Enabling social enterprise through regulatory innovation: A case study from the United Kingdom

Social enterprise, broadly defined as the innovative use of resources to achieve social goals, is a new and emerging part of the global economy that has the potential to address pressing social problems ranging from education to health care. It is a growing component of what is often referred to as the third sector; the part of the economy that encompasses organizations that are neither governmental nor for-profit business institutions. Within the last two decades, governments have begun to take note of this trend and make policy changes to support the sustained emergence of these enterprises. One policy option that has recently emerged in Europe and the United States is the creation of a separate regulatory framework for social enterprises via new forms of legal organization. This paper uses the United Kingdom as a case study to explore the effectiveness of one new type of social enterprise legal organization, the community interest company. By analyzing data collected from the UK's National Survey of Third Sector Organisations in 2009, this paper examines if organizations operating as community interest companies exhibit some of the characteristics that policy makers intended to foster when drafting the new legislation. Do community interest companies have easier access to a variety of funding sources and thus utilize a wider range? Also, are community interest companies relying on earned income as a primary and major source of funding as the legislation was intended to ease restrictions on market activities? The hypothesized relationship is positive in both of these cases but results of the analysis support only a positive relationship between community interest companies and prioritization of earned income. Community interest companies are more likely to rely on earned income for at least 50% of their funding than any other organizational form among third sector organizations.