such as the national growth rate, the growth rate of non-agricultural employment, and others (Terluin, 2003). It is essential that the indicators used by specific authors are precise and measurable and that they use public statistics and other sources. For instance, the last definition presented in Figure 1 describes lagging regions with the use of various indicators such as entrepreneurship capital, human capital, and others. Those indicators are clearly specified. For example, entrepreneurship capital is quantified by the rate of new business establishments per 1,000 individuals aged 16 to 64 years. Human capital is assessed based on the proportion of the population aged 20-64 years that has more than three years of tertiary education (Ejdemo and Örtqvist, 2021). The criteria used to identify lag regions are important, as they demonstrate the various causal links between economic and social problems. A population with low purchasing power can restrict the growth of small businesses that sell in local markets due to low demand. A low level of social capital can lead to low levels of entrepreneurship and hence to high unemployment rates and low household incomes. It is clear that the problems of lag regions may be complex. Therefore, descriptions that employ only economic indicators may be simplistic. Economic Interferences AE Vol. 26 • No. 66 • May 2024 573 Figure no. 1. Defining elements of lag regions LAGGING REGION IS DEFINED BY: 1. elements that can incorporate the dynamism of the existing economic and social structure (Curbelo and Alburquerque, 1993); 2. different economic and social contexts (Benneworth and Charles, 2005); 3. discrepancies in economic and social metrics as compared to the national, EU, and other developed nations average levels (Constantin et al., 2011); 4. economic and geographical factors (such as limited access to communication and transportation infrastructure, and the economic and socio-political marginality of a region), alongside the nongeographical attributes of agents (for instance, low levels of human and social capital). (Heffner, 2012); 5. economic dimension (economic peripherality) and social dimension, regarded as civilisational backwardness (Korenik, 2012); 6. respectively synthetic indicators of economic and complex social level of development (Korec, 2014); 7. eleven basic indicators such as GDP, unemployment rate, educational attainment, social progress index and others (Commission Staff Working Document, 2017); 8. four economic metrics (count of businesses and employees, wage levels, and tourism) and four social metrics (urbanization rate, educational attainment, cultural factors, and healthcare quality). (Strat and Cristian, 2017); 9. variety of economic (e.g., GDP) and social (e.g., uneducated and/or unskilled population) indicators (Pilati and Hunter, 2020); 10. multiple discriminant function analysis (GDP per capita, entrepreneurship capital, human capital, and many others) (Ejdemo and Örtqvist, 2021). ECONOMIC ASPECT SOCIAL ASPECT AE Determinants of the Development of Social Enterprises in the Lagging Region of Warmia and Mazury 574 Amfiteatru Economic It is the same as with social enterprises. Highlighting the duality of the economic and social goals of such enterprises raises the question of how effective they can be in lagging regions. For example, a community that has limited output and hence income, will generally have low purchasing power, and, subsequently, will struggle to hire fully qualified personnel. This increases the risk that the quality of local output will be low and calls into question whether the needs of the community can be met. Lagging regions may face problems (imbalances) in both demand and supply. Consequently, in underprivileged areas, the frequency of new business formation is lesser compared to non-underprivileged areas. However, the unique attributes of social enterprises suggest that their capacity to positively impact regional development exceeds that of for-profit enterprises (Haugh, 2005). Of course, social enterprises will not solve all the socioeconomic problems that affect lag regions. However, they can be one of many factors that support the development of such regions by facilitating the process of reducing the gap between lagging regions and other regions. Although social enterprises can contribute significantly to the development of lagging regions by creating employment opportunities and providing essential services, it is important to recognise that they cannot achieve comprehensive development on their own. Ensuring sustainable and inclusive development requires a collaborative and multifaceted strategy that includes government policies, private sector investment, and active community participation. By working together, various stakeholders can leverage their strengths and resources to address the complex challenges facing lagging regions and create a more prosperous future. 