The Role of Regulation in the Development and Internationalization of Social Firms

Citation: Montoya, M.A.; Cervantes, M. The Role of Regulation in the Development and Internationalization of Social Firms. Sustainability 2022,14, 7047. https://doi.org/10.3390/ su14127047 Academic Editors: Yingying Zhang-Zhang and Jay Rajasekera Received: 25 January 2022 Accepted: 2 June 2022 Published: 9 June 2022 Publisher’s Note: MDPI stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. Copyright: © 2022 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/). sustainability Article The Role of Regulation in the Development and Internationalization of Social Firms Miguel A. Montoya 1,* and Mauricio Cervantes 2 1Instituto del Futuro de la Educación, Tecnologico de Monterrey, Monterrey 64700, Mexico 2Escuela de Negocios, Tecnologico de Monterrey, Monterrey 64700, Mexico; [email protected] *Correspondence: [email protected]; Tel.: +52-33-3669-3000 Abstract: We seek to understand the drivers of the internationalization of emerging-market social firms. To accomplish this, we conducted a case study analysis of the Mexican multinational Farmacias Similares. The firm created a chain of pharmacies that sold generic medicines to poor consumers and included a low-cost doctor next to the pharmacy to address the lack of widespread medical insurance. It then became a multinational by expanding in Latin America. The analysis of the case reveals three insights. First, innovations addressing development challenges can be separated into two types, social and frugal, depending on whether they solve public-good or low-income problems. Second, changes in industry regulation facilitate the development of social firms and sustainable development within the country. Third, differences in regulations across countries constrain the internationalization of social innovations more than frugal innovations of emerging-market social firms. Keywords: sustainable development; social innovation; frugal innovation; emerging market; internationalization 1. Introduction Emerging economies provide a fertile ground for developing innovations that have a high social impact by helping the large proportion of the population with a low income have a better life. These innovations have been studied under a variety of terms, such as innovations for the base of the pyramid [ 1 ], frugal innovation [ 2 ], or catalytic innovation [ 3 ], among others. What these innovations have in common is their focus on addressing the needs of poor consumers in emerging economies who suffer from their country’s underdevelopment [ 4 ]. However, these innovations are not confined to the country in which they have been created. Some of these can be taken abroad to serve the needs of poor consumers in other emerging countries, and some of them may be even transferred to advanced economies to serve the desire for lower-cost products there, becoming reverse innovations [5]. The internationalization of these innovations has been done in several ways. One is the imitation of the innovations by other organizations abroad, which take the original social innovations and adapt them to the conditions of the local context [ 6 ]. Thus, for example, microfinance, which was developed in Bangladesh, has generated a plethora of imitators throughout the world, including both not-for-profit organizations, new, for-profit firms, and even established financial institutions [ 7 , 8 ]. Another example is the development of social innovations by established multinationals who transfer them across operations using their established network of subsidiaries [ 1 , 5 ]. A third one is the expansion of not-for-profit and multilateral organizations that promote the transfer of social innovations across the world and are not concerned with being able to recover the costs of operation since donors fund them [9,10]. However, less attention has been paid to the internationalization of the organizations that have developed the social innovations [ 11 ], with some exceptions [ 12 ]. This internationalization of for-profit social organizations from emerging markets is interesting for two Sustainability 2022,14, 7047. https://doi.org/10.3390/su14127047 https://www.mdpi.com/journal/sustainability Sustainability 2022,14, 7047 2 of 21 reasons. One is that there is limited research on the topic. Another, and a more important one, is that it challenges some of the assumptions of existing models of internationalization; these are reviewed in Rugman [ 13 ]. Social, for-profit firms straddle a challenging balance between having to make a profit to continue funding operations and expansions (unlike not-for-profit organizations that rely on donors to cover costs) and providing products that address social needs that suffer from market imperfections (unlike most firms that focus on private needs for which there is a clear market) [ 11 , 14 ]. This balance is challenging, given the large differences between goals and measures of success [ 15 ], and has resulted in the criticism of for-profit social enterprises [16]. Hence, to better understand the process by which for-profit social firms internationalize, we carry out a case study analysis. We investigate how the Mexican firm Farmacias Similares evolved its business models over twenty years (1996–2016) and internationalized into five countries. The company evolved from selling medicines to government hospitals, to creating a chain of pharmacies selling generic medicines to poor consumers, to including a low-cost doctor consultancy next to the pharmacy to address the lack of widespread medical insurance and the long queues at state-run hospitals. These social innovations were then taken to other countries in Latin America, but with varied success in their transfer. The analysis of this case highlights the role that regulations play in the development and internationalization of social firms, and supports three ideas. First, we propose separating innovations that address development challenges into two types, social and frugal, depending on whether they provide solutions to public-good or low-income problems. Second, we explain how changes in industry regulations facilitate the development of social firms within the country. Third, we explain how differences in regulations across countries constrain the internationalization of social innovations more than frugal innovations of emerging-market social firms. These three ideas contribute to a better understanding of two streams