Masaryk University
Faculty of Economics and Administration
The nonprofit sector in economic theory:
Beyond mainstream explanations
Habilitation Thesis
Gabriela Vaceková
Brno, 2016
Anitke a Vladkovi
Abstract
Having gone through a turbulent history, the nonprofit sector in the Czech Republic and
the neighboring European countries has tremendous socio-economic and political
potential. The achievement of this potential, however, depends on the sector’s ability to
deal with the socio-economic and political challenges that are no less tremendous.
Much of the work that needs to be done toward this goal involves the scientific analysis
and reconstruction of the sector’s conceptual foundations. This habilitation thesis
reviews the international definitional and theoretical approaches to the nonprofit sector
originating in the Anglo-Saxon environment with a view to assessing their applicability
in the (post-) transitional context and identifying the elements of their integrative
conceptual core. The emerging argument is that the societal determinants of the
nonprofit sector in Central and Eastern Europe, at least in the short and middle term, are
mainly related to supply-side rather than demand-side determinants, with the supplyside
factors including public funding, public regulation, and the legal environment of
the nonprofit sector. This argument is supported with empirical evidence assessing the
plausibility of alternative nonprofit theories in Slovakia and with investigations of the
commercialization and sustainability of nonprofit organizations in the Czech Republic.
The concluding section of the habilitation thesis draws attention to the ongoing
conceptual, organizational, and political redefinition of the Czech and Slovak nonprofit
sectors with possible implications for other (post-) transitive countries. The key drivers
of this ongoing definition process include the proliferation of new semantics, such as
social entrepreneurship and social innovations, and the emergence of novel
socioeconomic and political challenges.
Key words: nonprofit sector; civil society; economic theory; commercialization;
sustainability; (post-) transitive countries; Czech Republic; Slovakia
Declaration
I hereby declare that the Habilitation Thesis titled The nonprofit sector in economic
theory: Beyond mainstream explanations is my own work and that I have cited all of
the literature and other expert resources therein in accordance with applicable legal
regulations, the Internal Rules and Guidelines of Masaryk University, and the internal
managing acts of Masaryk University and the Faculty of Economics and
Administration.
Brno, December 21st 2016
………………………………………………
Acknowledgement
My sincerest appreciation is to my colleagues and friends with whom I have worked at
Masaryk University in Brno and Vienna University of Economics and Business in Vienna,
who encouraged my interest in nonprofit sector research and helped me make my
professional dreams come true.
Earlier versions of some sections of this habilitation thesis appeared in papers and book
chapters I have previously published. I would like to thank and acknowledge the work of
my associates on these projects. Special mention goes to PD Dr. Vladislav Valentinov
from IAMO Halle, my mentor and supervisor, who deserves my deepest gratitude.
A number of people from Masaryk University, Charles University, Vienna University of
Economics and Business and London School of Economics and Political Science read
drafts of this thesis at various stages and gave valuable feedback. I would like to thank
them all for their time and insights. Warm thanks are also due to Ms. Anne Johnson for her
proofreading, which I truly appreciate.
The thesis could have not been written without the continuous support of my beloved
family and close friends. Thank you for all your loving patience, this work is also truly
yours!
Table of contents
INTRODUCTION ..............................................................................................11
1 HISTORICAL, THEORETICAL AND CONCEPTUAL FOUNDATIONS...........15
1.1 HISTORICAL FRAMEWORK: CIVIL SOCIETY IN TRANSITION .............................. 16
1.2 DEFINITIONS AND FUNCTIONS OF THE NONPROFIT SECTOR .............................. 23
1.3 THEORIES OF THE NONPROFIT SECTOR: AN OVERVIEW .................................... 31
1.4 TOWARDS AN INTEGRATIVE THEORY: CRITICAL ASSESSMENT OF CURRENT
APPROACHES.................................................................................................... 41
2 TESTING NONPROFIT THEORIES IN THE (POST-) TRANSITIONAL
CONTEXT................................................................................................49
2.1 A SYNOPSIS OF NONPROFIT THEORIES: REALITY CHECK FROM SLOVAKIA ....... 50
2.2 NONPROFIT ORGANIZATIONS BECOMING BUSINESS-LIKE: THE CZECH CASE .... 64
2.3 NONPROFIT SUSTAINABILITY: EVIDENCE FROM THE CZECH REPUBLIC............ 78
2.4 CONCLUDING REMARKS: THEORETICAL VS. EMPIRICAL RESEARCH.................. 91
3 RE-CONCEPTUALIZATION OF THE THIRD SECTOR................................97
3.1 THE DRIVERS OF RE-CONCEPTUALIZATION ...................................................... 98
3.2 NEW SEMANTICS: SOCIAL ENTREPRENEURSHIP, SOCIAL ENTERPRISE, SOCIAL
INNOVATIONS ................................................................................................ 104
3.3 THE NONPROFIT RESPONSE TO REAL-WORLD CHALLENGES............................ 115
3.4 OUTLOOK ON TRENDS AND IMPERATIVES ...................................................... 121
CONCLUSIONS..............................................................................................127
REFERENCES................................................................................................133
11
Introduction
“If not for profit, for what?” (Young, 1983)
“To profit or not to profit?” (Weisbrod, 1998)
“Is being nonprofit important?” (Casey, 2015)
For nonprofit scholars, answering these and similar questions from various disciplinary
contexts and practices is often a daily revelation. The nonprofit sector has already
moved from being a minority scholarly interest (cf. Billis, 2010) and ranks alongside
the public and private sectors as a significant system and a major economic force in
modern society. It has been paid corresponding attention in the scientific literature
worldwide (see References). However, this habilitation thesis argues that it is necessary
to move beyond “traditional” explanations. The mainstream economic theories of the
nonprofit sector are in urgent need of a clearer conceptual approach, especially when it
comes to specific socio-economic and political conditions of (post-) transitive
countries.
The nonprofit sector is a major player in politics and economics. The role of nonprofit
organizations in (post-) transitional countries is certainly considerable and worthy of
study. Salamon and Sokolowski (2016a) make clear that the third sector is far from
following the same exact patterns in different parts of Europe. “Important though these
aggregate features of the third sector are, however, they can be misleading. [...] Behind
the averages often lie some significant cross-national and regional variations. And that
is certainly true of the European third sector” (ibid, p. 15). To make sense of these
variations, it is useful to examine them at the regional level. In Central and Eastern
Europe, 70 per cent of third sector employment takes the form of direct volunteering;
by contrast, employment in nonprofit institutions accounts for a much smaller 23.7 per
cent (ibid). This contrasts sharply with Northern Europe and testifies to the embryonic
nature of the more formal third sector institutions in the formerly Soviet-dominated
territories. Massive changes are occurring in the nonprofit sector around the globe,
bringing with them many expectations and problems. Can the sector live up to its
challenges? This thesis aims to fill severe research gaps that mainstream theories
cannot sufficiently explore.
An analysis of the literature (see in particular Section 1.3) shows that scientific research
of the nonprofit sector and nonprofit organizations takes two relatively independent
directions, as it is grounded in two different methodological approaches. The first
approach is descriptive and based on non-normative methodology and the
corresponding explanation tools that clarify the role of the nonprofit sector and
12
nonprofit organizations in the economy. The second approach turns in the normative
direction. It is based on normative methodology and on the explication or interpretation
of a researched topic. The contrast between these two different methodological
approaches to nonprofit organizations is a specific example of the current state of
scientific discussion in the areas of economics and social sciences. The contrast takes
the form of “two cultures” (Snow, 2002) or, in terms of scientific methodology, a form
of commensurability or incommensurability between normative and non-normative
statements about, or explanations of, a researched topic (Ochrana, 2015).
The general contradictions between economics and social sciences are reflected in the
scientific discussion about the nonprofit sector and influence the social role and
functions of nonprofit organizations. Sections 1.2 and 1.3 of this habilitation thesis
focus in detail on this situation in the scientific discussion. The habilitation thesis is
based on a critical evaluation of this discussion and offers a different solution. The
solution is an attempt to depart from the existing traditional approaches and reach some
synthesis. The habilitation thesis works on the assumption that it is possible to use
a starting point that would not be based on dichotomous approaches but on integrity.
The substance of this issue is expressed in the subtitle of the habilitation thesis title:
“Beyond Mainstream Explanations”. Valentinov (2009; ibid 2011; ibid 2012c;
Valentinov & Iliopoulos, 2013; Valentinov et al., 2015) provides the inspiration for this
solution to the issue.
The methodological basis for this integrity is the holistic approach (Fay, 2002;
Ochrana, 2015; Winch, 2004), enabling a shift in direction toward the integrative theory
(see Section 1.4). As John Dewey (1938, p. 491) observes: “the ultimate end and test of
all inquiry is the transformation of a problematic situation (which involves confusion
and conflict) into a unified one.” The thesis is based on Dewey’s theory of inquiry as it
aims to go beyond the “fact-value dichotomy” and follow the tradition of pragmatist
philosophy, going back primarily to Dewey. The main research interest of pragmatist
philosophy is in examining the societal problem-solving process. The thesis seeks
answers on how the nonprofit sector participates and contributes to this process which
indeed integrates normative and positive aspects: there is a normative imperative to
solve problems, and there is positive interest in discovering how nonprofit
organizations can actually do it.
The need for integrative research of nonprofit organizations is determined by two
groups of factors. The first group is the new social reality within which nonprofit
organizations operate (Section 1.1 and 1.2). This new reality includes transformations
of the positions, roles, and functions of nonprofit organizations. Therefore, this
13
represents an objective side of the issue: the ontological layer of nonprofit
organizations. The recent and ongoing changes in the position and functioning of
nonprofit organizations require a corresponding scientific approach and tools that
would enable proper research of these changes. Traditional existing approaches offer
dichotomous solutions: either explanations or interpretations. The integrative theory
bridges this dichotomy, offering a comprehensive view of the current issues related to
the operations of nonprofit organizations. The ambition of the habilitation thesis is to
contribute to the theoretical elaboration of the issue.
Taking these facts into account and focusing on the nonprofit sector in economic theory
as a research subject, the scientific objectives of the habilitation thesis were set as
follows:
The aim of the habilitation thesis is to conduct a critical reflection of the current
scientific discourse in the economic studies focused on research of nonprofit
organizations. On the basis of the ascertained situation, to test nonprofit theories
in the (post-) transitional context and develop a re-conceptualization of the third
sector as a new paradigm for researching nonprofit organizations under new
conditions.
With respect to these objectives, the following research questions were set:
RQ1. Does such a thing as an identifiable nonprofit sector even exist? If so, how
can it be defined in the (post-) transitional context?
RQ2. How and to what extent do mainstream theories reflect and respond to
changes in the positions and functioning of the nonprofit sector and nonprofit
organizations?
RQ3. What conclusions can be drawn from the testing of nonprofit theories, the
commercialization phenomenon, and sustainability issues in the (post-)
transitional context for the areas of scientific theory and practice?
RQ4. What new developments and revisions of theories does the empirical
evidence and socio-economic reality suggest?
RQ5. How does the nonprofit sector respond to the new real-world challenges and
which consequent trends and imperatives should the economic theory
reflect?
This habilitation thesis attempts to look for the answers to these questions and to
establish possible grounds for their solutions. Two types of research methods were used
to meet the research objectives and to seek answers to the research questions. Analysis
14
was selected as the general scientific research method; it was used specifically in
searching through theoretical resources and conducting data analysis. The synthesis
method and the generalization method were applied in particular in connection with
formulating theoretical conclusions. The incomplete induction method was used for
data analyses. The deduction method was applied in deducing logical conclusions
resulting from researched scientific theories. Primary and secondary data were
collected. A questionnaire survey and controlled interviews were used to collect data.
Descriptive statistics and statistical analysis were the applied special scientific methods
used in researching the obtained data set (see Section 2).
With respect to the research subject, research objectives, and research questions, it was
important to apply an appropriate methodological approach. First, it was necessary to
determine a research plan, taking stock of the current scientific discussions about the
nonprofit sector and nonprofit organizations by analyzing resources. Identifying as yet
unexplored areas followed, which enabled the research subject to be defined and
specified. Setting research objectives and research questions in relation to the subject
was the next step. The structure of the habilitation thesis corresponds to this process
and ends by answering the research questions, drawing conclusions, and making
suggestions for further research.
The chapters are organized around three major themes. The first section of the
habilitation thesis presents historical, theoretical, and conceptual foundations of the
research subject and broadly discusses the civil society in transition and the definitions
and functions of the nonprofit sector, and offers a comprehensive overview of theories
of the third sector. This chapter concludes with a critical assessment of current
approaches, proposing an integrative theory. The next part of the thesis is an empirical
inquiry that provides an analysis of the economic determinants of the nonprofit sector
in Slovakia through theory testing, examines the commercial transformation of the
nonprofit sector in the Czech Republic, and investigates the issue of nonprofit
sustainability in the Czech rural context. It concludes by offering a conceptual
innovation based on theoretical and empirical research. This opens the third section of
the habilitation thesis, which is devoted to the re-conceptualization of the third sector.
This chapter considers the drivers of the re-conceptualization and presents the new
semantics including social entrepreneurship, social enterprises, and social innovations.
It also focuses on the nonprofit response to real-world challenges, providing a basis for
an outlook on trends and imperatives regarding the research subject.
15
1 Historical, theoretical and conceptual
foundations
Nonprofit organizations play an important and irreplaceable role in building a civil
society. They are one of the main pillars of democracy and a bearer of democratic
principles, facts which can be used to argue the merits of the existence of nonprofit
organizations and the intensive research of their field on both the theoretical and the
practical level (Vaceková & Murray Svidroňová, 2016). Recently, there has been
a considerable surge of interest throughout the world in the broad range of
organizations that operate outside the market and the state (Salamon et al, 1999).
Known variously as the nonprofit, nongovernmental, voluntary, civil society, third, or
independent sector (Salamon, Sokolowski & Anheier, 2000), organizations that can
demonstrate that their activities generate a public benefit or common social good exist
in some form of special incorporation or registration in every country (Casey, 2016).
In recent decades, the activity and influence of nonprofit organizations have grown
exponentially (Casey, 2016; CIVICUS, 2013; Colás, 2002; McCarthy, Hodgkinson
& Sumariwalla, 1992; Salamon, 2010; Salamon & Sokolowski, 2010). Salamon (1994)
wrote about a global “associational revolution” focusing primarily on the growth of
nonprofit organizations and their increasing role in service delivery. Nonprofit
organizations have become central to policy making, the promotion of civic action, and
the delivery of new quasi-public services, as well. In addition to being more numerous,
modern nonprofit organizations (perhaps better described as late-modern or even postmodern)
are markedly more secular and nonpartisan in their affiliations, more
universalist in their service delivery and policy-making aspirations, and more
professionalized and commercialized in their operations than earlier iterations rooted in
religious charity, political movements, or grassroots collective and voluntary action
(Casey, 2015).
The term nonprofit was chosen as the primary term for use in this habilitation thesis
because it is currently widely recognized as both a concept and descriptor, both in its
English form and in its translation into other languages (cf. Casey, 2015). But nonprofit
is a relative neologism, with the early English-language research on the sector tending
to favor the term voluntary (Robertson, 1966; Smith & Freedman, 1972; Smith, 2012).
“Unanimous nomenclature for third sector and civil society continues to elude nonprofit
professionals and researchers, and in its places continues to be a veritable potpourri
of terms and definitions” (Casey, 2015). This chapter provides a comprehensive picture
16
of the theoretical and conceptual foundations of nonprofit sector studies while
addressing the need to revisit the actual economic theories that have contributed to the
development of a concentrated research agenda on nonprofit organizations (Anheier
& Ben-Ner, 2003). While the majority of theoretical research on nonprofit sector has
been done in the United States, it is vitally necessary to open discussions in the (post-)
transitional countries of Central and Eastern Europe (CEE). Although the development
of economic approaches to the nonprofit sector has been truly impressive in recent
decades, the full implications in the (post-) transitional context have not yet been
sufficiently explored.
1.1 Historical framework: Civil society in transition
Collective social endeavors that do not seek direct personal gain for individual
participants are as old as human civilization itself (Casey, 2016). The term civil society
dates back to ancient Greek and Roman philosophers, who considered societas civilis
“one in which good citizenship collectively shapes the nature of a society” referring
to both the state and non-state elements of a society (Götz, 2010). Later, the focus of
the discourse shifted to non-state societal structures and their relationship to the state
(cf. Beng Huat, 2003; Muukkonen, 2009; Van Til, 2008). Currently, the term civil
society appears frequently as a general equivalent for the nonprofit sector (Casey,
2016b). However, unlike the concept of the third sector, which focuses
on organizational structures, civil society is primarily conceived as the space or sphere
between the market, state, and family in which people organize, uncoerced, to pursue
their interests (Edwards, 2009; Van Til, 2008; Walzer, 1998).
In the first sub-chapter of this habilitation thesis, the historical background of the
development and understanding of civil society in the Czech Republic and Slovakia
will be considered in order to show how closely associated the notions of civil society
and nonprofit voluntary activities are with the fundamentals of democratic society.
In other words, to look at the central social and political developments of the Czech
Republic and Slovakia is to see how the nonprofit sector emerged and developed in the
wider context of (post-) transitional civil society. The civil society “lens” (Anheier,
2005) is useful for understanding the critical and distinct aspects of the Czech and
Slovak experience in comparison to the historical patterns and developments in AngloSaxon
countries. The emphasis of the civil society discourse on dissidence
in transitional countries provides a basis for investigating the generally positive,
normative, and heuristic analysis associated with its democratic role (Casey, 2015).
17
Two primary lines of reasoning can be found concerning the relationship between civil
society and democratic political practice. The first considers that civil society
organizations (CSOs) create social capital as schools for citizenship that teach
democratic culture and foster trust and civil engagement (Putnam, 1993). The second
sees them as generating political capital by promoting pluralism (Casey, 2015). At the
same time, proponents of both lines of reasoning acknowledge that CSOs can impede
democratic consolidation when they are “narrow in scope, chauvinistic in content,
stereotypical in form, and constructed around homogenizing impulses” (Farouk 2011,
p. 93). The political changes in the former Soviet Bloc countries of Eastern Europe
in the late 1980s brought civil society into vogue as the descriptor for the burgeoning
dissident movements and organizations that played a role in the transition to democracy
(Casey, 2015).
The concept of a transitive economy has always been a type of simplification and
abstraction; however, all of the post-Communist economies concerned, even after more
than 25 years of transformation, have certain shared characteristics — especially the
absence of a fully-developed democracy and market economy institutes. This is true
even for their civil society and the degree of its development. The term civil society
is ubiquitous in research on democratization, especially in the context of the collapse
of Communist rule (Weigle & Butterfield, 1992; Linz & Stepan, 1996; Ekiert & Kubik,
1997; Green, 1999). Although the term is increasingly used, it is increasingly difficult
to define as the bordering domains become more blurred and the hybridity and change
are permanent features (Brandsen et al., 2005).
In 1989 and 1990, the Velvet Revolution in the Vysegrád group (V4) countries
(Czechoslovakia – now the Czech Republic & Slovakia, Poland, and Hungary) was
decisive in overturning the political order in Central and Eastern Europe (CEE).
Arguably, this was civil society’s finest hour (Strachwitz, 2014). One may ask what has
become of CEE more than a quarter of a century after 1989. Civil society saw
a tremendous upsurge when the Communist Party monopoly of power was abolished
(Frič et al., 1999). Not surprisingly, the number of CSOs mushroomed in all four
countries after the transition. The change of the regime was largely perceived by
citizens as an opportunity for founding CSOs and getting involved in the civil society
sector (Navrátil & Pospíšil, 2014).
Currently, “the picture is quite diverse, both by country and by field of activity”
(Strachwitz, 2014, p.1). Poland was able to build on a stronger civic tradition than the
Czech Republic and Hungary. In countries in which service provision is the main
activity, CSOs rely on government funding and are widely seen as government
18
agencies. Where this is not the case, they face a struggle to survive. Slovak CSOs are
comparatively strong in education, while community development and housing are
stronger in Hungary, and culture, religion, health, and social services are stronger in the
Czech Republic. The activities of Polish CSOs are more evenly balanced among these
areas. Clearly, capacity building is the main concern in all four countries. CSOs need
help to be able to fulfil their role as watchdogs, change agents, and political forces
(ibid).
