Institutional Voids & Social Innovation

11 Feb Tutorial 2: Institutional Voids & social innovation Institutional entrepreneurship and social innovation at the base of the pyramid: the case of M-Pesa in Kenya Abstract - This paper explores the agency of multinational corporations that perform social innovation under conditions of institutional complexity and resource constraints - the paper identifies three types of institutional voids that entrepreneurs can exploit to implement a social innovation: market, policy, and social voids. Legitimating the social innovation involves appealing to the instrumental needs of target users, early and sustained engagement with policymakers and redefining meanings of both incumbent and new technologies Introduction - social innovation needed to engage base of the pyramid markets  induces changes in a society’s cultural, normative, or regulative structures (create divergent change to address social problems) - institutional complexities can therefore create opportunities for entrepreneurship (fill the gaps) - Insights are derived from the activities of Vodafone Group Plc and its affiliate Safaricom Kenya Ltd during the development and launch of M-Pesa, a mobile phonebased money transfer innovation. M-Pesa was launched in Kenya 2007 as an alternative to established commercial banking services with the view of providing formal financial services to ‘the unbanked’ population - the study identifies voids that were exploited by Vodafone and Safaricom to launch M-Pesa in the Kenyan financial services sector Social Innovation - social innovation should highlight a change in new interpretations of institutional elements such as roles, relations, expectations, practices, norms, and values  ‘social innovation consists of new, more effective and/or more efficient social practices with social ends and social means. Following this definition, actors engaging in social innovation may be perceived as institutional entrepreneurs who mobilize resources to create new institutions or transform existing ones in order to realize interests, they value highly Institutional Voids - BOP  defining characteristic of these contexts is economic poverty, severe resource constraints and “institutionally complex” environments (formal= constitutions, laws, property rights and governmental regulations and informal= customs, traditions and religious beliefs)  institutionally void contexts are characterized by a 1) variety of market failures (e.g., absence of formal institutions) that become apparent in the absence of efficient intermediation (e.g., regulatory systems), and thus, an increase in transaction costs. 2) Gaps occurring at the interfaces between indigenous or informal institutional spheres such as community, politics and religion and formal market institutions (e.g., property rights as formal market institution may conflict with patriarchal systems in many BOP settings that disfavor women’s access and ownership of assets)  voids have only been associated with spheres where weak formal institutions persist, and in spheres populated by informal institutions Legitimacy building challenges for social innovations - entrepreneurs must engage in legitimation activities to convince key actors about the fitness of the new organizational form existing norms, values, beliefs and definitions  The challenge of pursuing legitimacy for social innovation in and around institutional voids is exacerbated by the lack of relevant actors, and therefore the difficulty in identifying key actors with whom the entrepreneurs can build networks and form alliances with  shared meaning systems that would form the basis of a legitimation effort for an innovation are lacking (solution: proto institutions) Empirical context: M-Pesa as social innovation - big segment of the population “unbanked”  this segment was considered financially excluded (social problem, solution: microfinance) - At the time of development, pilot and national launch, M-Pesa was the only technology of its kind locally and globally. Due to this, M-Pesa had a high liability of newness, and thus, it is expected that its innovators would be confronted by a steep challenge to legitimate it. Data collection and analysis - 1. identifying instances in the formal and the informal institutional environments where institutional weaknesses and gaps were evident. Examples of codes in this phase included ‘voids in the formal environment’, ‘voids in the informal environment’ and ‘voids at the interface of the formal and informal’. - 2. identifying the strategic moves of Vodafone and Safaricom to influence their audience by building legitimacy, and codes such as ‘legitimacy among clients’, ‘legitimacy among government and industry officials’ were used Analysis: Vodafone and Safaricom as institutional entrepreneurs - strategies that Vodafone and Safaricom employed to influence prevailing institutions and introduce a divergent business model: Exploiting institutional voids The market Void - The absence of formal financial services in these regions – a phenomenon that can be understood as an absence of formal market institutions, and therefore a market void – presented an opportunity for entrepreneurship  Vodafone and Safaricom therefore began with the identification of the underserved market for which the innovative activity would be targeted, and an effort to understand the specific needs of this market in order to build a feasible solution The social Void - Due to a migration pattern, urban migrants remit substantial proportions of their wages to their rural homes. However, there was a lack of efficient mechanisms for making money transfers, especially since the senders tended to be the banked in urban areas, while the recipients were unbanked and the excluded in rural villages  social voids that were perceived as opportunities for innovation, such that Vodafone and Safaricom’s commercial team developed the M-Pesa launch proposition suggestive of this void, titled ‘Send Money Home’. The policy Void - As the policymakers grappled with regulating M-Pesa, the entrepreneurs also internally wrestled with the identity of M-Pesa in the existing institutional configuration. Neither Safaricom nor Vodafone had a banking license, and therefore, managing the legal and regulatory structure of the business proved challenging. Resolving the dilemma involved ‘many rounds of discussions with Kenyan and English lawyers, many straw men, and many heated debates’ from which a complex legal structure to run the M-Pesa service in Kenya was developed  By exploiting the policy void, M-Pesa innovation disrupted the boundary between telecommunications and banking, and initiated new networks of actors across those institutional boundaries Legitimating the innovation in and around voids - The entrepreneurs engaged in efforts to persuade constituencies on the merits of M-Pesa and form practical connections to existing institutions in order to gain widespread social acceptance in the financial services sector Legitimacy building among market audience - M-Pesa adverts featured a cultural, emotional and patriotic appeal for instance. In addition to the compelling value proposition, Safaricom was a ‘powerful brand’ in Kenya, well respected due to its home-grown products and CSR initiatives. Thus, MPesa’s legitimacy also rode on the dispositional spillovers reinforced by the trust and goodwill associated by the Safaricom brand. Legitimacy building among regulatory audience - Due to sustained interactions with the regulator, Safaricom participated in setting the agenda for reforming existing regulations on electronic payment and designing new guide- lines for anti-money laundering and branchless banking, and in so doing engaged in pro- active advocacy to institutionalize mobile money transfer as a legitimate financial service. Legitimacy building among contesting audiences - This discourse drew new boundaries of meaning that defined the banking domain vis-à-vis the mobile money domain, thus allowing M-Pesa to thrive despite protestations, effectively changing normative associations previously linking financial services exclusively to banking. As a result, mobile money was accepted as a parallel, and even complementary institution without challenging banking as the preexisting institution, but instead, leading other actors to challenge the efficacy of banking. Discussion and conclusion - Multinational enterprises that engage in social innovation in BOP markets – whether to expand their operations in order to increase their bottom line, or to address social problems as part of their corporate social responsibility mandates – are confronted with the challenge of navigating new institutional contexts that constrain their behavior. Entrepreneurial efforts in general involve instituting divergent change while gaining legitimacy, and such an undertaking is demanding when dealing with institutional complexities characteristic of BOP contexts