of research: the topic of social organizations and their internationalization, and the theory and models of the multinational. First, on the topic of social organizations [ 17 ], we clarify their types and especially their internationalization processes, which have received limited attention [ 11 ]. Separating innovations for the poor into the categories of frugal and social is important because they have been confused in much of the literature, despite having very different drivers. Frugal innovations address the challenge of customers’ low income, while social innovations address the challenge of a lack of provision of public goods by the government. Their development and especially their internationalization differ significantly as a result of the role of regulations. Industry regulations constrain the internationalization of social organizations because of the large differences in the effectiveness of governments and political systems across countries. In contrast, frugal innovations are less influenced by regulations because the driver is the existence of large segments of low-income consumers. Second, to the theory of the multinational, the study highlights the importance of regulations and their differences across countries as a key determinant of a firm’s ability to internationalize. Much of the work analyzing the challenges of internationalization [ 18 , 19 ] has highlighted differences across cultures, as conducted by Kogut and Singh [ 20 ] and reviewed by Tihanyi et al. [ 21 ], and institutions, as conducted by Khanna and Palepu in 2010, and reviewed by Doh et al. [ 22 ]. Surprisingly, differences in regulations have been littlestudied, even though they were acknowledged early on in the literature [ 23 ]. One reason may be that most internationalization studies use multi-industry databases of companies, which prevents them from obtaining a fine-grained understanding of the industry’s context. Thus, we highlight the importance of single-industry studies as a source of insights and suggest that future studies can go beyond the general concept of institutions [ 24 ] and analyze in more detail the role of industry regulations [ 25 – 27 ] on firms’ internationalization. Some of the challenges that companies face across countries attributed to institutions, such as the liability of foreignness [ 19 ], could simply be industry regulations. Moreover, the study also helps understand the theory of multinationals better by studying companies Sustainability 2022,14, 7047 3 of 21 that have social objectives and thus face tensions in balancing social and financial goals. This line of research provides a novel contribution to our understanding of differences across companies in their internationalization objectives, as is already happening with studies of state-owned multinationals, such as that described in the review by CuervoCazurra et al. [ 28 ]. The study of companies that have social objectives adds a more nuanced understanding of the role that these objectives play in the internalization of companies, contributing to a better analysis of the multinational. The ideas developed in the paper are also useful for decision makers. We provide a better understanding of an essential difference in the business model of companies that create innovations that address the needs of poor people in emerging economies. For companies focused on frugal innovations and addressing the challenge of low income, the paper highlights the relative ease with which these companies can internationalize and take their products to other countries. At the same time, it questions the ease by which competitors in other countries can imitate the company’s products. In contrast, for companies focused on social innovations that solve the lack of provision of public goods in emerging economies, the paper explains the additional challenge that regulations in other countries can have on their foreign expansion, while limiting competitors’ ability to imitate their business model. For policymakers, the paper shows the importance of analyzing the impact that regulations can have on the development of innovations by the private sector that address the limitations of the public sector. Thus, rather than carving out areas of exclusive activity for the public sector, policymakers may be encouraged to develop sensible regulations that allow foreign, private companies to step in and provide goods and services that have a high social impact in the country, ameliorating the harm of poverty and promoting sustainable development. 2. Theoretical Framework Emerging markets have become a fruitful area for analyzing how companies can develop innovations that address the needs of poor people there. Although there are poor people in every country, the proportion of people that have very low income and, in some cases, do not have enough to achieve a healthy and productive life is much higher in emerging economies [ 29 ]. This segment of the population, popularly known as the base of the pyramid [ 30 ], can be a market for multinational companies from advanced economies if the firms create innovations in production and distribution that enable the products to be sold at very low prices while still generating a profit [ 1 , 31 ]. Some examples are the Tata Nano car, the Bharti Airtel telephone service, the wireless computer mouse M215, and BYD lithium-ion batteries, among others [32,33]. These innovations that serve the needs of poor people in emerging economies have generated a plethora of terms. These include: (a) grassroots innovations in developing countries [ 34 ]; (b) catalytic innovations provoking transformative change [ 3 ]; (c) reverse innovation leveraging frugal insights for more sophisticated applications [ 35 ]; and (d) frugal engineering by multinational corporations [ 2 ]. To address the diversity of approaches, Zeschky et al. [ 33 ] proposed a classification of terms into three types: (a) cost innovation, or cost-reduction efforts, (b) good-enough innovation, or the reduction of functionalities, and (c) frugal innovation, or innovations designed to meet the needs of the lower-income population. Despite the growth in the literature, as seen in the studies in the special issues edited by Christensen et al. [ 36 ] and by Subramaniam et al. [ 37 ], there is still scope for analysis. One reason is that some of the innovations that have been presented as addressing the needs of poor people have been criticized as not fulfilling those needs, but