Stepping through transition: Civil society in the Czech Republic
Over the past 27 years, the nonprofit sector in the Czech Republic has experienced
a dramatic transformation from a totalitarian regime to a parliamentary democracy.
“The field of the Czech civil society and the nonprofit sector is still largely terra
incognita, or one large gap. The whole field remains in statu nascendi” (Pospíšil et al.,
2014). Czech civil society can be characterized by some specific features (cf. Frič
& Goulli, 2001; Pospíšil, 2006; Pospíšil et al., 2012):
− the tradition of the Czech National Revival (a considerable number of nonprofit
organizations base their work on the model of selfless sacrifice for a patriotic
cause);
− the tradition of the first Czechoslovak Republic (the pre-WWII Czechoslovakia
is seen as the golden age of civil society, and the desire to re-start its successful
institutions and to copy its successful models has been very strong);
− a legacy of mistrust (influenced by their experiences during the totalitarian
years, people continue to mistrust nonprofit institutions);
− a legacy of corruption / clientelism (a system of nepotism and informal
networks survived the fall of Communism and continues to pose a serious
challenge to any attempt to introduce the rule of law and standard procedures
even in the nonprofit sector);
− divides in the sector (a specific manifestation of the legacy of mistrust is the
deep divide that exists between “old” and “new” organizations, which makes
concerted action by the whole sector difficult, and the sector cannot provide
trustworthy representatives for negotiations with the state when needed);
− the position of churches (churches have been finding it very hard to recover
from the devastation inflicted on them by the Communist regime);
− the legacy of the nanny state (The paternalistic Communist state was
a monopoly provider of all educational, cultural, social, health, and other
19
services (cf. Brhlíková, 2004). It had a purpose-built centralized system of
organizations and a state nonprofit sector of its own. The public sector has
found it very difficult to accept the loss of its monopoly in public services after
1989, to recognize the existence of an independent nonprofit sector, and
to change its role from one of providing public services to the new role of
securing their provision (cf. Frič 2000); in the field of public services the
dominance of the state and state-run organizations is still clearly visible). This is
typical of countries other than the Czech Republic: it seems to be a general
“post-Communist” pattern in the provision of public services (Pospíšil
& Hyánek, 2009).
The civil society in the Czech Republic is increasingly thought of in positive terms
(Frič et al., 1999). “[C]ivil society is the best safeguard, not only against political chaos
but also against the rise of authoritarian forces that always emerge whenever a society
feels shaken or insecure about its future. The more power is left at the center the more
favorable are the conditions for such forces to gain control over the country.
Communists knew very well why they needed to dominate and manipulate every beekeepers’
association” (Havel, 1999).
The tradition of civil society in the Czech Republic dates back to the 9th century. The
most important process contributing to the rise of civil society was the Czech National
Revival, during the 18th and 19th centuries. The purpose of this movement was
to revive Czech language, culture, and national identity. By the end of the 19th century,
the Czech empire had the largest number of charitable and voluntary organizations
in the Austro-Hungarian Empire. Its long evolution culminated in the later 19th century
and early 20th century, and in the twenty years of the first Czechoslovak Republic.
During the First Republic (1918–1938), Czechoslovakia became one of the world’s
most advanced industrial-agrarian countries. The Constitution of February 1920
guaranteed that the new Republic would also be one of the few states in Europe to have
a parliamentary democracy. Consequently, dynamic charitable and voluntary
organizations flourished. Some organizations were extremely popular, almost national
institutions (e.g. Sokol). The community life in the nation was based on the existence of
volunteer organizations. The dynamic development of civil society and nonprofit sector
in Czechoslovakia came to an abrupt end when Hitler’s Wehrmacht occupied the Czech
lands in March 1939. It was the beginning of fifty years of totalitarian rule, during
World War II and the ensuing Cold War. Both the Nazis and the Communists ruthlessly
annihilated everything free and independent, and the free civil society was a prime
target.
20
The effects of these totalitarian regimes were devastating. Independent citizen
initiatives and opposition to the Communist regime did exist, but remained fragmented
and weak. Both the scattered early opposition of the 1950s and the mightier reform
movement of the Prague Spring in the 1960s were put down by force. In spite of the
admirable work of cultural activists and opposition leaders, the independent volunteer
sector remained small and isolated from the rest of society. In 1989, the people finally
gave voice to their long-suppressed frustration, and the Communist regime collapsed
within a week. How did charity and volunteer groups respond to the new freedom?
There were 537 (mass) organizations in existence at the end of the Communist years;
by the end of 1991, there were 21,000; in 1999, there were 60,000; there are currently
approximately 120,000 nonprofit institutions in the Czech Republic. In the first months
and years after 1989, the number of nonprofit organizations dramatically increased. The
country was receiving massive support from abroad for the development of civil society
and NGOs; European and US foundations and nonprofit organizations started working
in the country.
In the 1990s, the rapid growth continued but there was increased awareness of the need
to stabilize the new organizations, to learn necessary skills, and to improve the legal
and fiscal environment for nonprofit activities. The nonprofit sector assistance
programs established by the governments of many western countries played very
positive roles, as did numerous foreign foundations and organizations. With their help,
the sector drafted its own legislative proposals and increased pressure on the
government and parliament. Towards the end of this period, the long-term pressure on
the government began to pay off, and the relations between the state and the nonprofit
sector began to improve. The excellent performance of humanitarian organizations
brought about a dramatic change in the attitude of the public to the whole sector.
The nonprofit sector continued to grow rapidly through the end of the 1990s, but the
rate of growth began to slow down after 2002. The sector lacked trustworthy
representative bodies that most organizations would endorse, although some of its
service and umbrella organizations won wide approval. The attitude of the government
gradually changed from reservation to cautious cooperation. The country became
a member of the European Union (2004), which was a signal to most foreign
governments to phase out their assistance programs. Czech civil society at the
beginning of the 21st century has been thus far insufficiently researched. There was
a lack of available data from the Czech Statistical Office (CZSO) and only patchy and
unreliable data from several one-off research projects. Systematic nonprofit statistics
and research did not exist. The situation began to improve when the CZSO introduced
a satellite account covering nonprofit institutions in 2007. By 2010, it had resolved the
21
basic problems that accompanied the implementation and completed the work on
a short version of the account, so that now there are several years’ worth of reliable data
on nonprofit institutions. A change explicitly influencing the Czech nonprofit sector
was the adoption of the New Civil Code in 2014, which enabled new forms of nonprofit
organizations and opened opportunities for their profit-oriented activities.
Stepping through transition: Civil society in Slovakia
Civic and volunteer activities have also had a long tradition in Slovakia. The
establishment of the first nonprofit organizations in this area is related to the formation
and activities of the church. The oldest examples are charities, institutions providing
social and health services for the poor, and various religious brotherhoods (Kuvíková,
2004). In the 19th century, many voluntary associations and groups with self-help
missions existed in Slovakia. The first break in the development of voluntarism
occurred in the post-revolutionary years 1848–1849 when most of the associations
ceased to exist. In the 20th century, there were many regime changes within Slovakia
and Central Europe. Slovakia was under several different regimes: the AustroHungarian
Empire, Czechoslovak First Republic, Slovak Fascist State, Czechoslovak
Republic 1945–1948, Communist Czechoslovakia, Czechoslovakia after the Warsaw
Pact Occupation in 1968, Federal Socialist Czechoslovakia, and Federal Democratic
Czechoslovakia; the current Slovak Republic formed in 1993. There have been eight
currency reforms and nine constitutions. The country has experienced numerous
political systems, including a parliamentary democracy, a fascist regime, Stalinism,
“normalization,” socialism, and the post-communist return to democracy (Hochel,
1996). Despite these changes, NGOs and civil societies were successfully formed in
Slovakia.
November 1989 brought political and economic changes and increased civic activities,
as well as the entry of private institutions, including nonprofit organizations, into the
economy. The number of NGOs and volunteers soared. By 1993, there were almost
6,000 registered NGOs. In one year, the number increased to 9,800; by 1996, there
were more than 12,000 NGOs. Positive growth was complicated by the government’s
new restrictive laws. Administrative guidelines and limits for establishing and funding
organizations made it difficult for the existence of the nonprofit sector. In 1997, the Act
on Foundations was adopted, which greatly limited the independence of civic activities;
as a result, 1,800 Slovak foundations were closed. After the 1998 elections, a new
coalition established liberalized regulations regarding the nonprofit sector. Favorable
legal and economic conditions for its further development and existence were created
(Kuvíková & Svidroňová, 2010). There were attempts in early 2000 to establish a code
22
for nonprofit organizations that would have summarized all of the acts related to
different types of nonprofit organizations, but the attempts were unsuccessful and the
legislation concerning the nonprofit sector in Slovakia remains fragmented.
After the 2010 election, the government emphasized the topic of civil society,
establishing a representative post for the development of civil society. Based on the
representative’s recommendations, the Government Council for NGOs, which had
operated in Slovakia since 1999, was transformed into the Committee for NGOs.
Resolutions of the Committee were to be automatically placed as a reminder to relevant
materials discussed at parliamentary sessions (Radvanský et al., 2010). The government
that was elected in 2010 ended after the 2012 election, and the next government
proposed the creation of a post for a government representative for national minorities
and civil society. The nonprofit sector did not agree with this proposal, wishing to
maintain the post of an independent representative for a civil society. This issue has not
yet been resolved. There is no satellite account for nonprofit institutions in Slovakia.
Several universities, organizations, and researchers are dealing with the issues of
nonprofit organizations (e.g. EUBA, UMB, Majduchová, Kuvíková, Murray
Svidroňová, Marček, Bútora, etc.), but systematic statistics do not exist.
Generally, the role of civil society is to build a “good” and democratic society (cf.
Casey, 2015), however, the research focus of nonprofit scholars is mostly simply on the
organized interests, whatever their ends (see Cheema, 2010; Colás, 2002; Eberly, 2008;
Edwards, 2009; Florini, 2000; Fowler, 2012; Kaldor, 2000; Walker & Thompson,
2008). Commentary about civil society as a conceptual realm is almost always
immediately conflated with discussions of the role of CSOs. Exponential growth has
taken place in the activity and influence of CSOs in every surveyed country in the
world (Salamon, 1994; Salamon & Anheier, 1997). The narrative arc of the history of
many individual historic nonprofit organizations can be seen as a metaphor for the
whole sector: traditional roots have been severed, formerly all-voluntary activities have
seen substantial growth and professionalization, and the previously marginal has
become mainstream. Nonprofits are apparently no longer seen as the “poor cousins”
(Casey, 2016); instead, they are considered significant actors in the delivery of public
services.
The essential lesson from the turbulent history of the Czech and Slovak nonprofit sector
seems to be that the sector has tremendous socioeconomic and political potential but is
faced with challenges that are equally tremendous. While the private for-profit and
public sectors have clear and strong institutional identities, the same is not necessarily
true of the nonprofit sector, which still has to establish its institutional autonomy and
23
independence. Much of the work that needs to be done toward this goal involves the
scientific analysis and reconstruction of the conceptual foundations of the nonprofit
sector. The available definitions and theoretical approaches, many of which come from
different historical and institutional contexts, have to be critically reviewed with regard
to their workability in the (post-)transitional context. Empirical work is required for
clarifying the factual basis of theory-building efforts and for understanding the realworld
institutional embeddedness of the nonprofit sector. These are the tasks to which
the following chapters turn.
1.2 Definitions and functions of the nonprofit sector
The emphasis of the civil society discourse on dissidence in transitional countries
provides a basis for investigating the generally positive, normative, and heuristic
analysis associated with its democratizing role. Regardless of which approach to civil
society is the focus, the question of whether it can be equated with the nonprofit sector
depends on the nature of the polity being examined. The fault lines and definitional
problems concerning nonprofit theory lead to a logical questioning of whether one can
even legitimately claim that such a thing as an identifiable nonprofit sector exists.
Prior to the 1980s, the existence of a nonprofit or third sector was hardly acknowledged
in basic economic texts. There was nothing like a “unified academic field studying
nonprofit organizations” (Steinberg 2006). However, one constant theme in the
literature since then has been the “blurring of the boundaries” (Billis, 2010; Dees
& Anderson, 2003; Laville & Nyssens, 2001), discussed early on by scholars such as
Ralph Kramer and more recently by David Billis, Colin Rochester, and others. Since
the 1980s, nonprofit organizations have undergone remarkable changes that have made
them more similar to for-profit enterprises (Maier et al., 2014).
At best, any definition of a sector described as a “loose and baggy monster” (Casey,
2015) with fuzzy edges is subject to a multitude of caveats and clarifications (Corry,
2010; Macmillan & Buckingham, 2013). Is there actually a sector? Perhaps a pure
epistemological answer must be that there is not (Casey, 2015): a sector should, after
all, be defined by its boundaries, and the nonprofit sector, particularly when examined
from an international and global perspective, has ambiguous and permeable margins
that are almost impossible to discern (ibid).
The most widely accepted definitions of nonprofit organizations and the nonprofit
sector are based on a combination of structural and functional characteristics that
describe the organizational forms they adopt and the activities they undertake (Casey,
24
2016). The Johns Hopkins Comparative Nonprofit Sector Project definition, later
adopted by the United Nations for the purpose of creating comparable national surveys
of nonprofit institutions, uses the following five criteria for defining a nonprofit
organization (Salamon & Anheier, 1998):
− organized, i.e. institutionalized to some degree in terms of their organizational
form or system of operation;
− private, i.e. institutionally separate from government;
− non-profit-distributing, i.e. not returning any profits generated to their owners
or directors but plowing them back into the basic mission of the agency;
− self-governing, i.e. equipped with their own internal apparatus for governance;
and
− voluntary, i.e. involving some meaningful degree of voluntary participation
in the operation.
In the “structural-operational” definition by Salamon and Anheier (1998) the nondistribution
constraint is identified as a structural feature of nonprofit organizations.
The non-distribution constraint allows nonprofit organizations to make profits but does
not allow the distribution of the profit to managers or employees of the organization.
“Whatever surplus a nonprofit organization generates ought to be put back into the
quality of its products / services or ought to be used to finance the provision of services
to needy parts of population” (Brhlíková & Ortmann, 2006). A nonprofit organization
that earns a profit in any period may direct these resources in one of three ways:
increase expenses so that the profit is used up in current operations, invest in fixed
assets which presumably will be used in providing mission-oriented services, or retain
the profits as a source of internal capital (Calabrese, 2011).
A related approach is to focus on what makes nonprofit organizations distinctive from
organizations in other sectors. First, there is a three-sector framework (see Fig. 1).
In order to describe the organizations operating within the third sector, nonprofit
scholars use the term “private nonprofit organizations” as the most accurate for
expressing the fact that these organizations result from a three-sector economy. The
concept of a distinct third sector emerges from the analyses that separate government
from nongovernment and for-profit from nonprofit. The sectors are distinct but also
linked and overlapping (Corry, 2010). By convention, government is identified as the
first sector, business as the second, and nonprofit as the third. The three sectors are also
often characterized as “the Prince, the Merchant, and the Citizen” (Najam, 1996; Casey,
2016). The existence of a trichotomy of three distinct sectors (or social domains,
spheres, or realms) permeates Western thinking (Casey, 2016). Classical liberal
25
theorists emphasize the separation between public and private, whereas
poststructuralists focus on the continuities and cross influences. Beyond these three
formal institutional sectors, some scholars identify a fourth sector, one that is made up
of more informal relationships within the family, among friends, and in a community
(Offe, 2000; Streeck & Schmitter, 1985; Van Til, 2008), and debates occur over the
order and hierarchy of the sectors (cf. Casey, 2016).
Figure 1 Scheme of three sectors of the national economy
Source: Vaceková and Murray Svidroňová, 2016
A common visual representation of the sectors is a simple Venn diagram with three
overlapping circles representing the institutional domains – government/state (first
sector), markets (second sector), and nonprofits (third sector); occasionally, a fourth
circle represents the family or community. Some authors have suggested that the
nonprofit sector is by nature unsuited to singular definitions (Osborne, 2008). Pestoff
(1992; 1998) modified this perspective by situating the nonprofit sector at the center of
the welfare triangle, clearly separated from the state, market, and community
(households) by major social divisions, i.e., public/private, for-profit/nonprofit, and
formal/informal. One advantage of Pestoff’s classification is that the triangle image
makes it possible to read the basic characteristics of the organizations operating in the
individual areas. The diagram greatly contributes to the understanding of the nonprofit
sector position. The entire triangle represents a national economy.
It is divided into three areas, reflecting the following divisions:
− formal/informal sector – the division reflects whether there is a legal entity.
Legal entities are regulated by acts, making them formal;
Organizations
state
(government) nonprofit
organizations
FIRST SECTOR
private
profitable organizations
(companies)
SECOND SECTOR
(nongovernment) nonprofit
organizations
THIRD SECTOR
26
− public/private organizations – the division is a reflection of who founded, owns,
and operates the organization. Sometimes this division is problematic,
especially due to unclear legal regulations;
− profit/nonprofit organizations – this division is a reflection of the purpose for
which the organization was founded. This is indicated by legal regulations and
the Income Tax Act.
Nonprofit organizations are located in the center of the triangle, indicating that they are:
− private – founded not by the government, but by private entities, or even by
individual citizens or legal entities;
− nonprofit – not founded for the purpose of generating profit;
− formal – their image and position is adjusted by relevant acts.
Figure 2 The third sector in the welfare triangle
Source: Pestoff, 1998 & 2005
Nevertheless, economists have devoted very little attention to the operational definition
of “organization” in a nonprofit setting (Steinberg, 1997). Coase (1937) argues that the
boundaries of the for-profit firm are determined by the relative transaction costs
of market trade and internal non-market allocation, offering an especially rich
foundation for the analysis of nonprofit firms. Are the boundaries different because
of the non-market allocations of volunteers and donations? Although some analysis
27
of transaction costs in a nonprofit setting has begun (for example, Krashinsky, 1986;
Salamon, 1987a; Ben-Ner & Van Hoomissen, 1991; Ferris & Graddy, 1991; Grønbjerg,
1993), this analysis has not focused on the determination of organizational boundaries.
Several papers examine mergers, franchising, multiple outputs, and united fundraising
as attempts to remedy organizational externality problems (for example, Oster, 1992;
Bilodeau & Slivinski, 1995), another factor thought to mediate organizational
boundaries. There are still many difficult cases of sector blurring (for example, Billis,
1993) and unclear organizational boundaries within sectors due to the power of funders
over organizational governance, overlapping memberships in organizational boards
of directors, partnerships, and joint ventures, for-profit subsidiaries of nonprofit
organizations, nonprofit subsidiaries of for-profits, united fund-raising organizations,
and nonprofit franchise arrangements (Steinberg, 1997). The third chapter of this
habilitation thesis contributes some clarity to this taxonomic debate.
The institutional framework focuses on the structures and processes that continue
to shape the dynamics of the nonprofit sector and its relationships with the public and
for-profit sectors (DiMaggio & Powell, 1983; Selznick, 1996; Smith & Grønbjerg,
2006). A related approach concerns what makes nonprofit organizations distinctive
from organizations in other sectors (Casey, 2015). nonprofit organizations differ from
government entities and for-profits because of their unique combinations of production
functions, governance structures, revenue sources, and staffing, and their legal and tax
system (Salamon, 2010). As they are neither governmental nor for-profit, nonprofit
organizations have been seen as potentially combining the best of the two sectors: “the
public interest, responsibility, and wide perspective of government, melded with the
efficiency and knowledge of business” (Etzioni, 1973). All of the characteristics
ascribed to the sector have their own gray areas of definitional disputes (see e.g. Casey,
2015). Clear definitions are elusive and the various attempts to find neat fault lines
between the sectors have only served to underline the demarcation challenges (see
Chapter 3).
The question that must be pointed out in this context is Is being nonprofit important?