1.2. Social enterprise The emergence and evolution of social enterprises have varied across regions around the world, but can be broadly categorised into two types: market and hybrid forms of social enterprise. The market form emerged in Africa and North America, while the hybrid form, which integrates the generation of economic and social value, manifested itself in Europe and Latin America (Poon, 2011). The basic difference between classic and social enterprises is that with the former both their economic and legal aspects are stressed, while to the latter a social aspect is added. The concept of a social enterprise merges the efficiency and resources characteristic of a conventional business model with the altruistic mission similar to that of a charity (Ramus and Vaccaro 2017). The predominant secondary social objective of social enterprises is to empower and assist individuals who are, for various reasons, marginalised from the labour market. This is evident in Chan's (2016) conceptualisation of a social enterprise as a conventional commercial entity that generates revenue through trading goods and services. However, it distinguishes itself by striving to create job opportunities for those facing persistent challenges in securing or maintaining employment. Cho and Jang (2014) share a similar perspective, portraying a social enterprise as an organisational model aimed at achieving both social and economic goals. This model focusses in particular on facilitating the integration of individuals into the labour market, thus fostering social cohesion. An illustrative overview of these definitions of a social enterprise is provided in Figure 2. Economic Interferences AE Vol. 26 • No. 66 • May 2024 575 Figure no. 2. Defining elements of a social enterprise The overviews of the definitions shown in Figures 1 and 2 are united by a common ontological foundation that encompasses both economic and social dimensions. 1. An array of entrepreneurial or 'self-financing' strategies employed by non-profit organizations to produce a portion of their own revenue in support of their mission (NESsT, 1997). 2. A method wherein individuals collaborate to utilize market-based ventures for the attainment of mutually determined social objectives (Talbot et al., 2002). 3. A business trading for a social purpose (SEUK, 2003). 4. A hybrid form that amalgamates the creation of economic and social value (Alter, 2003). 5. A business focused mainly on social objectives, where the majority of its surplus is reinvested into the business or the community, instead of being primarily motivated by maximizing profits for shareholders and owners (DTI, 2004). 6. Enterprises that produce revenue with the aim of achieving social, cultural, communal, economic, and/or environmental objectives (BC Centre for Social Enterprise, 2005). 7. A competitive business, owned and trading for a social purpose (SEL, 2007). 8. An organization or venture that promotes its social mission through enterprising strategies that generate income (SEA, 2007). 9. A non-profit venture that merges the zeal of a social mission with the discipline, innovation, and determination typically linked with for-profit businesses (NRA, 2012). 10. An organization that highly values its autonomy and is committed to taking economic risks in relation to continuous socioeconomic activities (ERS, 2013). SOCIAL ENTERPRISE IS DEFINED AS: ECONOMIC ASPECT SOCIAL ASPECT AE Determinants of the Development of Social Enterprises in the Lagging Region of Warmia and Mazury 582 Amfiteatru Economic adaptability. Encouraging companies to diversify could be a crucial strategy in helping them establish a stronger foothold in both local and broader markets. This approach not only fosters economic resilience but also enhances the enterprises' capacity to address diverse social challenges. Conclusions Social enterprises have emerged as significant players in the European socioeconomic landscape, particularly in addressing the challenges faced by lagging regions. These companies combine traditional business models with social objectives, often targeting areas that suffer from economic underdevelopment, high unemployment, and social exclusion. Social enterprises must be equipped with the right resources and personnel. Further help may be accessible through social-economy support centres that provide training through regional projects. Depending on the activities and flexibility of the system, social enterprises can adapt to evolving opportunities in local and regional markets. It is important that social enterprises are recognisable in local environments, so that their customers know that their own purchasing decisions help achieve specific social objectives. That helps to make social enterprises effective growth generators in lagging regions. The role of social enterprises in regions such as Warmia and Mazury cannot be overstated, as they can contribute significantly to reducing regional disparities. The conclusions of the study emphasise the importance of long-term support and flexibility in the approach to social entrepreneurship. Taking into account the dynamics of changing economic and social conditions, it is crucial to continuously monitor and adjust support strategies, enabling these enterprises to fully utilise their potential in stimulating local and regional development. The study has limitations. First, it covers only one lag region. More research needs to cover more regions and, most importantly, more European Union countries. 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