rather serving the needs of the middle classes of emerging countries [ 38 ]. Even some of the innovations have been critiqued as not helping, but rather harming the poor [ 39 ]. Another reason is that the internationalization of the innovations is not a given, despite the potential for helping the poor population of the world, since some of these innovations are presented as Sustainability 2022,14, 7047 4 of 21 being country-specific, such as “Gandhian” and “Jugaad” innovation in India [ 32 , 39 ] and “Shanzai” innovation in China [40]. Surprisingly, for a topic of such importance, there have been few studies that analyze the internationalization of companies whose business model is based on innovations that address the needs of the poor [ 11 ]. We do have some examples of frugal innovations that have been applied in a variety of countries, as was, for example, the case of microfinancing that started in Bangladesh [ 7 ] and spread globally [ 41 ]. We also have cases of innovations created by advanced-economy multinationals in developing countries to address the low income of consumers there that have ended up being sold in advanced economies, and have therefore been termed reverse innovations [5]. However, it is not fully clear whether the companies that create the innovations for the poor can build a profitable organization on a global scale. In many cases, innovations have diffused across countries with the competitors emerging and copying the business model and adapting it to the conditions of the local country, in the traditional diffusion of innovations [ 6 ]. Moreover, some of the internationalization efforts of firms that create innovations for poor people have been criticized as not working well in advanced economies [ 42 ]. Additionally, many organizations that create business models based on innovations for the poor are structured as not-for-profit organizations. These have the advantage of being able to rely on support from donors to fund both their business model and internationalization. Internationalization is a very costly strategic activity that requires large amounts of information and capital to invest in other countries and operate successfully [ 19 , 43 ], and multinationals tend to have higher levels of debt ratios as a result [44,45]. Thus, analyzing the internalization of for-profit firms with business models that address the needs of poor people in emerging economies can serve as a laboratory for challenging some of the assumptions of existing theoretical models of the multinational, and contribute to a better understanding of internationalization. Hence, we conducted a case study analysis to provide a better understanding of the development of innovations for the poor, and the internationalization of the firms that create these innovations. The use of cases is in line with other studies that have analyzed innovations for the poor, but it goes beyond them because our focus is not on the frugal innovation per se, such as in the cases discussed in Govindarajan & Ramamurti [ 5 ] and Prahalad [ 1 ], but rather on the firm that creates the innovation. 3. Research Design We selected the Mexican pharmaceutical multinational Farmacias Similares to analyze the development and internationalization of firms that create innovations for the poor. Farmacias Similares, a privately held Mexican company, started operations in 1997 as a spin-off from Best Laboratories, selling generic medicines in pharmacies located in lowincome neighborhoods in Guadalajara, Jalisco. The company was the first to introduce the pharmacy–doctor business model in Mexico. The pharmacy–doctor business model combines a pharmacy with a low-cost medical doctor’s office adjacent to, but physically separated from, it. The doctor provides consultations at very low prices and writes down the prescriptions. Patients can take the prescription to the pharmacy and buy the generic medicines at a low cost. Local competitors imitated this model and sometimes used it to serve high-income consumers. The model was then used by the company in its internationalization, but with a varying degree of success across countries. Appendix A provides some background information on the healthcare industry in Mexico to help understand the context of the firm and its innovations. To have a complete picture of the firm, we used various data-collection techniques and sources. We first collected all available secondary data from web pages, company reports, and newspapers to create the basis of the case study and understand the company. We then complemented this with primary sources. We used participant observation and visited fifty pharmacies in Mexico, Peru, and Chile to understand the business model and how it changed across countries. We ran a survey of ten pharmacies during 2011 to Sustainability 2022,14, 7047 5 of 21 understand why consumers chose them. We completed the research in the urban area in Mexico’s Guadalajara, with a sample of 52 respondents, with ages ranging from 16 to 60 . We focused our research in the city of Guadalajara because this urban area is an ideal place to carry out market research or test new products or services before targeting the whole national market [ 46 ]. Guadalajara is the second-most populous municipality in Mexico, with slightly under five million people within the metropolitan area [ 47 ]. In this city, GDP per capita and economic behavior reflect the national average, and social stratification is also very close to the national average. Among the people interviewed, 32% were residents in low-income neighborhoods, 40% lived in middle-income areas, and 28% lived in highincome neighborhoods. The average age of the respondents was 27.8 years, and 69% of the sample were women. Finally, we conducted in-depth interviews with the founder and managers of the Farmacias Similares. We interviewed Maria del C. Villafaña, Director of Medical Services of Fundación Best on 5 August 2015, in Mexico City; Vicente Monroy, Communication Director of Grupo Por Un País Mejor on 25 September 2017 in Guadalajara; Moises Sanchez, Communication Manager of Grupo Por Un País Mejor on 9 January 2018 over the phone; and Moises Sanchez, Communication Manager of Grupo Por Un País Mejor on 8 February 2018 in Mexico City. Fundación Best and Grupo Por Un País Mejor are the foundation and holding companies that control Farmacias Similares, respectively. We followed the recommendations of Eisenhardt [ 48 ] and Yin [ 49 ] for the analysis