(cf. Casey, 2015). Nonprofit organizations fulfil a large variety of functions
in democratic societies (Neumayr et al., 2007). Following Boris and Mosher-Williams
(1998), social, civic, and economic functions can be detected to describe the roles
of nonprofit organizations. Kramer (1981) identified four key roles and functions:
service provider, innovator, guardian of values, and advocate. However, a closer look at
the categorizations of nonprofit functions offered in literature shows that they are
28
manifold and differ greatly (see, for example Kramer, 1981; Salamon et al., 2000). The
functions of nonprofit organizations are identified in Table 1.
Table 1 Concepts of nonprofits` functions identified in literature
FUNCTION/AUTHOR
Salamon/
Sokolowski
Estelle/Rose-
Ackerman
Land
Fumkin
Kramer
Kendall
Salamon/Hems
Service/Service providing
Expressive role (and leadership
development role)/Value guardian
role and
volunteerism/Representational
function
Philantropy
Charity
Improver/Advocacy role
Vangueard role and service
pioneer/Innovation function
Community building (and
democratisation
role)/Fellowship/Social capital
Social entrepreneurship
Source: Neumayr et al., 2007
The role of nonprofit organizations in democratic societies is a topic of perennial
interest in the political arena as well as in socioeconomic research. Nonprofit
organizations s may fulfil two major functions in contributing to the security and
stabilization of society while at the same time stimulating societal advancement. In
many countries, nonprofit organizations assume a mainstay role in integrating
disadvantaged groups through the provision of social services and hence constitute
“social mollifiers.” Simultaneously, nonprofit organizations assume an “expressive
function” by giving a voice to societal issues such as the protection of the environment.
It cannot be assumed that the expressive function and service orientation are
dichotomous variables. A majority of socially active nonprofit organizations identify
themselves with both functions even though this may inevitably lead to tension within
the organization between those who prefer the income-generating service activities and
those who push for the expressive obligations. The classification of organizations that
29
are active in both fields remains unclear. There is a no concise method in classification
systems such as the International Classification of Nonprofit Organizations (ICNPO)
that makes it possible to fully delineate advocacy (Neumayr et al., 2007). Apart from
the service function and expressive functions three more nonprofit functions are
acknowledged as highly relevant in the (post-) transitional context (Vaceková
& Murray Svidroňová, 2016):
1. The innovative function. The nonprofit sector can be a source of various
innovations, including in the use of technologies, new methods of education,
and innovative procedures of citizen mobilization. The innovative functions of
the nonprofit sector lead to the creation of a more challenging environment for
the work of public organizations.
2. The advocacy function or the social change function. These functions defend or
promote the interests and rights of individuals or specific groups of citizens. In
the Czech Republic and Slovakia, this function is one of the most important
because it contributes to the transformation of society.
3. The function of community building and the democratization function. This is
a very important function in the Czech Republic and Slovakia, where the former
regime adversely affected the development of community life and the natural
mechanisms of citizen mobilization in relation to public affairs governance.
On closer inspection of the functions of nonprofit organizations, it is visible that the
role of the nonprofit sector consists of taking an active part in shaping democracy and
diversity and controlling the rules adopted in society. The service provider role of
nonprofit organizations is the one to which most attention is usually paid. But the
service, entrepreneurial, and innovative functions are undoubtedly less contentious than
the expressive functions of advocacy, civic engagement, and cultural expressions
(Casey, 2015). In terms of their beneficial effects, the nature of the services that private
nonprofit organizations provide can be as follows (Kuvíková & Svidroňová, 2010):
− mutually beneficial services: private nonprofit organizations implement the
interests of their founders, direct their activities at meeting the needs of a small
group of people (an interest group), and are established on a membership basis;
for example: civic associations, political parties and movements, chambers,
clubs, and associations;
− generally beneficial services: private nonprofit organizations meet generally
beneficial objectives and serve everybody under the same conditions that are
known in advance; for example: civic associations, foundations, non-investment
funds, and nonprofit organizations providing generally beneficial services,
30
in particular as follows:
o provision of health care,
o provision of social assistance and humanitarian care,
o creation, development, protection, restoration, and presentation
of spiritual and cultural values,
o protection of human rights and fundamental freedoms,
o education and development of physical culture,
o research, development, scientific and technical services, and information
services,
o creation and protection of the environment and protection of public
health,
o services in support of regional development and employment,
o the provision of housing; management, maintenance, and renewal of the
housing stock.
− public utility services: private nonprofit organizations carry out tasks related
to the public interest, fulfil the tasks of the municipality or the state, or secure
other public functions; they are subject to public scrutiny and usually have
financial relations with public budgets.
It is possible to polemicize whether the mutually beneficial services, meaning the
services which meet the needs of a small group of people, can also be perceived as
generally beneficial from a broader point of view. In many cases, traditions are
preserved, non-traditional forms of education are created, sports and culture are
promoted, and the spare time of members is filled with meaningful activities (which
can be understood as preventing socio-pathological phenomena in society) when the
“hobbies” of an organization’s members are supported. It is therefore possible that
mutually beneficial activities are generally beneficial in a wider perspective, as they
benefit the whole society.
The provision of public utility (generally beneficial) services is referred to as a service
role. There are hypotheses that services provided by private nonprofit organizations
meet one or more of the following characteristics (ibid):
− Higher quality - since they are not profit-oriented, they provide services of
a better quality than commercial facilities. Nonprofit organizations are also
more flexible, being able to provide different (auxiliary) services, for example
in the area of community development, along their main service, which in a way
31
increases satisfaction of consumers. Hence, the quality of services can be
evaluated as superior.
− More justice - nonprofit organizations have more intensive motivation to serve
those who need it most, the services are more equitably distributed than
in commercial enterprises that “discriminate” against those who cannot pay.
This attribute does not necessarily have to be present as it does with the
provision of services by government.
− Lower cost ratio, higher efficiency - nonprofit organizations can reduce the
costs of their services and achieve greater efficiency by deploying volunteers
and the funds of a charitable and philanthropic character. At the same time, by
using resources other than those from the state, private nonprofit organizations
strengthen their autonomy and sustainability in the market of the provided
services of general interest.
− Specialization - based on their mission, values, and knowledge of the
communities in which they operate, nonprofit organizations may specialize
in a particular issue, a group of citizens, a type of intervention, and service
delivery.
From the perspective of public economics, another specific feature related to the
provision of services results from the information asymmetry on the part of the
consumer (Chiang & Venkatesh, 1988; Bloom, Standing & Lloyd, 2008). However, the
nonprofit sector of every country is the result of its particular social, economic, and
political history (Casey, 2016). The origin, function, and mode of operation of the
nonprofit sector in each country reflect the unique circumstances of that country
(DiMaggio & Anheier, 1990; James, 1989; Kramer, 1981; McCarthy et al., 1992;
Pryor, 2012; Salamon & Anheier, 1997; Salamon & Sokolowski, 2010; Skocpol, 2011).
Salamon and Anheier (1992a, 1992b, 1998) wrote of “social origins” and “nonprofit
regimes” whereas Anheier and Kendall (2001) talked about “national scripts.” It is
necessary to provide a critical assessment of the theories explaining the emergence and
justification of the third sector while taking the (post-) transitional context into account.
1.3 Theories of the nonprofit sector: An overview
What makes for a good theory in economics? Long neglected as a topic of theorizing
and empirical investigation by mainstream economics in particular, the initial theories
regarding nonprofit organizations have continued to shape theoretical and conceptual
efforts (Steinberg, 1997). Much work was achieved primarily between 1975 and 1985
32
when Henry Hansmann’s trustworthiness thesis, Burton Weisbrod’s public goods
theorem, Estelle James’s heterogeneity argument, and other economic theories were
first introduced to provide theoretical foundations for what was then a newly emerging
field (see Rose-Ackerman, 1996; Hansmann, 1987; DiMaggio & Anheier, 1990;
Anheier & Ben-Ner, 1997).
Importantly, the influence of this theorizing has continuously extended beyond
economics and informed sociological and political science approaches to the set
of organizations and institutions situated between the market firm and the state agency
(Anheier & Ben-Ner, 2003; ibid, 1997; DiMaggio & Anheier, 1990). While the
theoretical map of nonprofit research has expanded beyond the early attempts and now
includes several other major theories, such as stakeholder approaches, supply-side and
entrepreneurial theories, institutional theories, and comparative approaches, it is time to
take stock and reexamine some of the very basic concepts from which these economic
theories operate (Anheier & Ben-Ner, 2003).
Figure 3 Classification of nonprofit theories
Source: Murray Svidroňová, Vaceková & Valentinov, 2016
The existing theoretical approaches to nonprofit organizations can be classified into
three groups (Fig. 1): those reflecting the limitations of the economic system; those
reflecting the limitations of the political system; and those that cannot be attributed to
the failure of any specific functional system. The third group may seem vague, but it
can be conveniently conceptualized in terms of the societal values that are reinforced by
the missions of the particular nonprofit organizations. As Valentinov (2012c, p. 83)
wrote, “the role of the nonprofit sector is in reconfiguring the allocation of societal
resources, as it is evolving in the for-profit sector, so as to bring it in congruence with
the broader societal values, including those of human dignity, environmental
preservation, and care for disadvantaged people. The for-profit sector needs to be
supplemented by the nonprofit sector not because of market failures, but because of its
33
failure to take due account of the relevant societal values.” An advantage of the
proposed classification is that specific nonprofit theories may be assigned to several
groups at the same time. Furthermore, a specific listing of nonprofit theories does not
need to be comprehensive in order to fit in the classification.
Failure-based theories
Economic theories that seek to explain the existence of nonprofit organizations focus
on the concepts of public versus private goods and the various “failures” that drive the
demand for them (Salamon, 1987a; Steinberg, 2006). The first reconciliation of the
persistence of nonprofit organizations with classical economic theory was offered by
Burton Weisbrod (1977). His theory of government failure parallels the more
established theory of market failure (Le Grand, 1991). Weisbrod (1977, 1988) argued
that public goods provided by the government were generally targeted at the median
voter, which creates a gap that can be found both at the high end, for those able to pay
for such services in the marketplace, and at the low end, for the marginalized who must
organize alternative provisions. Those consumers for whom public goods are in high
demand may find that government does not supply as much as they would like. In order
to increase their utility, these high-demand consumers support nonprofit firms which
can satisfy their needs. Thus the existence of nonprofit firms depends upon the
existence of heterogeneous demand (Krashinsky, 1997).
Nonprofit organizations flourish when either, or both, “market failure” (for-profit firms
have no interest in a good or few trust that it can be delivered with equity and
accountability) and “government failure” (the government cannot deliver a public good
efficiently) have occurred. Weisbrod (1988) argued that the nonprofit organizations that
were not motivated by making profits had goals that differed from the goals of
profitable businesses and that those nonprofit organizations would not skimp on the
quality or quantity of the services provided at the expense of poorly informed
consumers. The advantage of the provision of those services by private nonprofit
organizations, compared to profitable companies, lies, inter alia, in reducing the degree
of the information asymmetry on the part of the consumer.
The failure-based theories of nonprofit organizations explain their ability to overcome
two types of failures (Valentinov, 2009): those involving public goods and those
involving information asymmetries. The basic assumption for such government
failure/market failure theories is the limitation in the ability of the market to provide
public goods in sufficient amounts. Classic economics argues that this market
shortcoming would serve as a justification for the state and government to exist. But the
34
government tends to reflect the preferences of median voters, resulting in the
persistence of unsatisfied demands for public goods. This government failure leads
people to turn to nonprofit organizations “to supply the public goods they cannot secure
through either the market or the state” (Salamon & Anheier, 1998).
Individuals, however, are not the only demand-side stakeholders. Governments
themselves purchase goods and services from private organizations. Because
governments often provide services that are consumed by other parties, and are often
involved in sectors in the first place because of the existence of public goods, they are
frequently prone to the same kinds of information problems discussed above (see
Krashinsky, 1997). This leads governments to turn to nonprofit providers for the same
reasons as private consumers do, and it is one of the reasons that governments are often
an important source of funds for nonprofit institutions (ibid). Discussion of this kind of
funding and its implications can be found in Salamon (1987b) and Krashinsky (1990).
Trust theories
When focusing on “failures” Hansmann (1980, 1987) described a “contract failure” that
posits that consumers prefer nonprofit organizations because governments fail
to provide services to all and for-profit businesses fail to offer assurances against
exploitation. Hansmann introduced the label “contract failure” to describe the role of
nonprofit ownership in markets with asymmetric information. The term is actually far
broader; in fact, it subsumes many other theories, including its main competitors: public
goods theories, subsidy theories, and consumer control theories (Hansmann, 1987).
The preference for nonprofit service is driven by the trust that nonprofit organizations
will deliver responsive and non-exploitative services and will not abuse information
asymmetries (Casey, 2015). The “trust hypothesis” is based on the claim that
asymmetric information in the markets for certain goods and services can explain the
existence of nonprofit enterprise in those markets (Hansmann, 1980, 1994). Assuming
that profit-maximizing producers might not have an incentive to deliver the quality
of goods and services they promised consumers and/or donors, Hansmann suggested
that nonprofit organizations eliminate the temptation to misrepresent the quality of their
wares by way of the non-distribution constraint (Ortmann & Schlesinger, 1997), which
is a key structural feature of nonprofit organizations (see Vaceková, 2014).
Hansmann hypothesized that such a constraint would take care of producers’ incentive
to engage in opportunistic behavior. The prohibition of profit distribution to owners is
an aspect of nonprofit trustworthiness, because it means that “those involved in
nonprofit organizations are less likely to be in the field solely for the money”
35
(Hansmann, 1980; 1987). Nonprofit organizations can be perceived as a solution for
another form of market failure arising from information asymmetries, such as when
consumers lack the information they need to judge the quality of goods and services
they purchase, mainly when the purchaser is not the same person as the consumer.
This approach has traditionally been criticized for exaggerating the significance of the
non-distribution constraint and assuming that it is perfectly enforced (James, 1997;
Ortmann & Schlesinger, 1997). The critical observations mentioned in the study
presented by Valentinov (2008a) reveal that “the traditional understanding of the nondistribution
constraint as a trustworthiness-enhancing device is incomplete.” Valentinov
shows that the non-distribution constraint is also a reflection of the directly utilityenhancing
character of involvement in nonprofit firms for their key stakeholders.
Recent studies have reaffirmed that the effect of the non-distribution constraint is
conditioned by the effectiveness of its enforcement. Malani and Posner (2007) showed
that “eliminating the profit incentive to compromise quality does not eliminate other
incentives to do so,” because the nonprofit form itself simply replaces one nonverifiable
condition (the quality of the product or service) with another (the altruism of
the entrepreneur). Valentinov (2008c) showed that even ordinary for-profit
entrepreneurship is importantly, if not primarily, motivated by non-monetary
preferences, such as for being one’s own boss, having the opportunity to use certain
skills and abilities, and pursuing one’s own ideas and ideologies (Benz, 2009).
Nevertheless, Hansmann’s (1980) suggestion that there is something interesting and
different about organizations that are constrained from distributing their profits has
borne the test of time (Steinberg, 1997). The constraint has been enormously useful in
economic modelling of the role and behavior of nonprofit organizations.
A mathematical representation of the non-distribution constraint plays an essential role
in most formal models (ibid), at least partly determining the patterns of crosssubsidization
and product offerings (for example, James, 1983; Ben-Ner, 1986; Schiff
& Weisbrod, 1991; Eckel & Steinberg, 1993), the quality or trustworthiness of service
(Easley & O’Hara, 1983; Ben-Ner, 1986; Chillemi & Gui, 1990, 1991; Handy, 1995;
Hirth, 1995), the level of donations (Bilodeau & Slivinski, 1995a,b), the patterns of
price discrimination (Hansmann, 1981a; Ben-Ner, 1986; Steinberg & Weisbrod, 1996),
the types of entrepreneurs and managers common in the sector (Schlesinger, 1985; Gui,
1990; Folland, 1990; Preston, 1992; Eckel & Steinberg, 1993; Bilodeau & Slivinski,
1995c), the average per-period deficit incurred (Austen-Smith & Jenkins, 1985), and
the accumulation of capital (Hansmann, 1981b, 1990; Tuckman & Chang, 1992).
As indicated, Hansmann’s central claim is that the non-distribution constraint reduced
36
the incentives for those associated with nonprofit organizations to claim any financial
surplus, and hence to misrepresent their activities to consumers of their services or
potential donors (Ortmann & Schlesinger, 1997). In this sense, nonprofit organizations
were thought to be more “trustworthy.” This hypothesis was subsequently developed
with greater mathematical rigor by Easley and O’Hara (1983, 1986), Ben-Ner (1986),
Chillemi and Gui (1991), and Hirth (1995). Each of these elaborations focused on
particular aspects of the processes that were thought to produce greater trustworthiness.
But as many scholars have observed, neither the original formulation nor its subsequent
formalizations created a complete and internally consistent explanation for the role of
nonprofit organizations in industries with mixtures of nonprofit and for-profit
ownership (James, 1986; Steinberg & Gray, 1993; Anheier, 1995). Furthermore, issues
of internal organization were downplayed (James, 1986; Ben-Ner, 1994; Brody, 1996;
Ortmann, 1996). Despite these doubts and skepticism, the use of asymmetric
information as an explanation for the existence of nonprofit organizations has become
widespread (Oster, 1995; Young & Steinberg, 1995).
Supply-side theories
Another theoretical approach treats the unsatisfied demand for public goods resulting
from state and market failures as a necessary but insufficient condition for the existence
and importance of nonprofit organizations in a socio-economic context. This supplyside
theory argues that another condition is needed, namely “the presence of people
with an incentive to create NGOs to meet such demand” (James, 1987).
Failure and choice equations tend to focus on demand conditions but do not necessarily
explain the supply-side decisions to organize according to nonprofit principles in
situations in which people have an option to choose between nonprofit and for-profit
structures (Casey, 2015). What advantage could these organizations offer if they have
a non-distribution constraint and thus provide limited material returns to those
delivering the good? Nonprofit organizations benefit by access to economic advantages,
including a reduced tax burden, the workforce contribution of volunteers, and access
to government grants and private donations (Lyons, 1993; Wolch, 1990). In order to
understand entrepreneurship theories, it is useful to recapitulate the concept of
entrepreneurship (Badelt, 1997). In his seminal pieces on entrepreneurship theories,
Dennis Young (1980, p.2ff) refers to Schumpeter’s basic characteristics of an
entrepreneur as described in his theory of economic development (see, particularly,
1934, p.65ff). An entrepreneur is portrayed as an individual with a specific attitude
towards change (Badelt, 1997). According to entrepreneurship theories, entrepreneurial
37
behavior explains why nonprofit organizations are founded and their engagement in the
provision of services.
Without founding entrepreneurs and those managers and board members willing to play
a continuing role in the evolution of an organization, the nonprofit share would
obviously fall to zero (Steinberg, 1997). Further, the type of entrepreneur attracted to
the nonprofit sector determines, at least in part, the objective of the organization and
therefore how it will compete and grow (ibid). Yet far too little attention has been
focused on detailed empirical and theoretic analysis here, especially in the (post-)
transitional context. Existing studies specify the variety of entrepreneurial motivations
(Young, 1983), but say little about the empirical distribution of entrepreneurial types
(for an exception, see Rawls et al., 1975). Public goods and transaction cost theories
provide an economic foundation for Salamon’s (1987a) “philanthropic particularism”
theory of voluntary failure (Ben-Ner & Van Hoomissen, 1991), but there is room for
much more integration between economic and political science theories (see Steinberg,
1997).
Entrepreneurial theories give a rationale for the existence of nonprofit organizations
from the supply side. In this sense, they introduce the concept of “institutional choice”
or “organizational choice” (Weisbrod, 1988; Badelt, 1990, 1997b; Ben-Ner & Van
Hoomissen, 1993, p.31) in a supply-oriented theory of the nonprofit sector. Therefore,
entrepreneurship theories can be viewed as “institutionalist” theories of the nonprofit
sector, making it difficult to compare them with more formal neo-classical theories
(Badelt, 1997a). Although some formal theories of nonprofit organizations that
conceptualize nonprofit behavior as neo-classical maximization models are based on
objective functions not too different from entrepreneurship theories (ibid),
an integration of both lines of reasoning has not been explicitly made, although there is
no doubt that the qualitative hypotheses forwarded by entrepreneurship theories may be
a good starting point also for the development of formal theories (Young, 1996).