of case studies. In general terms, both scholars prescribe an in-depth knowledge of the immediate and broader environment, while considering changes in uncontrollable factors. We analyzed our results along their guidelines, and we contrasted those findings with received theories. We followed four stages to understand the process by which the firm was created and internationalized. Stage 1. Identification of the innovation. We did a literature search on innovations for the poor in emerging economies to better understand the phenomenon, and we identified the pharmacy–doctor business model as a potential candidate to analyze this phenomenon. We then sought secondary information on the company and conducted interviews to understand how the firm came up with the innovation. This became the basis for the case in which we identified the process by which the firm created the social innovation. Table 1summarizes the main events of the company. Stage 2. Identification of the internationalization process. As we studied the firm’s transformation, we identified the diffusion of the innovation in three areas: within the firm, across competitors, and across countries. In this paper, we concentrate on the first and last one. Thus, we analyzed the development and transformation of the business model by studying the evolution of the firm and its subsequent internationalization by analyzing its foreign operations, both the successful and unsuccessful ones. Stage 3. Identification of the influence of regulations on internationalization. The analysis of the differences between the original innovation and the subsequent implementation in other countries became the basis for the analysis of the challenges posed by regulations. We considered other influences that are commonly discussed in the literature (geographic distance, culture, religion, currency, etc.), and we found many to have the usual effect. However, we identified regulations as an influence that appeared to have a high impact on the development and internationalization of the firm and its innovation and one that had been little discussed. Hence, we analyzed in more detail the influence of regulations and how they affected the firm across countries. Stage 4. Theoretical development. We ran an interactive process between the empirical findings and the theory to understand the processes and how these contributed to theoretical development. This was aided by the organization of information in chronological order and the analysis of changes in the innovation, firm, competitors, industry regulations, government provision of healthcare, and differences in actions across countries. This interactive process led to the development of the insights we present now. Sustainability 2022,14, 7047 6 of 21 Table 1. Main events at Farmacias Similares. Year In Mexico Abroad 1997 Foundation of Farmacias Similares. One pilot pharmacy store 1998 Change in law allows the sale of generics directly to consumers. Two pharmacy stores 1999 Pharmacy store number 100. Two hundred twenty medical doctors 2000 Two million medical consultations annually 2001 Seven million medical consultations annually 2002 Pharmacy store number 500 2003 Pharmacy store number 1000 Guatemala: Farmacias Similares opens 2004 Twenty million medical consultations annually Argentina: Farmacias Similares opens 2005 Pharmacy store number 2000. Four thousand medical doctors Chile: Farmacias Similares opens 2006 Thirty million medical consultations annually Guatemala: 100 pharmacy stores, 40% with medical doctor 2007 Pharmacy store number 3000 Argentina: 45 pharmacy stores, 100% with medical doctor 2008 Six thousand medical doctors Argentina: Farmacias Similares closes operations 2009 Forty million medical consultations annually Chile: 100 pharmacy stores, 5% with medical doctor 2010 Fifty million medical consultations annually 2011 Pharmacy store number 4000 Chile: 150 pharmacy stores, 5% with medical doctor 2012 Sixty million medical consultations annually 2013 Eight thousand medical doctors Guatemala: 87 pharmacy stores, 62% with medical doctor 2014 Pharmacy store number 5000 Peru: Farmacias Similares opens 2015 Nine thousand medical doctors. Chile: 200 pharmacy stores, 5% with medical doctor 2016 Eighty million medical consultations annually Peru: 3 pharmacy stores, 33% with medical doctor 2017 Pharmacy store number 6000. Eleven thousand medical doctors Guatemala: 85 pharmacy stores, 100% with medical doctor; 700 thousand medical consultations annually Sources: [50–52] and personal interview with the author on 8 February 2018. 4. Results The case analysis reveals three insights into social firms and their internationalization. First, the distinction between frugal and social innovations. Second, the importance of regulations and changes in regulations as a driver of frugal and social innovations. Third, the different impact of regulations on the internationalization of frugal and social innovations. Sustainability 2022,14, 7047 7 of 21 4.1. Frugal and Social Innovations 4.1.1. Innovations for the Poor by Farmacias Similares Farmacias Similares was created in 1997 by Victor González Gutierrez. Victor was a member of the family who owned Laboratorios Best. Laboratorios Best was founded in 1953 by Roberto Gonzalez Teran, Victor’s father, and produced generic drugs for state-owned health institutions in Mexico, especially IMSS, ISSSTE, Ferrocarriles Nacionales Mexicanos (National Mexican Railways), Secretaria de Marina (Marine Secretary), and Secretaria de Salud (Health Secretary). The relationship with the government was profitable and stable, but at the cost of having a single client, fierce competition, and low profit margins. Laboratorios Best expanded its production capacity and opened new factories to serve the needs of a growing population and produce a wider variety of medicines. In 1976, Victor became the firm’s CEO, and in 1978 the company received a quality award from IMSS. In late 1997, a regulatory change altered the business model’s viability. The new regulations allowed the distribution of generic prescription drugs directly to consumers under the name of their active ingredient. The cost differential between a generic drug and a branded one was very large, while the difference in quality was small [ 53 ]. At the same time, Laboratorios Best lost the contract with the state-owned sector. Thus, Laboratorios Best tried to sell generic drugs through private pharmacy chains. However, due to a widespread campaign to discredit generic medicines run by pharmaceutical firms, pharmacy chains in Mexico refused to sell its products, depriving Best Laboratories of a distribution channel. Without a channel to sell its products, Victor opted to create a new pharmaceutical chain that, unlike others, would specialize in the sale of generic prescription drugs and not carry branded drugs. Since generic medicines were little known and, in some cases, viewed with suspicion, the company started a campaign aimed at the poorest segments of society, using a motley and cartoons to communicate the attributes of their products. Farmacias Similares started with one pilot pharmacy store in 1997. It opened the second one in 1998, once the operational testing of the first pharmacy was successful. By 1999, it had reached 144 outlets. The company’s objective was to serve the needs of poor people. It located the pharmacies in the neighborhoods where the C and D income segments of the population lived, selling generic medicines that were much cheaper than branded ones. Since most poor people lacked access to medical services, as they worked in the informal sector and there was no social security (it was not until 2003 that public insurance covering poor people was offered), the pharmacies were modified to have a doctor next door. The Farmacias Similares model comprises a small medical clinic and a pharmacy (divided by a thin wall), where clients visit the doctor for a nominal fee (no more than two dollars) and are given a prescription if they need medicine. Patients purchase the low-cost generic drugs they need at the next-door pharmacy if they choose to do so (the prescription is valid in any pharmacy). This medical service is available for over 12 h daily , and in some pharmacies the doctor and pharmacy are 24/7 services. The new model offered an enticing proposal for customers, due to the convenient location of the point of sale, the low-cost medical services, and the lack of requirements for an appointment, along with the availability of generic drugs at affordable prices. In an interview with a state-run medical-service user in the city of Guadalajara, the respondent stated that . . . ”even with an advance appointment, the waiting time for a consultation is about three hours”. The respondent further stated that visiting the doctor with no appointment involved an average wait of more than five hours, despite the average consultation not exceeding ten minutes. Finally, the respondent claimed that “in most cases, four out of five, the drug is not free”. Doctors who worked in the Farmacias Similares outlets saw this new concept as a useful way to gain experience after graduation. The incentives were significant, as Dr. Villafaña (Medical Services Director at Farmacias Similares) explained in a personal interview: “there are thousands of doctors who are not working with Farmacias Similares. Universities tell us that we have become a source of employment for their graduates or even a second job for doctors working with public medical institutions”. Farmacias Similares provided opportunities for young Sustainability 2022,14, 7047 8 of 21 physicians and extra income to complement meager salaries for those more experienced who worked at IMSS. 4.1.2. Frugal and Social Innovations Farmacias Similares focused on the needs of the large, underserved population of Mexico by creating a new type of pharmacy that combined the sale of generic medicines with a medical doctor next to it to facilitate diagnosis and prescription. This new business model linked two different types of innovations: frugal and social innovation. Although similar in the sense that they address the needs of poor people in emerging economies, they have different drivers and implications. To clarify their distinction, in Table 2we provide a classification of innovations by level of positive externalities and type of customer. By the level of externalities, we separate between innovations that have high levels of positive externalities, i.e., social innovations, and innovations that have low levels of externalities, i.e., private innovations. By the type of customer, we separate between those that are targeting high-income customers, i.e., lavish innovations, and those that are targeting low-income customers, i.e., frugal innovations. Table 2. Types of innovation by level of positive externalities and customer type. Type of Customer Middle and high income (lavish innovation) Low income (frugal innovation) Level of positive externalities High (social innovation) Lavish social innovations Frugal social innovations Low (private innovation) Lavish private innovations Frugal private innovations Source: Authors. Frugal innovations are innovations designed to address the low income of poor people in emerging economies. The literature on innovations for the base of the pyramid started by Prahalad [ 1 ] has highlighted how companies can be creative in their design and production process to generate new products and services sold at very low prices, but still provide the firm with a profit margin. Some of these innovations can be a simple rethinking of the packaging and distribution, for example, by selling products in smaller quantities (e.g., shampoo sachets, individual pills, smaller bottles, etc.). Others can be more sophisticated, involving the redesigning of the product so that it costs less to produce and operate (e.g., Tata Nano car, the battery-operated Chotukool fridge, etc.). In all cases, innovations are sold to address the needs of poor people who cannot purchase high-cost items. Nevertheless, they tend to pay a poverty premium [ 54 ], i.e., the difference between what poor and middle-income households pay for the same goods because of inefficiencies in distribution or inability to purchase in bulk. In the case of Farmacias Similares, the frugal innovation came in the guise of the sale of generic medicines instead of brand name ones. This enabled poor people to access quality medicines instead of having to rely on traditional (and in many cases unreliable) homeopathic medicine or pay the high prices of branded medicines. The company was able to achieve this innovation because it already had experience in producing generic pharmaceuticals. However, it had no experience in distributing those pharmaceuticals as it had only one customer, the Mexican government and its agencies. Thus, in addition to selling generic medicines, the other dimension of the frugal innovation was