Interdependence theory
The welfare state theory, both failure theories (underlying the heterogeneity), and
supply-side theories “take as given that the relationship between the nonprofit sector
and the state is fundamentally one of conflict and competition” (Salamon & Anheier,
1998). Nonprofit organizations also face failure if they cannot deliver results. Salamon
(1987a) noted that nonprofit organizations are hampered by four potential failures:
insufficiency (they cannot meet needs), particularism (their activities focus on a limited
38
constituency), paternalism (they set the agenda with little end user input), and
amateurism (they do not have the capacity to effectively manage programs).
Nevertheless, close cooperative relationships can occur between nonprofit
organizations and governments. The possibility of cooperative relationships is the
subject of the interdependence theory. A specific version was proposed by Salamon and
Anheier (1998) called the social origins theory. In contrast to the single-factor
explanations advanced in the context of neoclassical government–market failure
models, the social origins theory focuses on a broad range of societal, political, and
economic factors in explaining the nonprofit phenomenon in a comparative perspective.
Although it focuses on a broader context, the analysis still rests on the prevailing
government-failure approach and a two-sector view of society. Institutional analysis
suggests nonprofit organizations should be viewed not as forming an institutional sector
but as part of a complex network of organizations linked together in the public sphere
(Wagner, 2000).
Rurality theory
A new theory to explain the role and existence of nonprofit organizations in the
economy and society is the rurality theory. This theory, which is a type of market
failure theory, was formulated by Vladislav Valentinov (2009) and assumes that
generally the existence of the nonprofit sector is a result of the limited abilities of forprofit
firms to satisfy human needs. Valentinov adds to this theory that there are
specific characteristics of rural areas with specific human needs resulting in “ruralityspecific
costs.” The rural theory’s general hypothesis is that rurality-specific transaction
costs led to the emergence of rural nonprofit sector organizations. Based on
Valentinov’s assumptions, the recognized empirical relevance and the growing political
popularity of the rural nonprofit sector have not yet been matched by a corresponding
development in nonprofit sector economic theories (Valentinov, 2012c).
In fact, a rural nonprofit economic theory has been altogether lacking. Traditional
general theories of the nonprofit sector emphasized its role in providing public goods
(Weisbrod, 1991), gaining consumer trust (Hansmann, 1987), ensuring better consumer
control over the production of goods and services (Ben-Ner, 1986), and serving as an
outlet for ideological entrepreneurship (Rose-Ackerman, 1996). These theories have
clearly been developed with no regard for the distinction between rural and urban
regions. Hence, none of these theories is adequately positioned to take account of the
specificity of rural conditions in explaining the existence of the rural nonprofit sector.
In line with traditional nonprofit economic theories, the rural theory assumes that the
39
existence of the nonprofit sector is a result of the limited ability of for-profit firms to
satisfy human needs.
The original contribution of the rural theory is in the argument that some of the
limitations of for-profit firms located in rural areas are related to rural characteristics
such as low population density, geographical dispersion, and poor infrastructure. These
characteristics give rise to “rurality-specific” transaction costs that must be borne by
for-profit firms located in rural areas. The rurality-specific transaction costs constrain
the scope of operation of rural for-profit firms, thus diminishing their ability to satisfy
rural dwellers’ wants and creating a niche for rural noprofit organizations (Valentinov,
2012b).
The applicability of nonprofit economics to conceptualizing rural development is based
on recognizing that the challenges of rural development ultimately result from the
lower presence of for-profit firms in rural areas than in urban ones. Indeed, the lack of
for-profit firms is precisely what constrains the rural dwellers’ opportunities to satisfy
their needs and to maintain their wellbeing at the level that is achievable in cities. In
terms of economic theory, this lack of for-profit firms can be thought of as
a consequence of the higher transaction cost of market exchange in rural areas. The
transaction cost in rural areas is evidently increased by population scarcity, the
significant geographic dispersion of consumers and producers, and a relatively poor
infrastructure (Terluin, 2001). This transaction cost limits the ability of for-profit firms
to maintain social welfare in rural areas at a level equivalent to that of cities.
While nonprofit economics locates the role of nonprofit organizations in the balance
against the for-profit firms’ limitations, the specific mechanism permitting nonprofit
organizations to provide this balance still needs to be explained. With rural nonprofit
organizations, this mechanism can be inferred from the fact that many nonprofit
organizations are mutual self-help organizations, i.e. they produce their core outputs for
the purposes of consumption by their own members rather than for sale. Due to their
foundations in mutual self-help, these nonprofit organizations may be designated as
self-sufficiency-oriented rather than exchange-oriented. Their self-sufficiency
orientation is the reason that high transaction costs do not (necessarily) disable their
existence. Indeed, transaction cost, following the definition by Ronald Coase (1937), is
the cost of using the price mechanism, i.e., the mechanism of market exchange. Since
self-sufficiency-oriented nonprofit organizations produce their output for consumption
by their own members, rather than for sale in the market, they are less affected by the
rurality-specific transaction cost. Moreover, economists have long recognized that the
replacement of the market exchange with self-sufficiency is a natural consequence of
40
high transaction costs (Demsetz, 1997; Becker and Murphy, 1992), so the ruralityspecific
transaction cost can be said to give rise to the replacement of exchangeoriented
for-profit firms with self-sufficiency-oriented nonprofit organizations.
It must of course be noted that not all rural nonprofit organizations are fully selfsufficiency-oriented.
Local community organizations, rural and agricultural
cooperatives, and rural partnerships may all produce at least some of their output for
sale in the market. But since none of these nonprofit organizations, by definition,
represent for-profit firms, their objectives necessarily include nonpecuniary aspects
related e.g. to the maintenance of local culture and infrastructure (e.g. Uphoff, 1993),
the rational use of common pool resources (e.g. Poteete and Ostrom, 2008), or the
organization of local collective action (Staatz, 1987). Apart from producing any
commercial output, rural nonprofit organizations necessarily undertake activities aimed
at achieving these nonpecuniary objectives because these objectives reflect precisely
those needs of nonprofit organization members that cannot be satisfactorily met by forprofit
firms. These nonpecuniary objectives are the object of self-sufficiency in rural
nonprofit organizations.
Thus, rurality may be regarded as a distinct theoretical rationale for the nonprofit sector
because it involves the rurality-specific transaction cost that limits the ability of forprofit
firms to satisfy human needs. Nonprofit organizations are able to balance
limitations of the for-profit firms because the rurality-specific transaction cost leads to
the replacement of exchange-oriented organizations (embodied by for-profit firms) with
self-sufficiency-oriented ones (embodied by nonprofit organizations).
While the notions of trust, information asymmetry, public goods, demand
heterogeneity, and transaction costs continue to serve as the building blocks of
economic theories in this field, recent work has expanded on previous research and
improved understanding of the origins of nonprofit organizations. While these
improvements have been useful for understanding nonprofit organizations, there is
nonetheless a need to reconsider the conceptual inventory of microeconomic theories
(Anheier & Ben-Ner, 2003). Nonprofit scholars have a tendency to retain “old” theories
as basic reference points even when the theories themselves may no longer be adequate
for current research efforts, especially in the post-transitional context. Even in 1997,
Anheier and Ben-Ner doubted that economic theories could inform empirical research
to the extent needed for continued theoretical development.
41
1.4 Towards an integrative theory: Critical assessment of
current approaches
Since the 1970s, neoclassical economists have been considering an apparent paradox:
“the presence of nonprofit organizations inside markets driven by the quest for profit”
(Laville et al., 2015). Economics literature on the nonprofit sector has continued in the
neoclassical tradition, “which examines the raison d'être of organizations in the market
economy” (ibid). Nonprofit organizations are chiefly explained in terms of their ability
to address market failure (Jegers, 2008; Steinberg, 2006). The limitations of this
explanation are, however, widely recognized (see Steinberg, 2006). Specifically, the
market failure explanation does little to include the motivational phenomena, such as
ideological commitment, altruism, social values, and mission-drivenness, that are
critical for the effective operation of the nonprofit sector (Rose-Ackerman, 1996).
Vladislav Valentinov (2011) argues that it is for this reason that the market failure
explanation for this sector is supplemented with the “ideological entrepreneurship”
theory, which is centrally concerned with the motivational phenomena. “However,
while focusing on the motivation of nonprofit entrepreneurs, the ideological
entrepreneurship theory does not systematically derive this motivation from the broader
institutional framework of the market economy. As a result, despite the booming
research on nonprofit economics in the last decades, an integrated theoretical vision of
this institutional arrangement has not yet evolved” (Valentinov, 2008b).
Valentinov has proposed numerous approaches for identifying this integrated vision. As
the market failure approach cannot accommodate “ideological entrepreneurship” and
other supply-side theories, Valentinov proposed replacing the concept of the market
with that of the social division of labor. The social division of labor is clearly a more
fundamental concept that theoretically includes both markets that fail and those that do
not. The concept itself, however, may be constrained, as acknowledged by Adam
Smith’s statement that that “the division of labor is limited by the extent of the market.”
Recent literature acknowledged that additional constraints on the social division
of labor include transaction costs and technological knowledge (Valentinov, 2006).
Valentinov traced the economic origins of the nonprofit sector to the constraint of the
social division of labor by transaction costs, using the term “transaction costs” with
a meaning which must be carefully differentiated from transaction costs in the new
institutional economics understanding of the term. In later work, Valentinov put the
social division of labor argument on an institutionalist basis by referring to the
“institutionalist dichotomy” prominent in American institutional economics,
alternatively called “old” or “original” institutional economics.
42
The old institutional economics perspective questions the ability of the new institutional
economics to provide an exhaustive explanation of the nonprofit sector, as the new
institutional economics does not seem to cover the economic space beyond the social
division of labor. Following a seminal article by Ronald Coase (1937), which
“highlighted that certain transaction costs can explain the formation of economic
enterprises” (Laville et al., 2015), Oliver Williamson (2012) defined an organization
as a“governance structure” that enables the reduction of transaction costs. The new
institutional economics, as introduced by Coase and further developed by later authors
including Williamson, “confers to the organization a theoretical status that was not
previously recognized by orthodox economic science” (Laville et al., 2015). For
example, the main hypothesis of transaction cost economics asserts that transactions are
aligned with governance structures in a transaction cost-economizing way. The
minimization of transaction costs thereby serves as a criterion of efficiency in the
appraisal of governance structures. The use of efficiency criteria implies the assumption
that there is an efficiency maximum, and that the competitive pressures of the market
facilitate the attainment of that maximum, even though it might remain unreachable due
to transaction costs and related reasons (see also Demsetz, 1969). However, if the
nonprofit sector is truly based in the economic space beyond the social division of
labor, as Valentinov (2006, 2008c) stated, then the assumptions of efficiency and
transaction cost-economizing become less relevant.
Old institutional economics rejects these assumptions of efficiency and economizing.
One of its key ideas is the “pecuniary-industrial” (or Veblenian) dichotomy
emphasizing the limitations of the markets and of the price system in guaranteeing
a high quality of human life. “The pecuniary-industrial dichotomy is a major theme in
the work of Thorstein Veblen, and has found further development in the form of the
‘technological-ceremonial’ dichotomy in the writings of Clarence Ayres” (Valentinov,
2008b). Original institutional economists also do not share the new institutional
economists’ faith in the beneficent natural order of social organization that is embodied
in the Pareto-optimal competitive equilibrium (Gruchy, 1987), a faith that can be
inferred from the use of efficiency criteria in the terms of which this equilibrium is
defined. New institutional economics gives a much more prominent place to markets
than old institutional economics does (Rutherford, 1995). This new institutional
economics attitude is exemplified by Williamson’s (1975, p. 21) assertion that “in the
beginning there were markets” (Ankarloo and Palermo, 2004; Hodgson, 1998). The
favorable disposition toward markets is associated with the use of efficiency criteria in
evaluating the performance of real-world institutions. The institutions of the nonprofit
sector may be more appropriately appraised by alternative criteria. Drawing on the
writings of the institutional economist Radhakamal Mukerjee, Valentinov (2011)
43
suggested that the role of the nonprofit sector is more properly seen in “helping the
economies to better accommodate broader societal values” as well as in “the pursuit of
common interests rather than in individual utility maximization.”
The most important factor of the institutionalist vision of the integrative conceptual
core of the nonprofit sector is that the nonprofit sector generates behavioral patterns
that cannot be imitated by profit-seeking behavior. This factor seems to have
implications that go beyond those that Valentinov elaborated. Valentinov (2009, 2012a,
2012d) convincingly showed that this behavioral difference accounts for the ability of
nonprofit organizations in rural areas to contribute to the quality of social life in ways
that cannot be copied by for-profit organizations. If rural areas are indeed marked by
“rurality-specific transaction costs” that constrain the social division of labor, then the
for-profit firms located on the “pecuniary pole” of the institutionalist pecuniaryindustrial
dichotomy must indeed be constrained by the lowered pecuniary
attractiveness of these areas.
However, Valentinov’s innovative application of the institutionalist dichotomy has
considerably broader implications, going beyond the rural development context. To
begin with, the basic service-providing role of the nonprofit sector largely arises out of
its nonprofit orientation, which is emphasized by the dichotomy (Salamon et al.,
2016b). The services that nonprofit organizations are expected to provide are those that
involve some “public” or collective character. Such goods and services are typically
difficult to supply through the private market because they are available to everyone
regardless of whether they have been paid for, because those in need of them lack
resources, or because the services require some special element of trust (Hansmann,
1980; Weisbrod, 1975; Salamon, 1987). The Third Sector Impact project (2016)
showed that “in situations where trusted economic institutions to provide credit or assist
with marketing and related roles are unavailable, moreover, nonprofits can also be
expected to provide such economic services (e.g., in many developing countries and
transition economies). In a number of places, the nonprofit service role is not
distinguished sharply from that of government, though in some places, such as Central
and Eastern Europe (e.g. Hungary, Romania, Slovakia), nonprofit organizations are
now expected to be the primary service providers” (Salamon et al., 2016).
Furthermore, as nonprofit organizations are not principally profit-oriented, they can
afford to provide a higher quality of service than commercial enterprises (Weisbrod,
1989; Billis & Glennerster, 1998). Because of their access to voluntary and
philanthropic support, their charitable goals, and their more limited interest in profit,
nonprofit organizations should be more inclined to serve those in greatest need. Their
44
client profiles can therefore be expected to differ from those of commercial enterprises,
though not necessarily from those of government agencies (Weisbrod, 1989; James
& Birdsall, 1992; Kramer, 1981). Access to volunteers and charitable support can
enable nonprofit organizations to offer services at a lower cost than other providers and
therefore be considered more efficient (Weisbrod, 1989; Badelt & Weiss, 1990).
Because of their value-based missions and embeddedness in communities of place and
need, nonprofit agencies can specialize in a problem, a group of people, a service
delivery system, or a method of intervention (Farrington & Bebbington, 1993; Kramer,
1981, p.259).
As they are not driven by the “bottom line,” nonprofit organizations are also potentially
more flexible and adaptable than other types of organizations and more able to take
risks, thus fulfilling the innovation role. All three types of innovation identified by
Stephen Osborne (1998) can be identified with the nonprofit sector: evolutionary
innovation in situations in which there is a new process/product; expansionary
innovation where there is a new market; and total innovation where there is a new
process/product and a new market. This innovation role is widely recognized in the
literature (see, for example: Kramer, 1981; Osborne, 1998; Light, 1998).
Because they are not beholden to the market and are not part of the governmental
apparatus, nonprofit organizations can be expected not only to innovate, but also to
push for changes in government policy or in societal conditions (Boris & MosherWilliams,
1998; Habib & Taylor, 1999; Kramer, 1981; Lipsky & Smith, 1989). This
advocacy role is also consistent with the voluntary character of nonprofit organizations
and the availability of these organizations as mechanisms to gather people who share
a particular concern. Two dimensions of the advocacy role appear significant in the
literature: the personal and the public (Hayes, 1996), alternatively termed “citizen
advocacy” and “policy advocacy” (Knapp et al., 1988, p.15). This is consistent with the
“expanded conception of advocacy” proposed by Boris and Mosher-Williams (1998,
p.488), which embraces not only policy-oriented activity but broader “civic
involvement” that nonprofit organizations can facilitate. Ralph Kramer also termed this
the vanguard role (Kramer, 1981).
Nonprofit organizations can be expected to take advocacy as one form of their
representational activities. These organizations may also perform a broader role
as vehicles for individual and group self-expression (Weisbrod, 1975). Kramer referred
to this as the “value guardian role” of nonprofit organizations: “As a value guardian
of voluntaristic, particularistic and sectarian values, a voluntary agency is expected
to promote citizen participation, develop leadership, protect interests of social,
45
religious, cultural, or other minority groups” (Kramer, 1981, p.9). David Horton Smith
(1973, p.337) also identified the ability of the voluntary sector “to liberate the
individual and permit him or her the fullest possible measure of expression of personal
capacities and potentials within an otherwise constraining social environment....” as one
of the sector’s central impacts (Smith, 1973, p.337). Thus, groups form to give
expression to ethnic and religious heritages, to occupational matters, to shared
ideologies and interests, to musical or cultural concerns, and to thousands of other
interests. In addition, because they offer vehicles for individual self-expression,
nonprofit organizations encourage leadership development. Through this expressive
role, therefore, nonprofit organizations should be instrumental in promoting the value
of pluralism and diversity in society, providing outlets for the development of new
leadership teams and vehicles through which people can fulfill themselves in a variety
of ways.
Finally, while the expressive role emphasizes the contribution that nonprofit
organizations can be expected to make to diversity and pluralism, these organizations
can be expected to perform a unifying role as well (Berger & Neuhaus, 1996; Kingsley
& Gibson, 1999; Smith, 1973). This community building and democratization role is
embodied in the concept of “social capital” that has been gaining considerable currency
(Putnam, 1993), although it was recognized much earlier in discussions of the
“integrative role” that these organizations perform (Smith, 1973, p.335). The central
idea is that by encouraging social interaction, nonprofit organizations help to create
habits of trust and reciprocity that in turn contribute to a sense of community and
support democratic values. In this sense, the nonprofit sector can contribute to both
diversity and community at the same time. This community building role, in turn, has
been credited with encouraging both economic growth and democratization, each
of which require extensive bonds of trust in order to flourish.
In addition to these positive contributions, nonprofit organizations may also be
expected to exhibit certain characteristic vulnerabilities that need to be examined in
gauging the impact of this set of institutions (Salamon, 1987b). Valentinov (2011) fully
acknowledged these vulnerabilities in the context of the nonprofit commercialization
pressures. However, these vulnerabilities can be seen more broadly and include the
following:
Particularism. The very qualities that make nonprofit organizations potentially
responsive to group interests or concerns can make them hostile to broader public or
community interests. Indeed, nonprofit organizations can be discriminating in their
operations, providing benefits only to people sharing the religious, or ethnic, or cultural
46
values of the members and denying benefits to others (Salamon, 1987b; Lewis, 1998;
Kramer, 1981; Smith, 1973, p.342). In situations in which groups vary in their
resources, this can reinforce inequalities.
Paternalism. Unlike governments, nonprofit organizations cannot establish “rights,”
only privileges. They can thus reinforce the dependence of those who rely on their
services (Salamon, 1987b; Berger & Neuhaus, 1996; Kramer, 1981). This dependence
can, in turn, be used to force those without alternative recourse to accept religious,
moral, or political convictions they would not otherwise choose. To the extent that this
leads to forced conversions or the subjugation of important traditions, it constitutes
a denial of individual liberty rather than a promotion of it.
Excessive amateurism or professionalism. Nonprofit organizations pride themselves on
their reliance on volunteer input and private charitable support. While this can be
a source of innovation and independence, it can also be a recipe for ineffectiveness
(Lewis, 1998). Nonprofit organizations may not be able to attain the scale of effort
required to make a serious dent in a major problem, they may use approaches that fail
to take advantage of the latest techniques, or they may rely on the unique skills
of a particularly effective individual that cannot easily be replicated. “Scaling up” the
innovations and contributions of nonprofit organizations can consequently be a serious
problem. By the same token, nonprofit organizations can also fall prey to excessive
professional control and the professionalization of problem-solving. This happens when
professional staff acquire too complete control over agency operations and limit the
involvement of members, clients, or other non-professionals (Kramer et al., 1993;
Lewis, 1998; McKnight, 1995).