creating a chain of pharmacies located in the poor neighborhoods, which were underserved by traditional pharmacy chains, and developing a marketing campaign to make generic medicines acceptable. In a move that was unique at the time, the company created a mascot, Dr. Simi, that proved crucial in differentiating the company and building trust with the customers. In sum, one type of innovation that companies create to address the needs of poor people in emerging economies is frugal innovations, which are focused on creating products Sustainability 2022,14, 7047 9 of 21 and services that can be sold profitably to customers that have very low levels of income. We summarize these ideas in the following propositions: Proposition 1a. Frugal innovations are innovations created to address the needs of poor people in emerging economies and thus are designed to be sold at low prices. Proposition 1b. Companies that build business models based on frugal innovations focus on serving the needs of low-income consumers and delivering products and services at a low cost. In contrast, social innovations are innovations created to have high positive externalities in society. The challenge that these innovations face is that goods with positive spillovers may not be profitable enough to be sold by firms. The reason is, as a result of contractual imperfections, companies may be unable to fully capture the benefits from the positive spillovers they create, while they have to incur the costs [ 55 ]. In many cases, social goods, or goods and services that have high positive externalities in society, tend to be provided or subsidized by the government, with the logic that private investors will underinvest in the provision of such goods and services [ 25 ]. Typical examples of these social goods are education, healthcare, and infrastructure. In these cases, the country benefits from the provision of such goods. More-educated individuals are more productive in their jobs and make better-informed decisions for themselves, their families, and society [ 56 ]. Healthier individuals can be more productive in their jobs, are less likely to spread diseases, and require less external care [ 57 ]. Furthermore, supportive infrastructure in the form of hard infrastructure (e.g., roads, airports, ports, etc.) [ 58 ] and soft infrastructure (e.g., rules, regulations, judicial system, etc.) [ 59 ] helps individuals achieve higher levels of productivity, as they can interact and collaborate with others more efficiently and effectively. Unfortunately, in many emerging countries, governments cannot provide the social goods or the money necessary to fund the provision. The capacity of the state in many emerging countries is very limited [ 60 , 61 ], in part because of the misuse by politicians of state funds and the resulting underinvestment, and, in part, because the low salaries undermine the ability to hire qualified employees. As a result, in emerging economies, international organizations such as the United Nations or the World Bank or not-for-profit organizations and charities tend to subsidize their provision, creating schools and hospitals for the masses and funding them from donations received from philanthropists. However, the provision of public goods does not have to be limited to governments and not-for-profits. They can be provided by for-profit companies that build a business model that helps address the social needs while enabling the achievement of a profit that sustains the company and the continued provision of the services. In the case of Farmacias Similares, its creation of a pharmacy–doctor model was the social innovation that addressed the lack of medical services for most of the Mexican population. At the same time, since the doctors were located next to the pharmacies and these were in the poorest areas of the cities, the pharmacy–doctor model addressed the underprovision by the government, as well as improved the distribution of healthcare via its location in areas underserved by doctors. In sum, another type of innovation that companies develop in emerging economies is social innovations, which have a high impact on society via positive externalities and that substitute for the lack of the government provision of public goods. We summarize these ideas in the following propositions: Proposition 1c. Social innovations are innovations created to address the underprovision of public goods by the government and thus are designed to have high positive externalities in society. Proposition 1d. Companies that build business models based on social innovations focus on serving the needs of consumers who are not served or underserved in the government’s provision of public goods. Sustainability 2022,14, 7047 16 of 21 this concept was highlighted in recent studies that demonstrated the idea that firms that are exposed to relationships with the government at home because they operate in regulated industries are better adept at entering countries with high government discretion on the economy [ 77 ], or that companies with countries with higher political risk are better adept at operating in other countries with high political risk [ 78 ]. However, again, these studies include a variety of industries and do not go into detail in the influence of regulation. This focus on regulation is important because it not only helps to better understand the models of the multinational, but it also provides a better understanding of the internationalization of social organizations. Social innovations have diffused around the world, as is commonly the case of any innovation that gets diffused as competitors imitate the business model of the innovator [ 6 ], even across countries [ 79 ]. However, the internationalization of the specific firms that create social innovations has received less attention [ 11 ]. This is partly because they tend to focus on their home country and rarely internationalize. It is also partly because many of them are not-for-profit organizations, which limits their ability to expand across borders because they do not have the funds or mandate to address the social needs abroad. In contrast, firms with social innovations have both the incentive and ability to expand across borders because the innovation in the business model developed in the home country can find a ready market in other countries with similar conditions. However, their internationalization, unlike traditional nonsocial firms, is more constrained. The social aspect of the innovation tends to be addressing the particular needs of a segment of the population that is currently not served or underserved by the government because it does not invest in the provision of public goods. Much of this underserving is driven by regulations that limit the ability of the private sector to invest by excluding it from certain activities (e.g., infrastructure until the emergence of private–public partnerships), or that limit the incentives of the private sector from finding innovations to address the problem (e.g., caps on interest rates reduce the financial model of microlending firms). Thus, it requires more creativity on the company’s part to develop a new business model that addresses this underserved market in the home country. This, at the same time, limits the ability to serve customers in other countries, as the underprovision of public goods differs. Hence, we summarize these ideas in the following proposition: Proposition 3a. Frugal innovations can be more successfully used in other countries that have similar conditions to the home country in both the level of poverty of citizens and the underprovision of public goods by the government. Social innovations are more difficult to adapt to local conditions than traditional innovations because social innovations are driven by particular conditions of public goods’ underprovision rather than by technological advances. Regulation appears to have a more significant impact on the ability of firms to transfer innovations when innovation is a higher social component rather than when it has a higher frugal component. The reason is that social innovations are highly dependent on the ability of the company to substitute for the lack of government investments in public goods. As a result, these areas tend to receive closer attention by the government. Even if the government is unable to invest, international organizations, not-for-profit organizations, and those harmed by the lack of investment will pressure it. This was, for example, the case of the regulation of the location of the pharmacies in some of the countries in which Farmacias Similares entered. In contrast, the areas that are subject to frugal innovations are less likely to be highly regulated by the government because they are more dependent on the challenge of the low income of consumers rather than on the underprovision of public goods. Thus, although the government may face pressure to try to remedy extreme poverty, this is likely to be addressed via transfer systems rather than regulation, with the government providing assistance or conditional cash transfers to poor people [80]. In sum, regulatory challenges that limit internationalization are more likely to affect social innovations rather than frugal innovations, because the incentive of the government Sustainability 2022,14, 7047 17 of 21 to regulate the social area is higher than in the frugal area. We summarize these ideas in the following proposition: Proposition 3b. Regulation has a higher impact on the internationalization of social than frugal innovations. 5. Discussion We sought to understand the process of development and internationalization of social firms, studying the case of Farmacias Similares. Although the large literature in international business has analyzed the internationalization of companies [ 13 ], there is a limited understanding of the particularities of social companies during internationalization [ 11 ] because such organizations are less likely to internationalize, as many are focused on the local market and are not-for-profits. However, some companies have been created with a social mandate, and a few of them have become multinationals, facing particular challenges that the social nature of the business model creates. The case of the Mexican company Farmacias Similares, which created a new business model by integrating a pharmacy that sells generic medicines with the doctor next door that can serve customers at a low price, served to gain insights on the topic. This case study reveals the importance of regulation in the development of social innovations and on the internationalization of companies with business models based on social innovations. Specifically, the study reveals three insights. First, in the innovations developed to address the needs of poor people, there is an important distinction between frugal innovations that address their low levels of income, and social innovations that address the underprovision of public goods by the government. These two tend to go together in many cases because people in emerging economies suffer from both. However, they are theoretically and empirically different, and their study requires separate analyses. Second, regulation plays a role in the development and transformation of social innovations by providing the market needs that the social innovation covers. Since social innovations address the lack of provision of public goods, government regulation plays an important role, as a government may decide to exclude private companies from areas even if it is not providing public goods at an adequate level for the country. Social innovations can benefit from the lack of an explicit regulatory exclusion but are subject to challenge in their ability to continue serving the market once new regulations are put in place. In contrast, frugal innovations are less influenced by regulations. Third, regulation plays a large role in the internationalization of social firms, since regulations can challenge the basis of the business model in other countries. In contrast to traditional innovations, the internalization of social organizations is limited, given that the underlying basis for their business model tends to be constrained to the particularities of customers in certain industries and certain countries. The ideas presented in this paper contribute to two streams of research. First, to the topic of the internalization of social organizations, the paper explains some of the challenges that these companies have in their ability to transfer the business model to other countries due to the regulation there. The paper provides new insights on the internalization of social firms [ 11 ]. Much of the scant research on the internationalization of social organizations has been based on the internalization of not-for-profit organizations [ 7 ], with some exceptions [ 12 ]. Unlike these cases, social firms will not only enter other countries in which