Resource insufficiency. One of the additional inherent limitations of the voluntary
sector is the difficulties encountered with generating resources on a scale that is both
adequate and sufficiently reliable to cope with the range of human problems it seeks to
address (Salamon, 1987b; Billis & Glennerster, 1998; Kramer, 1981; Lewis, 1998;
Ostrander, 1989; Grønbjerg, 1994; Fowler, 1995). This is, to a considerable extent,
a product of the “free rider” problem inherent in the production of collective goods.
Since everybody benefits from a society in which those in need are cared for even if
they have not contributed to the cost of the care, there is an incentive for each person to
let their neighbor bear most of the cost. As long as reliance is placed solely on a system
of voluntary contributions, therefore, it is likely that the resources made available will
be less than those that the society actually considers optimal. Furthermore, because
of the twists of economic fortune, benevolent individuals may find themselves least
able to help those in need when the need is greatest. In addition, the available resources
47
are frequently not available where the problems are most severe. As a consequence,
nonprofit organizations, on their own, have serious vulnerabilities in generating
a reliable stream of resources to address community needs.
Accountability gap. A fifth key vulnerability of nonprofit organizations results from
their lack of sufficient accountability mechanisms (Hayes, 1996; Kramer, 1981;
Herzlinger, 1996; Fleishman, 1999). For-profit businesses are ultimately held
accountable by the consumers of their products and by their boards of directors, who
have a vested interest in the performance of the corporation. Government agencies are
similarly held accountable firstly by elected representatives and ultimately by voters in
a democratic system. By contrast, the principal vehicle for accountability in the
nonprofit sphere is the trustworthiness of agency managers. Society assumes that
because the organizations these managers head cannot generate profits to benefit their
managers, these managers can be relied on to act in the best interest of the organization
and those it serves. However, there are many ways in which organizational operations
can benefit organization managers, making this is an imperfect accountability
mechanism at best. Furthermore, because the boards of nonprofit organizations have
fewer incentives to monitor organizational performance than is the case in the business
sector, the likelihood is great that board oversight will be less vigorous. As a result,
nonprofit organizations may lack the accountability mechanisms operating in the other
spheres.
Finally, it is necessary to mention that the dichotomy-informed approach to the
integrative understanding of the nonprofit sector assumes the nonprofit sector exists in
response to the societal imbalances induced by the well-established for-profit sector
(Valentinov, 2011; Valentinov et al., 2015). This is a demand-oriented assumption that
makes perfect sense in the context of the Western world, but it is less applicable to the
transitional context of the Central and Eastern European countries, whose institutional
structure is still in the process of emerging and forming. In the Central and Eastern
European countries, it seems more plausible to hypothesize that the societal
determinants of the nonprofit sector, at least in the short to medium term, will be
mainly related to supply-side rather than demand-side factors, with the supply-side
factors including public funding, public regulation, and the legal environment of the
nonprofit sector. This raises the subject of the next part of the thesis.
49
2 Testing nonprofit theories in the
(post-) transitional context
First, this chapter provides an analysis of the economic determinants of the nonprofit
sector in Slovakia (see also Murray Svidroňová, Vaceková & Valentinov, 2016). Rather
than using the neoclassical market failure approach, the analysis builds on the
institutionalist framework that draws attention to the shortcomings of the dominant
institutional structures of the private for-profit and public sectors. A survey of 60
nonprofit organizations was used to identify their key characteristics; the “supply-side”
and “interdependence” theories were identified as the most useful explanations for the
existence of these nonprofit organizations. These results emphasize the role of
nonprofit organizations in fulfilling societal values while taking account of institutional
complementarities, regional variations, and legal peculiarities.
Second, this chapter examines the commercial transformation of the nonprofit sector in
the (post-) transitional Czech context (see also Vaceková, Valentinov & Nemec, 2016).
Some nonprofit economists see nonprofit commercialization as a moral dilemma
because commercial activities may secure the survival of the organization at the
expense of undermining the mission orientation. This moral framing of the
commercialization debate is insufficient for describing the Czech nonprofit sector,
which is still struggling to develop its own distinct institutional identity. Financial
independence is part of this identity, and commercial activities might be able to assist
nonprofit organizations in emancipating themselves from the previously paternalistic
state. The institutional nature of the commercialization phenomenon in the Czech
Republic has been emphasized on this basis. The decisions favoring commercialization
by Czech nonprofit managers are shown to be heavily influenced by the current
institutional and regulatory environment, which explicitly promotes nonprofit selffinancing
initiatives. If nonprofit commercialization is understood as an institutional
phenomenon, then its moral significance is best captured in terms of institutional ethics
rather than in terms of the individual ethics of nonprofit managers, an approach that
seems to be predominant in the Anglo-Saxon literature. After presenting recent
empirical findings on self-financing, this subchapter concludes by stressing the
interrelation between the semantic and ethical aspects of the commercialization
concept.
Finally, this chapter investigates the issue of nonprofit sustainability (see also
Valentinov & Vaceková, 2015). The sustainability of nonprofit organizations is a key
50
concern for contemporary nonprofit scholars and practitioners. Building upon the
nonprofit economics literature, this subchapter introduces the distinction between the
demand-side and supply-side determinants of nonprofit sustainability and examines the
discrepancy between them. This discrepancy provides a generic conceptual explanation
of nonprofit sustainability issues and can also be applied to the European rural
nonprofit sector. Three arguments are advanced. First, the notorious implementation
problems of LEADER partnerships can be explained as a manifestation of the
discrepancy. Second, and relatedly, the rural context implies the tendency of the
supply-side determinants of nonprofit sustainability to undermine the demand-side
determinants. Third, recent empirical findings from the Czech Republic indicate that
this tendency does not necessarily imply the possibility of clear classifications for the
demand-side and supply-side sustainability determinants. Rather, those features of rural
areas and communities that significantly affect the size of the local nonprofit sector
exhibit a controversial entanglement of demand-side and supply-side identities.
2.1 A synopsis of nonprofit theories: Reality check from
Slovakia
The academic field of nonprofit sector studies has been advancing in recent decades
across the globe. Nonprofit organizations are now widely acknowledged to “play
a variety of social, economic, and political roles in society. They provide services as
well as educate, advocate, and engage people in civic and social life” (Boris & Steuerle,
2006, p. 66; cf. Kuhlmann, 2010; Michalski & Mercik, 2011). Nonprofit organizations
also act as initiators of innovation in public services delivery (Nemec, Mikušová
Meričková & Svidroňová, 2015). To Salamon et al. (2013, p. 1), the rising prominence
of nonprofit organizations constitutes a global “associational revolution” i.e., “a major
upsurge of organized, private, voluntary and nonprofit activity [that] has been under
way around the world for the past thirty years or more” (ibid). Under these
circumstances, it is only natural that social scientists have initiated a creative search for
theories and models that would explain the evolution and societal functions of the
nonprofit sector and help to productively harness its policy potential.
This subchapter primarily addresses the theories and models that interest economists.
Given that the global nonprofit sector presents a key economic force (Salamon et al.,
2013), economists have developed numerous clever explorations of the ways in which
nonprofit organizations have played important roles in modern economies, especially in
the Anglo-Saxon institutional context. The main thrust of these explorations ascribes
nonprofit organizations the ability to correct specific types of market failure (Steinberg,
51
2006). Economics, however, is a pluralistic science. Economic science in the Western
world is clearly dominated by neoclassical and new institutional economics approaches,
but at the same time it contains a number of heterodox strands that hold a critical stance
on the market failure framework. This stance is especially attractive to sociologists and
political scientists who see the market failure framework as a reductionist attempt
to constrain the complex and institutionally rich social reality into a market setting
consisting of consumers and producers.
Following this line, Smith and Grønbjerg (2006, p. 235) criticize the market failure
explanations of nonprofit organizations for failing to properly account for their
institutional embeddedness. Anheier and Salamon (2006) developed the “social
origins” theory as a direct counterpoint to the market failure explanations. The social
origins theory is intended to emphasize “the embeddedness of the nonprofit sector in
the cultural, religious, political, and economic realities of different countries. It thus
views decisions about whether to rely on the market, the nonprofit sector, or the state
for the provision of key services as not simply open to choice by individual consumers
in an open market…Rather, it views these choices as heavily constrained by prior
patterns of historical development and by the relative power of various social groupings
that have significant stakes in the outcomes of these decisions” (ibid, p. 106).
The social origins theory is primarily geared toward explaining the geographical
variations across the global nonprofit sector rather than toward identifying the causal
mechanisms responsible for the “reconstitutive downward causation” from the
encompassing institutional structure onto the level of specific nonprofit organizations
(Valentinov, 2012b). To identify these mechanisms would certainly be a daunting task.
In contrast to this popular belief, this subchapter identifies and implements an empirical
strategy that both traces the roles of nonprofit organizations back to the limitations
of the economic and political functional systems and also considers the nonprofit
activities that are not registered on these systems’ radars. This is done by exploring the
nonprofit organizations populating a given institutional space, in this case Slovakia.
In contrast to available empirical studies focused on testing the validity of specific
market failure theories (cf. Steinberg, 2004), this study seeks to establish the
comparative validity of alternative theoretical approaches using a representative sample
of Slovak nonprofit organizations. In doing so, insights are obtained into the validity
of specific theories and into their comparative usefulness in making sense of a complex
and institutionally rich social reality.
Nonprofit theories reflecting the limitations of the economic system include
Hansmann’s trustworthiness theory, Weisbrod’s governmental failure theory, and the
52
recently advanced rurality theory (Valentinov, 2009; Valentinov & Iliopoulos, 2013).
Hansmann’s and Weisbrod’s theories have been widely discussed in the secondary
literature and are generally seen as market failure theories (despite Weisbrod’s
reference to “governmental failure”). Valentinov’s (2009) rurality theory refers to the
discrepancy between the standards of living in urban and rural areas. This discrepancy
is the result of several socio-economic characteristics of rural areas, including low
population density, geographical dispersion, and a lack of infrastructure. These
characteristics lower the rate of return on for-profit entrepreneurial activities and thus
create a niche for rural nonprofit organizations. Nonprofit theories reflecting the
limitations of the political system include Weisbrod’s governmental failure theory and
Salamon’s (1987a) voluntary failure theory, also known as “interdependence” or “thirdparty
government” theory. Finally, the “supply-side” or “entrepreneurship” theories
(Young 1993; Rose-Ackerman, 1996) explicitly emphasize the role of nonprofit
organizations as outlets for fulfilling specific societal values and ideologies.
Table 2 presents the key theoretical approaches, with a summary, key terms, key
strengths, and key weaknesses. The social origins theory was omitted because it is
intended to apply to cross-national comparisons rather than explorations within one
country.
Table 2 Theories of the nonprofit sector
THEORY SUMMARY KEY TERMS KEY STRENGTHS KEY WEAKNESSES
Heterogeneity
Theory
a.k.a.:
Public Goods or Governmental
Failure Theory
Unsatisfied demand for public
and quasi-public goods in
situations of demand
heterogeneity leads to
emergence of nonprofit
providers
Demand heterogeneity; median
voter; government; quasi-public
goods
Explains part of governmentprivate
institutional choice
dynamics in liberal democracies
in the context of public fund
shortages; why nonprofit
organizations become “gap-
fillers”
Assumes inherent conflict
between government and
private nonprofit provision
Supply Side
Theory
a.k.a.: Entrepreneurship Theory
Nonprofit organizations are a
reflection of demand
heterogeneity, served and
created by entrepreneurs
seeking to maximize nonmonetary
returns
Social entrepreneurship; nonmonetary
returns; product
bundling; demand heterogeneity
Explains close link between
value base of many nonprofit
organizations and choice of
service field including health
and education (to maximize
value impact and formation)
Assumes neutral state; equates
religious and secular valuebased
behavior; does not
address non-value based
nonprofit organizations
Stakeholder Theory Given information asymmetries
between provider and
consumer, stakeholders decide
to exercise control over delivery
of service
Nonrival goods; information
asymmetry; trust;
principal-agent problems
Introduces tripartite relation as
basic theoretical problem and
goes beyond simple principalagent
issues: Stakeholder –
provider – recipient
Scope of theory limited to
experience of informational
problems faced by deeply
concerned stakeholders—does
not address more conventional
nonprofit organizations
Trust
Theory
a.k.a.: Contract or
Market Failure Theory
Non-distribution constraint
makes nonprofit organizations
more trustworthy under
conditions of information
asymmetry which makes
monitoring expensive and
profiteering likely
Non-distribution constraint;
trustworthiness; information
asymmetry
Explains part of nonprofit – forprofit
institutional choice from
supply-side perspective, with
focus on inherent problems in
“nature” of good or service
Other institutional responses
possible (government
regulation); nonprofit constraint
weakly enforced; indirect profit
distribution possible (for profits
in disguise)
Source: Vaceková & Murray Svidroňová, 2016; based on Anheier, 2013
Interdependence Theory
a.k.a.:
Voluntary Failure Theory or
Third-Party Government
Theory
Because of (initially) lower
transaction costs, nonprofit
organizations precede
government in providing public
benefit goods, but due to
“voluntary failures” develop
synergistic relations with the
public sector over time
Philanthropic insufficiency,
particularism, paternalism, and
amateurism; third-party
government
Moves away from zero-sum,
competitive relation between
voluntary sector and
government; explains frequent
pattern of public-private
partnerships
Assumes neutral, yet wellmeaning
state; equates valuebased
and non-value-based
behavior; does not address
when synergies will or will not
develop – conditions unclear
Social Origins The size and structure of the
nonprofit sector are a reflection
of its “embeddedness” in a
complex set of relationships,
classes, and regime types
Comparative-historical
approach; path-dependency;
state-society relations
Moves away from emphasis on
micro-economic models and
puts interdependence theory in
context
Difficulty in testing counterfactual
as nonprofit form varies
significantly over time and
across countries/
cultures
55
To examine the economic theories that motivated the establishment of NGOs in
Slovakia and that justify their existence, a pilot questionnaire was created and
distributed. A total of 60 organizations responded. The sample reflects the current state
of the structure of NGOs in Slovakia. The appropriateness of the structure and the
scope of the sample were confirmed by the statistically significant results of a chisquare
test.
The Friedman and Wilcoxon tests were used to examine whether the nonprofit NGOs
had a specific reason or motive for their establishment. Pearson’s chi-square test of
independence was used to analyze the dependence of economic theories on other
factors including region, location, legal status, core work organization, etc. If there was
a confirmed dependency, the level of intensity of dependence was measured with
Cramér’s V. The respondents were different types of nonprofit NGOs located
throughout the territory of Slovakia; Table 3 indicates the locations in all eight Slovak
regions.
Table 3 Location of nonprofit organizations by region
REGION
NUMBER OF
ORGANIZATIONS
Banská Bystrica 5
Bratislava 16
Košice 2
Nitra 4
Prešov 7
Trenčín 14
Trnava 7
Žilina 5
Source: Murray Svidroňová, Vaceková & Valentinov, 2016
Of the total sample of 60 organizations, 48 were active in a city or town, accounting for
80% of the total number of organizations involved; the remaining 12 functioned in
villages or in the countryside, representing 20% of the total number of organizations
involved. The respondents varied in terms of the size of the municipality in which they
operated. Most organizations were located in cities with a population of over 100,000
inhabitants (15 respondents) and in towns with between 50,000 and 99,999 inhabitants
(14 respondents). The fewest respondents reported operating in municipalities with
populations smaller than 199 or between 500 to 999 inhabitants. For a better overview
of the answers of all respondents, the results are presented in Figure 4.
56
Figure 4 Share of the respondents by the size of municipality in which they operate
Source: Murray Svidroňová, Vaceková & Valentinov, 2016
The largest share of nonprofit organizations involved in the research, a total of 46
respondents, were civic associations. Two organizations were foundations, three were
noninvestment funds, and six were established to provide generally beneficial services
(public benefit organizations). The remaining three organizations selected the option
“other” (an association of legal entities and unspecified nonprofit organizations). An
overview is presented in Figure 5.
Figure 5 Legal form of the respondents
Source: Murray Svidroňová, Vaceková & Valentinov, 2016
Figure 6 shows that the respondents had usually been active in the nonprofit sector for 5
to 10 years.
2%
3%
2%
5%
8%
10%
7%
15%
23%
25%
0 - 199
200 - 499
500 - 999
1 000 - 1 999
2 000 - 4 999
5 000 - 9 999
10 000 - 19 999
20 000 - 49 999
50 000 - 99 999
100 000 and more
46
2 3
6
3
0
10
20
30
40
50
Civic associations Foundations Non-investment
funds
Public benefit
organizations
Other
Numberoforganizations
Legal form
57
Figure 6 Age of the responding organizations (how long they had operated in the
nonprofit sector)
Source: Murray Svidroňová, Vaceková & Valentinov, 2016
To describe the size of respondents, two characteristics were used: the number of
employees and/or volunteers (Table 4) and the size of the annual budget (Table 5).
Table 4 Overview of full-time and part-time employees and volunteers in responding
organizations
Source: Murray Svidroňová, Vaceková & Valentinov, 2016
* The sum of organizations with volunteers does not total 60, as one organization reported only
occasional volunteer help for special events.
3
26
11 11
9
0
5
10
15
20
25
30
Less than 5 years 5 - 10 years 10 - 15 years 15 - 20 years More than 20
years
Numberoforganizations
Age of organizations
NUMBER OF ORGANIZATIONS
Yes No
Full-time employees 13 47
- up to 5 employees 7
- 5 to 9 employees 2
- 10 to 20 employees 3
- more than 20 employees 1
Part-time employees 14 46
- up to 5 employees 11
- more than 5 employees 3
Volunteers* 50 9
- up to 5 volunteers 5
- 5 to 10 volunteers 21
- 11 to 20 volunteers 12
- 21 to 50 volunteers 9
- 51 to 80 volunteers 2
- more than 80 volunteers 1
58
Table 5 Size of the annual budget in respondent organizations
ANNUAL BUDGET (IN THOUSANDS OF €) NUMBER OF ORGANIZATIONS
Less than 1 9
1 - 5 15
5 - 10 12
10 - 20 7
20 - 50 4
50 - 100 5
More than 100 8
Source: Murray Svidroňová, Vaceková & Valentinov, 2016
Based on their reported fields of operation, the respondents covered all of the main
areas in which nonprofit organizations operate and provide services (Table 6).
Table 6 Areas of operation of the respondents
AREAS OF OPERATION NUMBER OF ORGANIZATIONS*
Health care 8
Education 12
Sport 10
Welfare 15
Human rights 1
Culture and art 8
Religion and spiritual development 4
Environment 4
Other (research and development, family issues, leisure
activities, drug prevention, not specified)
5
Source: Murray Svidroňová, Vaceková & Valentinov, 2016
*The sum was greater than 60, as respondents were able select up to three fields of activity in
which they operated.
Figure 7 shows the reported activities of the responding nonprofit organizations. The
respondents were mostly service organizations (43%); 40% were not able to identify
themselves using the provided options and they selected “other,” mostly stating that
their activities were a combination of watchdog and service or advocacy and service
organization.
59
Figure 7 Reported activities of the responding NGOs
Source: Murray Svidroňová, Vaceková & Valentinov, 2016
Each nonprofit organization was assigned an economic theory in accordance with the
reason they cited for their foundation. The results are shown in Table 7. Respondents
were allowed to select from among the available answers, shown in the first column,
and they were assigned directly to particular theories, shown in the second column. The
third column reflects the number of organizations that selected the particular theory.
The sum of respondents is greater than 60, since they were allowed to select up to three
reasons for their creation and existence.
Table 7 indicates that eight respondents selected the option stating that they wanted to
conduct some kind of business and a legal nonprofit organization was the most suitable
way for them to do so, because they would achieve a profit with their activities, but
these activities fulfilled the characteristics of a general benefit. The organizations
reinvested their achieved profits in the core business, as required by legislation. This
reason or motivation for establishing an NGO is described under the for-profits-indisguise
theory (Weisbrod, 1988). The most commonly selected theory was the supply
side theory, which was chosen by 30 organizations involved in this research,
representing half of the total surveyed organizations. This preference was confirmed by
the Friedman test, which was used to determine whether the organizations were created
for the same reason or theory, or if there was a more strongly preferred theory. Based
on the results of the Friedman test, the nonprofit organizations clearly favored the
supply side theory as the reason for their creation and existence. Only one organization
selected the third-party government theory.