there is a business opportunity, but also exit those countries when the business model does not allow them to achieve the desired profitability. This points out the traditional tension between profits and the achievement of social goals [ 15 ], which in the case of for-profit organizations is resolved in favor of profits. The paper also reveals the importance of looking at regulatory conditions in other countries and the role of the government there in the analysis of the internalization of social organizations. Much of the literature focuses on whether there is a social need in other countries [ 30 ], and rarely looks at the condition of regulation to understand whether the business model can be Sustainability 2022,14, 7047 18 of 21 transferred and applied to the host economy. We highlight the importance of regulation and the different role it plays in the internalization of frugal and social innovations. Future research can take the insights identified in this paper and test them with a large sample, modifying the arguments to the particularities of their sample. Second, the paper contributes to a better understanding of international business theory and the internalization process. The contribution is not only the study of a type of company that has been scarcely studied, social companies, but more importantly, the identification of the importance of regulation on internationalization. Although regulation has been discussed as a driver of the internalization of companies [ 81 ], most of the studies control for industry and thus do not study the specific impacts of regulation, or merely indicate that differences or similarities are related to the harming of or helping in the internalization of companies. We go beyond the simplistic characterization and explain the particular role that industry regulation plays in internationalization. The arguments presented contribute to managerial thinking by explaining how regulation affects the development and internationalization of social firms. For managers interested in developing companies that have a social mission, the paper highlights the need to pay attention to regulation and how changes may challenge the business model developed. It also highlights the need to analyze the internationalization of the company not only in terms of market opportunities in other countries, but also in whether specific regulations limit the ability of the company to transfer its social innovations. Future research can build on the ideas presented and add new insights. First, the arguments are based on a case study designed to identify new theoretical insights. These insights need to be modified and tested with large samples to ensure that they apply to a large number of companies in a variety of countries. Second, the analysis is based on a particular industry that has a high level of social impact. The insights gained from understanding social innovations may need to be adapted to other industries that, even though they might be important to society, may have a lower public good nature. Third, the study is based on the analysis of companies in emerging economies, which offered new growth opportunities for the development of social innovations. The ideas may need to be modified in the analysis of companies in advanced economies in which the government has a higher capacity for providing public goods and consumers have fewer basic needs not covered. In sum, the paper provides new insights on both social companies and their internationalization. These insights are useful for a better understanding of the internalization of these organizations, given the particular contribution they provide to society when governments are unable to play the role of providers of public goods. We hope that the arguments presented here will spur additional research on the internalization of these important firms. Author Contributions: Investigation, M.A.M. and M.C. All authors have read and agreed to the published version of the manuscript. Funding: This research received no external funding. Institutional Review Board Statement: Not required. Informed Consent Statement: Informed consent was obtained from all subjects involved in the study. Data Availability Statement: Data information available with Miguel A. Montoya [email protected]. Conflicts of Interest: The authors declare no conflict of interest. Appendix A. The Healthcare Industry in Mexico In Mexico, the healthcare industry has suffered from gross underprovision. For many decades, the local industry was dominated by the public sector with a few significant changes over time. In fact, by 1997, the healthcare industry mainly comprised public institutions, such as the Instituto Mexicano del Seguro Social (IMSS, Mexican Institute of Sustainability 2022,14, 7047 19 of 21 Social Security) and the Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado (ISSSTE, Institute for Security and Social Services for Government Employees), and decentralized Seguridad Social (SS, Social Security) hospitals. IMSS was covering 35% of the population, ISSSTE about 5%, and SS another 1% [ 82 ]. It was mandatory for every employee in Mexico to enroll either in IMSS or ISSSTE, depending on whether they were working in the private sector (IMSS) or in the public sector (ISSSTE). However, a large percentage of the population was employed or self-employed in the informal sector and did not have health coverage. IMSS provided coverage to the majority of the population. This gave IMSS the privileged position of dominance as a provider of medical services and pharmaceutical products, but also led to allegations of widespread corruption [ 83 ]. However, IMSS and ISSSTE customers often preferred to visit private doctors, even if they had access to free consultation and treatment through the public coverage system, due to the perceived superiority of the private services over IMSS and ISSSTE services [ 65 ]. Less than 20% of the population could afford the private health insurance system, although this figure overlapped with the percentage of users of public services. As a result, 59% of the Mexican population had no health coverage in 2011 [ 65 ], and they were forced to pay for every medical event. They only had access to low-cost alternative medicine treatments (homeopathy and herbal medicine, for example), and certain practitioners (faith healers, for example), as they offered the only affordable option [ 82 ]. 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