40%
43%
15%
2%
Other
Service-providing organization
Advocacy organization
Watchdog organization
60
Table 7 Theories of creation and existence of the responding NGOs
REASON FOR ESTABLISHMENT/CREATION THEORY
NUMBER OF
ORGANIZATIONS
Nonprofit organization was created based on the personal
interests of its founder, i.e. founder followed their own
needs and motives for self-fulfillment. Or (the
organization) wanted to provide a service to ourselves; we
created an association that provides mutual benefits to its
members.
Supply Side
Theory
30
This product / service was needed for the community of
people living in rural areas; we wanted to contribute to the
development of the community/locality.
Rurality theory 7
We perceived the need for a nonprofit organization in the
locality /in Slovakia in addition to public and private profit
organizations, so we were established.
Interdependence
Theory
17
We perceived that the market lacked a trustworthy partner
and in our opinion a nonprofit organization was a more
credible producer of goods / services to the consumer, so
we were established.
Trust Theory
(Information
Asymmetry
Theory)
2
We established our nonprofit organization as an atypical
form of business; we did not want to create a business or
social enterprise, but the activities that we do are publicly
beneficial (beneficial for the wider environment) and by
these activities a profit can be produced, which we return
to the main activities of the organization.
For-Profits-InDisguise
Theory
8
The government did not provide a service / product at the
national or local level because it lacked the capacity
(financial, personnel, etc.), or the product was provided by
the government but with signs of cronyism or corruption,
so we were established.
Heterogeneity
Theory
(Government
Failure Theory)
10
We were established in partnership with government/local
government. Government helped us with the foundation;
the government (national, regional or municipality) was
our founder.
Third-Party
Government
Theory
1
No private companies provided such a service / product
because it would be unprofitable for them, i.e. there was a
lack of such a service in the market, so we were established
to provide it.
Fulfillment of
Societal Values
Theory
13
Source: Murray Svidroňová, Vaceková & Valentinov, 2016
Many factors may contribute to the establishment of a nonprofit organization, including
the region in which the organization operates, the population in the area, the location of
the organization in an urban or rural area, the area of operation, and the type of activity.
It may also depend on the legal form, but since most of the surveyed organizations were
civil associations, it was unnecessary to examine the dependence of the theory on the
61
legal form of organization. There were insufficient responses to evaluate correlations
for other legal forms. Selected factors for which this evaluation was possible were:
− region in which the nonprofit NGO operates;
− location of the nonprofit organization – place where the NGO activities are
focused (town/village);
− size of the municipality (number of inhabitants) in which the nonprofit NGO
operates;
− area of operation in which the nonprofit NGO operates (health care, welfare,
education, environment, etc.);
− number of years of operation of the nonprofit NGO;
− size of the nonprofit NGO based on the number of employees;
− size of the nonprofit NGO based on its annual budget.
Pearson’s chi-square test of independence was used to evaluate the dependence of the
selected factors for the establishment and existence of the nonprofit organization on
other various factors. Cramér’s V was used to measure the intensity of any confirmed
dependency. All calculations were made using SPSS statistical software, and the results
were reviewed with an expert in the field of statistics.
Table 8 presents an overview of the theories of nonprofit NGOs with confirmed
dependencies (for the sake of brevity, only those theories and factors for which
dependencies were confirmed are shown). Dependency was confirmed only in four
theories of the existence and establishment of nonprofit organizations: trust theory,
interdependence theory, rurality theory, and heterogeneity theory (based on government
failure).
For the trust theory (or information asymmetry theory), a dependence was confirmed on
the region in which the organization operates. All of the respondents who selected this
theory were from the Zilinsky region. They reported a connection to this theory because
the market lacked a credible producer of goods or services and nonprofit organizations
could be a solution to the problem of untrustworthy for-profit commercial
organizations. These organizations were able use this view as an argument to gain more
support from the region.
For the interdependence theory and the rurality theory, the dependence on the
population in the municipality and on the field in which the nonprofit organization
operated was confirmed. The rurality theory was selected more frequently by
62
respondents who work in rural areas, mostly in villages with less than 5000 inhabitants.
This thus indirectly confirmed the importance of this new theory. Further attention
should be paid to researching this theory in order to identify the specific needs of these
organizations and design tools to support them. Nonprofit organizations can greatly
benefit a municipality, and the municipality should therefore encourage their
establishment and existence, in the form of subsidies or tax credits in local directives.
The interdependence theory was selected by organizations operating in cities with
larger populations. This indicates that nonprofit organizations are complementary with
for-profit organizations in urban areas in which the economy is developed at a higher
level and there are better conditions for such cooperation.
Table 8 Overview of economic theories of NGOs with confirmed dependency
ECONOMIC THEORY CONFIRMED DEPENDENCY
Trust theory − the region in which the nonprofit NGO operates
Interdependence theory − the number of inhabitants in the municipality in which a
nonprofit NGO operates
− the seat of the nonprofit organization (town/village)
Rurality theory − the number of inhabitants in the municipality in which a
nonprofit NGO operates
− the area of operation in which the nonprofit NGO operates
(health care, welfare, education, environment, etc.)
Heterogeneity theory − the type of activities that the nonprofit NGO carries out as their
core work (service, advocacy, etc.)
Source: Murray Svidroňová, Vaceková & Valentinov, 2016
The last confirmed dependency was of the heterogeneity theory, the dependence of the
type of activities performed by the organization on government failure. The
government in such cases did not produce a sufficient amount of goods and services,
and governmental activities were insufficient to support the interests of others, so these
nonprofit organizations were created to cover the gap.
Concerning nonprofit organizations as an alternative to commercial enterprise, the forprofits-in-disguise
theory was selected by eight respondents. This presents an
interesting argument for why NGOs are being established in Slovakia. When the
government fails, the solution may be the market and profitable businesses, but the
nonprofit sector also provides products and services, sometimes as their core work and
sometimes as a side activity. The provision of products and services as a side activity is
considered to be a commercial activity of nonprofit organizations. These commercial
63
activities are allowed in Slovakia for all of the legal forms except non-investment funds
when the non-distribution constraint condition is met (i.e. the profit gained must be
fully reinvested into the core work of the NGO). Table 9 compares classic commercial
and nonprofit enterprises. The table demonstrates the benefits of nonprofit business in
comparison to classic entrepreneurship. It follows from the table that entrepreneurs in
Slovakia consider establishing an NGO to be easier, faster, and less expensive than
setting up a commercial enterprise.
Table 9 Basic characteristics of commercial and nonprofit entrepreneurship
CHARACTERISTICS COMMERCIAL
ENTREPRENEURSHIP
NONPROFIT
ENTREPRENEURSHIP
Goal main goal is to achieve profit fulfilment of organization’s
mission – to provide social
benefits
Equity depends on the legal form (e.g.,
for Ltd. which is the most
common form, it is at least
€5,000)
obligatory only for foundations
and non-investment funds
Business activity business is a main activity, the
reason why the company was
established
funded under redistribution
mechanisms; entrepreneurship is
seen as a side activity
Tax exemptions no tax exemptions no income tax on the income
from the main activity (core
work), no income tax on income
from tax assignation
Duration of establishment
procedure
depends on the legal form (e.g.,
for Ltd. it is between 15 and 21
days)
up to 30 days, usually up to 10
days
Registration business register relevant registers at the Ministry
of Interior
Registration fees depends on the legal form (e.g.,
for Ltd. it is €331.5 for the
registration in the business
register, plus between €5 and
€15 for other administration
fees)
usually €66 per registration
Source: Murray Svidroňová, Vaceková & Valentinov, 2016
The advantage of doing business as a nonprofit organization in Slovakia is that
nonprofit NGOs usually do not have to have equity; only two legal forms, foundations
and non-investment funds, require equity; the rest do not need to have any assets to
start their activities. Although nonprofit NGOs are not established for doing business,
64
they can conduct business activities if they meet the condition of reinvesting profit into
their main activities /core work. Revenues gained through the main activity for which
they were established are exempt from income tax. Thus, if the nonprofit NGO
develops activities that meet the nature of their core work and fulfil a generally
beneficial purpose, the nonprofit organization can be regarded as a specific form of
business/ entrepreneurship.
It is probably for these reasons that eight of the survey respondents selected
entrepreneurship theory. Their nonprofit organizations were founded as an atypical
form of business. Their primary goal was not to establish a business, but their activities
were generally beneficial and were able to make a profit, which was then returned to
the core work of the organization. This finding opens the second subchapter devoted to
the nonprofit commercialization issue that was empirically examined in the Czech
Republic.
2.2 Nonprofit organizations becoming business-like:
The Czech case
All over the world, nonprofit organizations are experiencing the challenging
implications of austerity and financial uncertainty and are turning to commercial
activities in order to meet the emerging survival challenges. The Johns Hopkins
Comparative Nonprofit Sector Project documents commercial revenue as the most
important funding source of the global nonprofit sector (Salamon et al., 2013). Scholars
and practitioners broadly agree that commercialization may be an essential coping
strategy for those nonprofit organizations that are affected by the cuts in public funding
as well as by the rising insecurity of support from individual and corporate donors
(Froelich, 1999). Public administration literature furthers this position by indicating the
increasing involvement of nonprofit organizations in the public-private mix of social
service delivery (e.g., Pollitt & Bouckaert, 2000).
Nonprofit commercialization can assume many faces. It may involve the increasing
market orientation and entrepreneurial activism of nonprofit organizations (Nicholls
& Cho, 2006; Sharir & Lerner, 2006; Weerawardena, McDonald & Mort, 2010) as well
as their growing innovativeness (Jaskyte, 2004; McDonald, 2007; Weerawardena,
Sullivan & Mort, 2006). It may also generate an overly competitive stance as well as an
increased interest in outcomes targeted by public policies (Weerawardena, McDonald
& Mort, 2010).
65
The objective of this subchapter is not to take sides in the debate over whether
nonprofit commercialization is morally reprehensible in terms of mission attainment,
promotion of civil society, or other criteria. Rather, the subchapter contends that this
type of moral framing of the commercialization idea is insufficient in describing the
transitional context of the Czech Republic. The transition-specific institutional meaning
and moral content of nonprofit commercialization will be shown to differ widely from
the Western case and to offer unique insights into the societal functions of the Czech
nonprofit sector. To this end, the subchapter briefly presents the Western nonprofit
commercialization debate and then proceeds to sketch the institutional context of the
Czech nonprofit sector and outline the significance of nonprofit commercialization in
the Czech Republic. This presentation will be supported by the preliminary survey
evidence of the perception of commercialization by nonprofit practitioners in the Czech
Republic.
The authoritative Johns Hopkins Comparative Nonprofit Sector Project defines
nonprofit organizations in terms of five attributes: organizational institutionalization,
private character, self-governance, nonprofit orientation, and non-compulsory nature
(cf. Anheier & Salamon, 2006, p. 95). Building upon this definition, the project has
convincingly documented the extensive size and scope of the nonprofit sector
worldwide, and especially its startling heterogeneity. The nonprofit sector includes
“religious congregations, universities, hospitals, museums, homeless shelters, civil
rights groups, labor unions, political parties, and environmental organizations, among
others. Nonprofits play a variety of social, economic, and political roles in the society.
They provide services as well as educate, advocate, and engage people in civic and
social life” (Boris & Steuerle, 2006, p. 66). Given the structural-operational definition
of nonprofit organizations, and their nonprofit nature in particular, it is not
automatically clear why they often need to rely on the commercial revenue that would
make much more sense in the for-profit sector context. Yet, the Johns Hopkins
Comparative Nonprofit Sector Project itself documents and confirms the dominant role
of commercial income in the funding structure of the global nonprofit sector.
The importance of commercial income has not gone unnoticed in the nonprofit research
literature. Serious concerns about the potentially distracting effects of commercial
activities on fulfilling nonprofit missions have been influentially voiced by Burton
Weisbrod, who recommended that “nonprofit organizations should get out of
commercial ventures” (Weisbrod, 2004, p. 40) unless they want to “lose their souls”
(ibid, p. 46). It is difficult to resist the impression of an at least implicit moral
disapprobation when commercialization is understood as the “marketization of welfare”
(Salamon, 1993) and is associated “with the explicit intent of earning a profit”
66
(Tuckman, 2000, p. 39) or with a businesslike character (McKay et al., 2015).
Eikenberry and Kluver (2004, p. 135) contend that the benefits of nonprofit
commercialization or marketization exact a price in the form of undermining “the
nonprofit sector’s role in creating and maintaining a strong civil society – as value
guardians, service providers and advocates, and builders of social capital.” All this
“may be too high a price to pay” (ibid). The list of critical moral concerns about
nonprofit commercialization can be extended, even when the commercialization is
driven by commendable social and financial intentions (Guo, 2006). These concerns
can be summarized by admitting that the ability of nonprofit organizations to succeed in
their mission and improve the social quality of life is “limited by the corrupting effects
of the embedding pecuniary culture” (Valentinov 2011, p. 901).
A critical view of nonprofit commercialization is often associated with critiques of
neoliberalism. Evans et al. (2005) see nonprofit commercialization as a part of
neoliberal governance which, in turn, suffers from the paradox of “centralized
decentralization.” This implies, among other things, a compromise of autonomy and
advocacy as well as a shift away from a community-oriented focus toward a business
model (ibid, p. 73). Critics have noted that instead of bringing prosperity and resilience,
the business model orientation has weakened the nonprofit sector and tightened its
control by the government (e.g., Bruce & Chew, 2011; Salamon & O’Sullivan, 2004;
Means et al., 2002; Taylor, 2002; Walsh, 1995). While it is debatable whether these
critiques pertain to commercialization as such or rather to neoliberal governance as
a whole, they do reinforce the widespread suspicion that commercialization undermines
the civil society impact of the nonprofit sector.
At the same time, the existing literature includes many arguments for accepting or even
promoting nonprofit commercialization. For one, it may well be the case that nonprofit
commercialization as such is a much too abstract and broad concept to enable
a meaningful moral judgment. As a starting point, it makes good sense to follow
Enjolras’ (2002) distinction between the two paths of commercialization:
commercialization may be the result of activities intended to finance the production of
mission-related outputs or it may be the result of the transformation of the relationship
between the organization and its members from participation to consumption. Moral
concerns seem more appropriate in the latter case than in the former. Froelich (1999,
p. 246) suggests that these concerns originate from “our casual, naïve, or maybe
wishful thinking” about nonprofit organizations that are assumed to be “travelling an
unfettered path in pursuit of (their) goals, free of mundane concerns associated with
resource acquisition.” Indeed, given that “many nonprofit organizations are located in
hostile environments” it follows that “commercial activities provide a self-regulatory
67
mechanism that enables, rather than hinders, nonprofit organizations to perform their
missions in environments where the supply of critical resources is insecure” (Moeller
& Valentinov, 2012, p. 366).
More generally, it seems that nonprofit commercialization is another illustration of the
well-known heterogeneity of the nonprofit sector. Traditional approaches to the
nonprofit sector, including those of Salamon and Anheier (1998), illustrate the
insufficiency of single-factor explanations. It is becoming increasingly clear that
different nonprofit organizations have different goals and subsequently different
structures, both organizational and financial. The “governance” theories (e.g., Peters,
2000) in particular underscore the spread of partnerships (not only political ones) in
modern Western societies. Furthermore, economists have long recognized that public
service delivery can be organized through many mechanisms. Cullis and Jones (1992)
document the trend toward the pluralization of public service delivery, i.e., a shift away
from the classic public delivery system toward the increasing involvement of private
(for-profit and nonprofit) organizations. Pollitt and Bouckaert (2000) likewise note that
the traditional delivery systems are giving way to multi-tiered systems exhibiting clear
borders between financing, procuring, and producing functions.
It is certainly true that specific institutional models of service delivery systems vary
across countries and their subnational structures because of traditions and due to the
pervasive consequences of introducing competition into the public sector. However, it
is also true that the systems of “public-private-civil sector mix” and “public-privatecivil
sector partnerships” in public service delivery have been created nearly
everywhere, and that within these systems, nonprofit commercialization is a legitimate
phenomenon. Under these circumstances, it is impossible to avoid seeing the moral
framing of the debate on nonprofit commercialization. This framing basically highlights
the normative ambivalence of commercialized nonprofit organizations which are
considered to be likely to lose their capacity to deliver socially beneficial missionrelated
activities. As the next section makes clear, this ambivalence does not do justice
to the transition-specific institutional meaning of nonprofit commercialization in the
Czech Republic.
In the global comparison suggested by the findings of the Johns Hopkins Comparative
Nonprofit Sector Project, the nonprofit sector is considerably more economically
powerful in the Western hemisphere than in the transitional Central European countries
(Salamon et al., 2013). This fact presents a useful point of departure for understanding
the specific nature of nonprofit commercialization in the latter region, including the
Czech Republic. While historically well-established in the Western hemisphere, the
68
Czech nonprofit sector had to undergo a difficult process of emergence and formation
over the last 25 years as the Czech Republic overcame its totalitarian past and evolved
into a parliamentary democracy. However, the latest available aggregate
macroeconomic data indicate that the Czech nonprofit sector is exhibiting upward
trends in several crucial indicators, including the number of legal entities, share in GDP
and the employment rate, and overall revenues (Table 10). It must be mentioned that
the number of legal entities may not be a very useful indicator, as current Czech
legislation does not require nonprofit organizations to dissolve if they terminate their
activities. Caution is likewise needed in interpreting the apparently low share of
volunteers, for many nonprofit organizations do not report the actual number of their
volunteers and/or do not account for all the volunteering work. Table 10 still shows
a rend of decreasing numbers of volunteers over the indicated period.
Table 10 The Czech nonprofit sector: key indicators
2008 2009 2010 2011 2012
Number of legal entities 84,033 103,943 109,208 114,184 118,375
Value of output (million CZK) 96,492 98,028 101,268 103,360 106,701
NPO share in GDP (%) 1.45 1.52 1.58 1.63 1.69
Number of FTE employees 100,988 99,282 100,847 99,527 100,174
Number of FTE volunteers 27,255 27,145 25,039 25,983 25,964
Share of employees in the employment
rate (%)
1.71 1.89 1.93 1.96 2.04
Revenues
Payments for market output
(in million CZK) – commercial income
8,966 15,104 14,746 15,540 15,149
Payments for non-market output
(in million CZK) – nonprofit income
17,475 16,605 18,558 19,267 20,200
Property income (in million CZK) –
commercial income
2,248 1,465 1,554 1,554 1,236
Other common transfers (in million
CZK) – nonprofit income
63,030 66,264 65,514 65,514 65,153
Voluntary work (in million CZK) 5,602 5,734 5,479 5,634 5,648
Source: Vaceková, Valentinov & Nemec, 2016
While substantial knowledge is still lacking about specific areas in the Czech nonprofit
sector, it is possible to identify a number of salient historical and institutional factors
affecting it (cf. Frič & Goulli, 2001; Pospíšil, 2006; Pospíšil et al., 2012). It is broadly
69
acknowledged that the current evolution of the Czech nonprofit sector is a response to
the historical traditions of the Czech National Revival and the first Czechoslovak
Republic. The tradition of the Czech National Revival explains why a considerable
number of Czech nonprofit organizations pattern their work on a model of selfless
sacrifice for the patriotic cause; following the traditions of the Czechoslovak Republic
is an appeal to the legacy of the golden age of civil society in Czechoslovakia before
the Second World War (ibid). Among the key obstacles hindering the development of
the Czech nonprofit sector are the legacies of mistrust, corruption, and clientelism. The
shadow of the totalitarian past is still visible in the widespread distrust toward nonprofit
organizations whose occasional practices of nepotism and other forms of unethical
behavior do not help to improve their public image (ibid). The Czech nonprofit sector
furthermore exhibits a divide between the old and new organizations which still have
difficulties in communication and coordination.
The legacy of the “nanny state” (cf. Brhlíková, 2004) is of particular importance in
understanding nonprofit commercialization. During the totalitarian period, the
Communist government was a monopoly provider of educational, cultural, social,
health, and other services that constitute the premier fields of activity of the nonprofit
sector and of the broader public-private sector mix in the Western world. After this
period was over, the democratic Czech government was reluctant to cede this monopoly
and to acknowledge the nonprofit sector as an alternative and independent service
provider (cf. Frič, 2004). The delivery of public services in the Czech Republic is still
heavily dominated by public and state-run organizations. Furthermore, the
unwillingness of the public sector to cede control of public service delivery is by no
means limited to the Czech Republic. Pospíšil and Hyánek (2009) note that this is
a general “post-communist” pattern of public service delivery. For nonprofit
organizations, this pattern primarily means a lack of autonomy from the public sector.
Nonprofit commercialization accordingly presents a way to develop this autonomy with
a view to advancing to a full-fledged societal sector that would be worthy of
comparison with the market and the state.
At this point, it is useful to step back and reconsider the influential understanding of
commercialization put forward by Weisbrod (1998, p. 12): “nonprofit organizations
confront a dilemma, as does public policy toward them: how to balance pursuit of their
social missions with financial constraints when additional resources may be available
from sources that might distort mission.” This understanding takes for granted that
nonprofit organizations hold a distinct institutional identity defined, among other
things, by autonomy from the public sector. While this assumption is perfectly sensible
for the Western and especially Anglo-Saxon institutional environment, it is less
70
applicable to the transitional context of the Czech Republic, where the nonprofit sector
still “remains in statu nascendi” (Pospíšil et al., 2014, 49). Accordingly, in the Czech
context, commercialization is not something that needs to be balanced, or traded off,
against the pursuit of the nonprofit organization’s mission. Rather, it presents a tool for
nonprofit organizations to gain autonomy from the public sector and thus to become
empowered to independently define their missions in the first place.
The relation to the public sector presents a crucial contrast with the institutional
embedding of nonprofit commercialization in the Anglo-Saxon world, where this
phenomenon is taken to be an integral part of neoliberal governance (Evans et al.,
2005). Far from promoting autonomy from the public sector, commercialization in the
neoliberal governance system “hides a steeply hierarchical and centralized relationship
of power embedded in a contractual arrangement between the state and those agencies
increasingly responsible for the delivery of public goods and services” (ibid, p. 78).
This hierarchical relationship is most visibly demonstrated in the reorientation of
nonprofit accountability from a broad range of civil society actors toward the state
(cf. McCambridge, 2005). Under these circumstances, nonprofit scholars and
practitioners alike need to be aware of the markedly different moral connotations of
nonprofit commercialization in the Czech Republic and the Anglo-Saxon world.
At the same time, the contrast between the Czech and neoliberal Anglo-Saxon
manifestations of nonprofit commercialization suggests that caution should be applied
when interpreting the causal links between the commercialization of the nonprofit
sector and the sector’s autonomy from the state. This makes it possible to differentiate
between distinct yet functionally equivalent means of attaining the nonprofit sector’s
autonomy from the state. While commercialization has been the relevant means in the
Czech Republic, the Anglo-Saxon context of neoliberal governance is radically
different. Thus, without assuming commercialization to be a necessary causal
determinant of nonprofit autonomy, it is still possible to contend that the Czech
nonprofit sector would have experienced more difficulties in developing its autonomy
had it been more dependent on state subsidies after the Velvet Revolution.
In fact, in the Czech Republic, it is primarily the government itself that expects
commercialization to boost nonprofit autonomy. This political attitude is evidenced by
the recent adoption of policies that counteract the legacy of the nanny state and foster
the independence, and thus self-financing, of the nonprofit sector. The New Civil Code
that came into force in January 2014 redefined the legal forms of nonprofit
organizations so as to enable a wide liberalization of nonprofit commercial activities.
While these activities must be in line with the core mission, be transparently
71
documented, and remain within reasonable limits, the net effect of the Code is to
facilitate nonprofit sector initiatives aimed at securing financial independence. For
example, since 2014, the commercial income of nonprofit organizations has involved
new categories including interests and dividends. Furthermore, commercial activities
have become legally admissible for foundations, with the tax deduction limits
simultaneously increasing from 10 percent to 15 percent for individual donors and from
5 percent to 10 percent for corporate donors (USAID, 2015). These and other measures
of the liberalization of nonprofit commercial activities have been accompanied by strict
controls against “for-profits-in-disguise” that might exploit the nonprofit status to gain
unfair advantages over for-profit competitors.
The new national policy toward nonprofit organizations for 2015-2020, as approved at
the Czech government assembly on July 29, 2015, is similarly remarkable. This policy
rests on four basic principles: 1) supporting the sustainability of strong, diverse, and
independent nonprofit organizations; 2) ensuring an effective and transparent state
policy towards NGOs, including legislation, funding, and institutional framework; 3)
supporting volunteering and private giving; and 4) supporting cooperation between the
state and nonprofit organizations. The first principle’s focus on sustainability suggests
that the government does not view commercialization as a potential hindrance to the
fulfillment of nonprofit missions. Rather, commercial activities are assumed to improve
the independence of nonprofit organizations so as to empower them to define and fulfil
their missions more effectively. If the commercialization decisions have ever been
morally burdensome in Weisbrod’s sense for Czech nonprofit managers, then the New
Civil Code and the newly approved national policy both work to alleviate these moral
burdens. This seems to be a positive effect, as the Czech Republic ranks among the
countries with the least economically strong nonprofit sectors in the world (Salamon et
al., 2013), even though a recent USAID (2015) estimate has placed the Czech nonprofit
sector in third place among 29 countries from Central and Eastern Europe and Eurasia.
The main thrust of the Czech institutional developments described in the preceding
section is in making commercialization the default option for many nonprofit
organizations. In contrast to seeing commercialization as a dilemma for nonprofit
organizations and public policy (cf. Weisbrod, 1998, p. 12), the Czech public
authorities view it as a necessary step in building the nonprofit sector’s independence
and autonomy. The institutional and regulatory environment of the Czech nonprofit
sector is thus undergoing changes which work to integrate commercialization into the
normal means of nonprofit operation. These changes fundamentally affect the moral
content of commercialization for nonprofit decision makers. Instead of being a morally
problematic strategy of sacrificing the mission orientation, commercialization turns into
72
a considerably more neutral strategy of complying with the requirements of the
institutional environment in which commercialization is seen quite favorably. The fact
that commercialization may ensure conformity with the institutional environment has
been also recognized by Western scholars (cf. Kerlin & Pollak, 2011). In the Czech
Republic, this fact is additionally reinforced by the official endorsement of
commercialization by public authorities.
Thus, compared with the situation in Western countries, the causal nexus of nonprofit
commercialization in the Czech Republic is shifted from the level of individual
managerial decision making to the level of institutional environment. Put differently, in
the Czech Republic, nonprofit commercialization presents a legal and institutional
phenomenon rather than an object of individual economic and moral choice. An
indication of this argument is that the legal and institutional definition of
commercialization is quite ambiguous, especially against the backdrop of a seemingly
harmonious relationship between commercialization and mission attainment.
Institutional ambiguities are certainly acknowledged in the Western literature, which is
sensitive to the existence of “for-profits-in-disguise” that “are lured into the nonprofit
sector by the tax and subsidy advantages they get therefrom” (James, 1998, p. 273; cf.
Weisbrod, 1998). Western scholars acknowledge that commercialization and “forprofits-in-disguise”
may be similarly driven by cross-subsidization, which aligns well
with the assumption of the mission-drivenness of individual nonprofit decision-makers.
In the Czech context of peaceful coexistence between commercialization and mission
attainment, these institutional ambiguities are amplified.
Under these circumstances, it is understandable that the term “commercialization” is
not widely used in the Czech Republic. A more popular term is “self-financing” which
stresses the ability of nonprofit organizations to financially support themselves in
addition to, and independently from, the support that may be forthcoming from the
public sector. As with commercialization, self-financing means offering products and
services for sale (see also Tuckman, 2000; Weisbrod, 1998), but it also includes the
income that nonprofit organizations raise in the form of donations and other voluntary
contributions, especially membership fees (see also Svidroňová & Vaceková, 2012).
Even though self-financing is not an entirely clear term (ibid), it accentuates the role of
funding in the formation of the distinct institutional identity of the nonprofit sector.
A specific ambiguity in nonprofit funding is related to membership fees, which are
legally considered to be a nonprofit income in the Czech Republic but may hide
a commercial income as well. For example, some internet providers (such as HovNet,
Lipaci.Net, and MiloviceFree) that are legally incorporated as associations are mainly
73
funded through membership fees. At bottom, however, these fees present a price for
a commercial product (the internet supply). It is not implausible to suppose that these
associations are “for-profits-in-disguise” that emerged to take advantage of tax
privileges. On the other hand, while sponsorship is considered to be a commercial
income in the Czech Republic, it may be very close to a corporate donation if the giving
corporation makes a contribution to attaining the mission of the recipient nonprofit.
This seems to have been the case with the partnership between Nadace partnerství,
a Czech environmental foundation, and the Skanska Company, a for-profit construction
firm, under the Tree of Life project, which has been ongoing since 2004. The Skanska
company’s sponsorship activities helped promote its own commercial goals, but it did
also integrate ecological thinking into its business philosophy, thus supporting Nadace
partnerství’s ecological mission. Another characteristic example is the possibility of
creating “affiliated funds” for foundation entities as envisaged in the new Civil Code.
Originally intended to support charitable giving, this option helps nonprofit
organizations to mobilize commercial income obtainable from administering assets they
do not own. This income, however, is intended to support foundations in attaining their
missions. The boundary between commercial and nonprofit incomes is again blurred.
Finally, as an institutional and legal phenomenon, nonprofit commercialization has to
be seen in the context of the ongoing evolutionary trends of the Czech welfare state.
Horák et al. (2013) contend that the nature of the public-private mix of social service
delivery is being affected by the centralization of decision-making, the marketization
and contractualization of service delivery, the increasing use of new public
management methods, organizational innovation, and the increasing networking
between state and non-state organizations. At bottom, these trends reflect the increasing
involvement of the nonprofit sector in service delivery processes, as well as its closer
entanglement and coordination with the public and private for-profit sectors (Bode &
Brandsen, 2014). In the Czech institutional context (see also Nemec et al., 2014), it is
plausible to speculate that nonprofit commercialization constitutes a part of the
evolutionary dynamics of the welfare state, a dynamic that is likely to be accepted by
individual nonprofit decision makers, and unlikely to be seen by them as a moral
dilemma in Weisbrod’s (1998, p. 12) sense.
In terms of statistical indicators, the institutional nature of nonprofit commercialization
in the Czech Republic is evident from systematic variations in the share of commercial
revenues across the organizational forms of nonprofit organizations. Table 11 presents
the data on the structure of revenues for foundation entities (i.e., organizations with the
legal form of a foundation or an endowment fund in the Czech Republic), nonprofit
providers of public services (i.e., organizations with the legal form of a public benefit
74
company), and civic associations (i.e., organizations with the legal form of an
association and its organizational unit). Table 11 indicates variations in the share of
commercial revenues in total revenues within each of these legal forms of nonprofit
organizations; it is clear that this indicator systematically varies across the legal forms.
More specifically, the share of commercial revenues in total revenues is highest for
service providers and lowest for foundations, with associations being in between. While
it is possible to correlate the shares of commercial revenues with the commercialization
decisions of individual nonprofit managers, the variation across the legal forms of
nonprofit organizations indicates the institutional determination of commercialization.
Table 11 Nonprofit commercial revenues
2008 2009 2010 2011 2012
The share of commercial income for total income
Foundations 24.37% 17.61% 17.45% 18.23% 12.68%
Nonprofit providers of public services 43.54% 45.47% 43.25% 43.89% 44.12%
Civic associations 21.58% 23.08% 23.10% 35.51% 35.85%
Revenues per unit in mil. CZK
Foundations 37.1 39.8 33.1 30.4 35.5
Commercial revenues 9.0 7.0 5.8 5.5 4.5
Contributions and gifts 6.5 3.5 1.0 6.6 2.2
Operating subsidies 1.9 0.1 0.9 0.7 0.8
Other revenues 19.7 29.1 25.4 17.4 28.0
Nonprofit providers of public services 17.0 18.0 17.9 18.2 18.6
Commercial revenues 7.4 8.2 7.7 8.0 8.2
Contributions and gifts 0.7 0.8 0.7 0.9 0.9
Operating subsidies 7.0 7.1 7.1 7.0 7.0
Other revenues 1.9 2.0 2.3 2.3 2.5
Civic associations 22.1 25.6 25.9 18.3 17.7
Commercial revenues 4.8 5.9 6.0 6.5 6.3
Contributions and gifts 0.9 1.3 1.2 1.0 1.3
Membership fees 0.6 1.2 1.0 0.8 0.8
Operating subsidies 4.4 4.9 5.2 6.0 6.3
Other revenues 11.4 12.4 12.5 3.9 2.9
Source: Vaceková, Valentinov & Nemec, 2016
This section reports the results of a 2013 survey of Czech nonprofit organizations asked
to provide information on their commercial, or self-financing, activities (Table 12). The
75
primary survey was conducted within the framework of the Masaryk University project
“CZ.1.07/2.3.00/30.0009 Employment of Newly Graduated Doctors of Science for
Scientific Excellence.” A total of 250 nonprofit organizations were contacted, of which
67 responded. Of the responding nonprofit organizations, 46% are civic associations,
25% are church or religious associations, 21% are public benefit organizations, 6% are
foundations, and 2% are foundation funds. A chi-square test proved the
representativeness of the sample at the significance level alpha of 0.05 (p-value of
0.129 > alpha).
Table 12 Percentage of responding nonprofit organizations that report benefits from
selected income items
TYPE OF FUNDING SOURCE OF FUNDING
PRIMARY DATA
FROM THE CZECH
REPUBLIC
Public funding
State, state subsidies, municipal budgets 67%
State/public contracts *
Self-financing
Mission-
related
Individual donors/companies 66%
Grants (private foundations) 48%
Memberships fees 24%
Sale of own products and services 69%
Sponsorship 1%
Foreign sources, including EU grant and
subsidies
22%
Mission-
unrelated
Assets rental 28%
Investment appreciation 3%
Other Other sources 1%
Source: Vaceková, Valentinov & Nemec, 2016
The surveyed nonprofit organizations provided their assessments of the extent to which
self-financing interferes with fulfilling their mission. Among the responding nonprofit
organizations, 81% of respondents claimed that self-financing does not interfere with
the mission, 13% claimed the opposite, and 6% were not able to decide. Under these
circumstances, it is unsurprising that 98% of Czech respondents confirmed their
inclination to use self-financing in the future.
Modern moral philosophers differentiate between functional and dysfunctional
discrepancies. Such discrepancies can occur between social structures and semantics,
between institutions and ideas (Pies et al., 2009; Beckmann et al., 2014). While the
76
functional discrepancies provide an impetus to social learning processes, the
dysfunctional discrepancies suppress these processes and slow the advance of
civilization (ibid). Through their effect on the evolution of society, both varieties of
these discrepancies are infused with a moral content. This approach to the identification
of moral content and meaning seems more relevant to the phenomenon of nonprofit
commercialization in the Czech Republic than the Anglo-Saxon imputation of moral
dilemmas to the behavior of individual nonprofit managers.
In fact, in the Czech Republic, the reflections and findings on nonprofit
commercialization suggest that the semantics of commercialization do not merely
diverge from the Czech social structure; they are divergent in an apparently
dysfunctional way. In contrast to self-financing, social entrepreneurship, and related
terms, the term “commercialization” is specifically acknowledged to be burdened with
negative connotations (cf. Toepler, 2004). While some believe that social
entrepreneurship is “revolutionizing the nonprofit sector” (cf. Stecker, 2014),
commercialization creates problems (Weisbrod, 2004; Toepler, 2004). Given that these
negative connotations emerged in the institutional context outside of Central and
Eastern Europe, it may be understandable that this term failed to gain popularity in this
region. Far from being systematically examined, it seems to be only occasionally
mentioned in the gray literature, such as diploma theses and working subchapters.
It does not seem improbable to suspect that some nonprofit scholars and practitioners
strategically avoid the term, thus creating a semantic incongruence in the discursive
constructions of the nonprofit sector in the East and West. This incongruence
complicates the comparative analysis of the nonprofit sector across institutional
contexts and downplays the potentially significant negative side effects of nonprofit
commercialization in the Czech Republic.
The challenges arising from the misalignment between the Anglo-Saxon semantics of
commercialization and the Czech social structure need not be fatal. They can be
resolved by reframing the vision of the moral significance of commercialization. While
there are many possible ways to undertake this reframing, a useful point of departure is
suggested by the proposed understanding of commercialization as an institutional
phenomenon. Interestingly, a crucial insight emerging from modern scholarship in
moral philosophy and business ethics is that the social structure of modernity is much
more adequately described by the semantic categories of institutional ethics than by
individual ethics (Pies, 2012; Suchanek, 2007; Homann, 2002). Whereas individual
ethics locates morality in the sinfulness and virtuousness of individual behavior,
institutional ethics shifts morality to the level of institutions rather than individuals
(ibid). Furthermore, institutional ethics functions with the awareness that many
77
“problems of the modern society are emergent” (Valentinov et al., 2016, p. 11), i.e.,
incapable of unambiguous attribution and expression through the semantics of
individual responsibility. These arguments make clear that if nonprofit
commercialization is accepted as an institutional phenomenon, then its moral
significance, both positive and negative, is best captured by institutional rather than
individual ethics. The thrust of the institutional ethics standpoint is that nonprofit
managers and other stakeholders cannot bear individual moral responsibility for
nonprofit organizations “losing their souls” (Weisbrod, 2004, p. 46), and that nonprofit
commercialization is not merely a matter of individual opportunism, weakness of will,
or another form of lack of virtue.
The emphasis that institutional ethics places on institutions rather than individuals
considers both the advantages and disadvantages of commercialization with the
understanding that they cannot be reduced to the ontological level of individual
intentions. The key advantage of commercialization is that it may help the nonprofit
sector to develop a sufficient resource base, which would empower it to make
important contributions to the quality of social life in terms of democracy building,
social cohesion, and service delivery. But institutional ethics likewise acknowledges
that nonprofit commercialization may have a potentially broad range of
disadvantageous side effects that cannot be attributed to the level of individuals and are
in this sense genuinely unintentional.
The main side effect is the covert and unintentional “smuggling” of business thinking
and management methods into nonprofit settings so that nonprofit organizations shift to
fields of activity unrelated to their core mission (cf. Young & Salamon, 2002). Added
to this is the fact that many nonprofit organizations, especially in Central and Eastern
Europe, exhibit a level of organizational vulnerability that makes them extremely prone
to varied business risks (Rymsza, 2013; Vaceková & Svidroňová, 2014). The
“governmentalization” of nonprofit organizations (Rymsza, 2016), including “satellite
foundations” that are controlled by public sector organizations, is a similar concern.
From the perspective of institutional ethics, even the spread of “for-profits in disguise,”
while fully acknowledged as another undesirable side effect of nonprofit
commercialization, cannot be attributed to individual opportunism alone.
A further crucial implication of the institutional ethics viewpoint is that the public
policy support for the commercialization, or self-financing, of nonprofit activities
should not be taken at face value. Many nonprofit organizations in Central and Eastern
Europe are reported to be highly vulnerable and dependent on this supportive
infrastructure (Rymsza, 2016; Vacekova & Svidronova, 2014). A recent study of rural
78
nonprofit organizations in the Czech Republic revealed that their ability to contribute to
the quality of rural life is severely limited by the socioeconomic characteristics of the
examined rural areas (Valentinov & Vacekova, 2015). If the effectiveness of nonprofit
activities is dependent on the institutional context, then the institutional ethics
viewpoint underscores the responsibility of the government to make this context
supportive in ways that go beyond a mere permissive attitude toward self-financing. If
this attitude is the sole supportive measure, then it betrays the government’s reluctance
to assume responsibility for shaping a favorable institutional environment for the
nonprofit sector. This conclusion is indirectly corroborated by studies finding the
existing public sector support for social entrepreneurship in the Czech Republic to be
limited and unsystematic (European Commission, 2014). This opens the question of
nonprofit sustainability, which is the main focus of the next subchapter.
2.3 Nonprofit sustainability: Evidence from the Czech
Republic
The sustainability of nonprofit organizations is an increasingly prominent theme in the
booming multidisciplinary field of nonprofit sector studies. Especially in the Western
world, the nonprofit sector fulfills a broad range of socio-economic functions that are
intended to strengthen the social and ecological dimensions of sustainable development
(see also Hagedorn, 2014; Boehnke et al., 2015; Li & Ma, 2014; Wei & Kong, 2014).
Yet many individual nonprofit organizations operate in a complex and turbulent
environment that poses a significant challenge to their own economic sustainability (see
also Hung & Ong, 2012; Besel et al., 2011; Weerawardena et al., 2010). It is primarily
the economic sustainability of individual nonprofit organizations that nonprofit scholars
have in mind when referring to “nonprofit sustainability” (see also Bowman, 2011; Bell
et al., 2010). A consensus seems to be emerging among these scholars that the challenge
of economic sustainability is shaping both the strategies and structures of nonprofit
organizations. For example, many nonprofit organizations are under increasing pressure
to rely on commercial sources of income (e.g., Ebrahim et al., 2014; Svidroňová
& Vaceková, 2012; Vaceková & Svidroňová, 2014; Svidroňová, 2013) as well as to
seek partnerships with public agencies (Mikušová Meričková et al., 2015) and private
for-profit corporations. In the scholarly literature, these organizational transformations
in the nonprofit sector are analyzed through the lenses of sociological institutionalism
(e.g., Baum & Oliver, 1991), organizational ecology (e.g., Hannan & Freeman, 1997),
resource dependence (e.g., Froelich, 1999), and social systems theory (e.g., Moeller
& Valentinov, 2012). All these analyses have implied that the precarious sustainability
of nonprofit organizations potentially undermines the useful functions that are
79
theoretically ascribed to nonprofit organizations. This disturbing implication raises the
novel research idea of enriching the theoretical understanding of nonprofit functions
with an account of nonprofit sustainability problems so as to arrive at a more balanced
assessment of the actual impact of the nonprofit sector.
This subchapter addresses this research idea in two respects. First, it traces the challenge
of nonprofit sustainability back to the roots of nonprofit economics, a burgeoning
economic subdiscipline. Since its beginnings in the early 1980s, nonprofit economics
has included two distinct types of theories, usually designated as demand-side and
supply-side theories. The demand-side theories examine the societal problems
addressed by nonprofit organizations and characteristically locate these problems in
specific types of market failure. The supply-side theories study the behavior of
nonprofit managers and entrepreneurs with a view to understanding the structures and
functions of nonprofit organizations. One interesting and provocative modern nonprofit
economic thought is that there is a persistent lack of connection between the demandside
and supply-side theories, suggesting that the behavior of nonprofit managers and
entrepreneurs may be only distantly related to the societal problems that nonprofit
organizations are supposed to solve (Aligica, 2014; Valentinov & Iliopoulos, 2013;
Young, 2013; Jegers, 2011; Steinberg, 2006; Hansmann, 1987). This subchapter will
conceptualize the split between the demand-side and supply-side theories as
a discrepancy between the demand-side and supply-side determinants of nonprofit
sustainability. In doing so, it will advance the thesis that the deficits of nonprofit
sustainability are systematically predicted by the nonprofit economics literature.
The second contribution of this subchapter to understanding nonprofit sustainability is
in applying the above thesis to European rural development. In the last decade,
European rural areas have been witnessing the shift “from government to governance”
i.e., the increasing transfer of responsibilities from state to non-state actors (see also
OECD, 2006; De Vries, 2013). The shift from government to governance means
an increasing role is played by nonprofit organizations, including LEADER
partnerships, in revitalizing depressed rural areas through community-based endogenous
initiatives. The extensive amount of scholarly literature generated in response to the
LEADER program emphasizes the problems of sustainability for European rural
partnerships. An authoritative literature review indicated that the social inclusion
potential of these partnerships has often been limited, especially in terms of the most
vulnerable groups; the power relations between partners have often been contested; all
too often, partnerships have been instrumentalized for the purpose of attracting funding
without a genuine concern for long-term community development; fundraising efforts
have been often excessive; and local state agencies have tended to dominate community
80
self-organization processes (Furmankiewicz et al., 2010). This subchapter will interpret
these problems in terms of the discrepancy between the demand-side and supply-side
sustainability determinants of rural partnerships. This discrepancy will be shown to be
exacerbated by characteristic features of rural areas and made more complex by the fact
that the distinction between the demand-side and supply-side determinants is much
easier to draw in theory than in practice.
The following passages will provide a brief background on the lack of connection
between the demand-side and supply-side economic theories of nonprofit organizations
and on this basis introduce the distinction between the demand-side and supply-side
determinants of nonprofit sustainability. This argument will then be applied to the rural
development context and supported with empirical evidence of the rural nonprofit sector
in the Czech Republic.
The distinction between the demand-side and supply-side theories of nonprofit
organizations goes back to the influential writing of Henry Hansmann (1987) who
sought to produce a comprehensive map of the field of nonprofit economics as it existed
at the time. Hansmann’s authoritative overview reached the conclusion that the supplyside
theories of nonprofit organizational behavior demonstrated a lack of contact with
the demand-side theories that located the societal role of nonprofit organizations in the
correction of market failures. Since then, the demand-side theories have been criticized
on a number of grounds. Framed by neoclassical economics, these theories said little on
the institutional embeddedness of the nonprofit sector (cf. DiMaggio & Anheier, 2001;
Anheier & Salamon, 2006; Balgah et al., 2010; Valentinov, 2009; ibid, 2008a; ibid,
2011; ibid, 2012; ibid 2008b) and indeed committed the Polanyian “economistic
fallacy” (Adaman & Madra, 2002). In contrast to the demand-side theories, Chaves and
Monzón (2012) see nonprofit organizations as a part of the broader social economy that
contributes to sustainable development while laying bare the monistic nature of the
mainstream neoclassical economics that has been mainly focused on capitalist for-profit
enterprises. According to Lohmann (1992), the main thrust of the demand-side theories
is negative, telling more about what the nonprofit sector is not than what it is. Most
important to the present context, however, is the charge that demand-side market failure
theories “explain why consumers would want to buy from and donors donate to
nonprofit organizations, but do not explain why nonprofit organizations are there for
them to use. What is needed is a theory of the supply of this organizational form to
complement the theories of demand” (Steinberg, 2006, p. 128). According to RoseAckerman
(1996), supply-side theories must address the important motivational and
behavioral aspects of ideology, altruism, social values, and mission-drivenness, each of
which gets short shrift in demand-side market failure theories.
81
A related strand of the nonprofit literature highlights the geographical implications of
the split between the demand-side and supply-side theories. An authoritative literature
review demonstrated that studies of the locational dynamics of nonprofit organizations
“take a common approach in that needs and resources (including poverty or income) in
a specific region (usually a city) are held to determine the number of nonprofit
organizations in that region” (Bielefeld & Murdoch, 2004, p. 222). By emphasizing
needs and resources, these studies endorse the theory-driven distinction between the
demand-side and supply-side determinants. For example, Corbin’s (1999) study of
factors influencing the growth of nonprofit organizations in social services in the United
States identified demand-side factors, including demand heterogeneity and market
failure, and supply-side factors, including social cohesion, resource dependence, and
philanthropic culture. In a similar vein, Grønbjerg and Paarlberg (2001) use countylevel
data for the state of Indiana in order to examine the community variations in the
size and scope of the nonprofit sector. They discovered that the demand-side factors of
these variations are largely overridden by the supply-side factors and by the effects of
community social structures.
The split between demand-side and supply-side theories indicates that the behavior of
nonprofit organizations is more complex than assumed by demand-side theories, many
of which present stylized models of market failure (Jegers, 2011; Steinberg, 2006;
Hansmann, 1987). This split is likely caused by the difference in the levels of analysis
of the two types of theories. Demand-side theories refer to the problems of society as
a whole; supply-side theories are aimed at the level of organizations which face a range
of organizational-level challenges that are invisible from the societal point of view.
These challenges make nonprofit sustainability insecure and erode trust in the ability of
these organizations to address societal problems. Therefore, taking an appropriate
account of nonprofit sustainability requires adopting an organization theory perspective
that could interrelate organizational goals, i.e., missions, with actual organizational
behavior.
A highly suitable platform for such an organization theory synthesis is provided by
Scott’s (2003) influential textbook that identifies three basic approaches to
organizations. Scott (ibid) designates these approaches as the rational, natural, and open
system perspectives. From the rational system perspective, “organizations are
collectivities oriented to the pursuit of relatively specific goals and exhibiting relatively
highly formalized social structures” (ibid, p. 27). From the natural system perspective,
“organizations are collectivities whose participants are pursuing multiple interests, both
disparate and common, but who recognize the value of perpetuating the organization as
an important resource. The informal structure of relations that develops among
82
participants is more influential in guiding the behavior of participants than is the formal
structure” (ibid, p. 28). Finally, from the open system perspective, “organizations are
congeries of interdependent flows and activities linking shifting coalitions of
participants embedded in wider material-resource and institutional environments” (ibid,
p. 29).
In the nonprofit context, the rational system perspective makes clear that demand-side
theories, including those of Weisbrod (1977) and Hansmann (1987), offer theoretical
and normative justifications of nonprofit goals but fail to suggest the actual capacity of
nonprofit organizations to attain them. Salamon’s (1987a) “voluntary failure” theory
explained why these organizations may lack the expertise and resources to deliver on
their missions (cf. Seibel, 1996; Valentinov, 2012d; Valentinov et al., 2015). In
emphasizing the role of informal relations as well as organizational survival
considerations, the natural system perspective provides a valuable means of capturing
the importance of “mission-drivenness” (Lohmann, 1992; Rose-Ackerman, 1996) and
enables thinking of opportunistic tendencies and “discretionary excesses” of nonprofit
managers and entrepreneurs (Young, 2013). The open system perspective seems to have
the most critical implications. It suggests that nonprofit organizations must effectively
reach their external stakeholders and also that they may fail to manage their resource
dependencies (Hung & Ong, 2012; Besel et al., 2011; Weerawardena et al., 2010;
Bowman, 2011; Moeller & Valentinov, 2012).
The open system perspective is especially interesting because it apparently underpins
the distinction that Bell et al. (2010) made between programmatic and financial types of
nonprofit sustainability. To Bell et al. (ibid, p. 16), programmatic sustainability means
that “nonprofit’s programs are relevant to its constituents and are having an impact” and
financial sustainability means that “the organization has sufficient working capital for
its needs and activities.” While each of the three organization theory perspectives are
appropriate for capturing nonprofit sustainability problems, this subchapter will draw
upon the approach that Bell et al. (ibid) took and generalize the distinction between the
programmatic and financial types of sustainability. Framing the nonprofit economic
theories in terms of the terminology of Bell et al. (ibid), it makes sense to differentiate
between the demand-side and supply-side determinants of nonprofit sustainability.
While the demand-side determinants refer to the societal relevance of nonprofit
missions, the supply-side determinants are related to the ability and willingness of
nonprofit decision-makers to secure the resource base required for fulfilling these
missions over time. Obviously, the sustainability of nonprofit organizations requires the
concurrence of its demand-side and supply-side determinants.
83
If demand-side and supply-side theories are conceptualized as the respective
sustainability determinants at the organizational level, then the split between these
theories translates into the tendency of the supply-side sustainability determinants to
diminish the demand-side sustainability determinants. Regardless of the empirical
support for the demand-side theories, the sheer empirical validity of the supply-side
theories indicates that the societal roles of nonprofit organizations deviate from the
demand-side theories’ predictions, suggesting that the realities of institutional life are
considerably more complex than the demand-side theories seem to assume. One
example of the way the demand-side determinants of nonprofit sustainability are
undermined by the supply-side determinants is Lenette and Ingamells’s (2015) study of
human services for refugee immigrants to Australia. The authors identify the increasing
chasm between funding-driven agencies and social and community needs. Their
conclusion is that “the field of human services … needs to reclaim a broader paradigm
of human service practice allowing for joined up, locality-based, capacity building work
that is responsive to people, contexts, and specific issues emerging over time.” As the
next section indicates, the relationship between the demand-side and supply-side
determinants of nonprofit sustainability is notoriously precarious in the rural
development context.
Iliopoulos and Valentinov (2009) contend that the socio-economic characteristics of
rural areas, including low population density, low per-capita incomes, geographic
dispersion, and relatively poor infrastructure generally tend to lower the attractiveness
of rural areas as a location for profit-driven business (see also Valentinov, 2007; ibid,
2009; ibid, 2012). “The lower return on investment weakens the incentives of for-profit
firms to operate in rural areas. This means, in turn, that rural dwellers may be
dissatisfied with the levels of consumption goods and services delivered to them by forprofit
firms” (Iliopoulos & Valentinov, 2009, p. 441). They assert that the emerging
gaps in the provisioning of rural dwellers could be filled by various types of nonprofit
organizations that are not concerned with the profitability of their activities in the same
way that for-profit firms are (ibid). It is common knowledge that “people living and
working in rural Europe usually experience higher rates of risk of poverty and lower
levels of employment, income, educational attainment, health care, and access to
infrastructure and public services” (Volunteurope, 2014, p. 6). Nonprofit organizations
hold considerable potential for “break[ing] the vicious cycles of exclusion and
marginalization in rural areas” (ibid, p. 12). These arguments suggest that the endemic
developmental problems of rural areas constitute a distinct demand-side rationale for
nonprofit organizations, a rationale that constitutes the ultimate, if implicit, core of the
theoretical justification of rural partnerships as a rural development policy instrument
(cf. Trukhachev, 2015; Wang et al., 2015; Lange et al., 2015).
84
Identifying the demand-side justification for rural partnerships and other nonprofit
organizations suggests that their supply-side sustainability determinants may be
disconnected from the demand-side sustainability determinants. As with the more
generic nonprofit case, there seem to be no grounds for assuming that the supply-side
determinants will automatically translate into the demand-side determinants. Thus, there
is no basis for optimism in terms of the overall sustainability of the concerned nonprofit
organizations. It is not surprising that the split between the two types of sustainability
determinants manifests itself in the widely acknowledged and discussed implementation
problems with which these organizations have been grappling. The greatest focus in the
scholarly literature on the LEADER program has been on its implementation problems.
Although its intentions are noble, the theoretical justification for the LEADER program
could not and did not translate into direct action. Participation has to be enabled by the
appropriate organizational structures; funding modalities have to be adjusted (cf.
Furmankiewicz et al., 2010); social capital, networks, and accountability mechanisms
have to be put into effect (cf. Marquardt et al., 2012); and collective action problems
need to be addressed (cf. Hagedorn, 2014). Furthermore, as Munoz et al. (2014)
correctly noted, the very challenges of rural areas that determine the demand-side
sustainability of nonprofit organizations simultaneously deprive these areas of the
resources and capabilities required for community-based service providers to operate
effectively. Dispersed settlement patterns, low population densities, aging populations,
and other characteristics of rurality are highly contradictory in that they give a boost to
the demand-side sustainability of rural nonprofit organizations while suppressing their
supply-side sustainability (ibid).
Munoz et al. (ibid) present an argument that illuminates the rurality-specific mechanism
by which the demand-side and supply-side determinants of nonprofit sustainability
undermine and defeat each other. The precarious relationship between these has
attracted much scholarly attention. For example, concerning Poland, Furmankiewicz et
al. (2010) describe how the supply-side determinants, including funding arrangements
and the influence of local authorities, “undermine the ability of Polish partnerships to
operate in ways which harness the endogenous capacities of local communities.” More
radically yet, Shucksmith (2000) notes the self-undermining tendencies of endogenous
development initiatives that “favor those who are already powerful and articulate, and
who already enjoy a greater capacity to act and to engage with the initiative. This may
even lead to a capturing of the initiative by elites or sectional interests, in extreme cases.
More marginalized groups are less able to participate or engage with the program, and
are less likely to be empowered unless explicit attention is given to their inclusion.”
These studies underscore that in the rural context, the validity of the supply-side
85
sustainability determinants is less likely to complement than to undermine the demandside
sustainability determinants.
The available econometric evidence of the effects of the socio-economic characteristics
of rural areas and communities in the Czech Republic on the size of the local nonprofit
sector contributes to the proposed theoretical understanding of nonprofit sustainability
in two respects. First, it documents the rurality-specific relationship between the
demand-side and supply-side sustainability determinants that was outlined in the
preceding subsection. This relationship adds a valuable qualification to Iliopoulos and
Valentinov’s (2009) argument that the attributes of rurality enhance the demand-side
sustainability of the rural nonprofit sector. The empirical findings make it more
plausible to suggest that these attributes act on both the demand side and the supply
side, with their supply-side identity undermining or counteracting their demand-side
identity. Second, somewhat unexpectedly, empirical work has shown that the distinction
between the demand-side and supply-side sustainability determinants may be hard to
draw. The suggested “double nature” of the attributes of rurality indicates that their
demand-side and supply-side identities cannot be easily disentangled. This presents a
sharp contrast to the unambiguous differentiation between the demand-side and supplyside
sustainability determinants in studies of the locational dynamics of nonprofit
organizations (Bielefeld & Murdoch, 2004; Corbin, 1999; Grønbjerg & Paarlberg,
2001). Thus, the key hypothesis is that the size of the local rural nonprofit sector is
affected by both demand-side and supply-side sustainability determinants. The
verification of this hypothesis is supplemented by an analysis of the ambiguity of the
distinction between the demand side and supply side.
The hypothesis is verified using primary and secondary data (Table 13). The primary
data originate from interviews that were conducted with mayors in 190 randomly
selected municipalities of the Czech Republic (Vysočina and Jihomoravký kraj) in
2013. To make certain that the municipalities are rural, attention was limited to
municipalities with less than 2000 residents. The interviews were based on a structured
questionnaire containing questions about the municipality residents, infrastructure, and
economic activity, the number of local nonprofit organizations, their size (in terms of
membership), and the nature of their activities, social capital, local action groups, the
main challenges of local development, and the quality of local life. As each
municipality was represented by its respective mayor, 190 mayors were approached. Of
these, 11 mayors were not able to provide the requested information. Accordingly, this
sample consists of 179 rural municipalities that contain 699 nonprofit organizations (see
also Curtiss et al., 2014; Curtiss & Škarabelová, 2015).
86
The secondary data comes from the 2011 census by the Czech Statistical Office and
contains information on the demographic, social, and economic characteristics of
residents in these municipalities. In addition to the census data, the Linked Open Data
from the surveyed regions were used, including the data provided by the free databases
ÚFIS, ARIS, and MONITOR (cf. Soukopová & Struk, 2011). MONITOR is the
information portal of the Czech Ministry of Finance and allows free access to the budget
and accounting information related to all levels of public administration. ARIS contains
publicly available information about municipal incomes and expenditures in the Czech
Republic for the 2001–2009 period; the information for subsequent years is provided by
ÚFIS, the successor database. The information provided by the mayors was crosschecked
using the publicly available annual reports of formally registered nonprofit
organizations.
Table 13 Qualitative and quantitative methods used for primary and secondary data
collection and analysis
METHODS AND TOOLS
USED
interviewing; descriptive statistics; cluster analysis; correlation analysis;
exploratory data analysis; pattern recognition; regression analysis
AVAILABLE DATA
Primary data: Questionnaire survey
Secondary data: Census Data; Linked Open Data from regions;
Linked Open Data from the free databases of the Czech Ministry
of Finance (ÚFIS, ARIS, MONITOR); NPO Annual Reports
Source: Valentinov & Vaceková, 2015
The sample of 179 rural municipalities is satisfactory if compared with the minimum
sample size required to maintain the relative error standard deviation δ(s) as
a prescribed value (Bilšťan, 1999). The minimum sample size is determined by the
formula:
2
min 2
( ) 1
1
4 ( )
g u
n
s
−
= +
δ
(1)
Given a relative standard deviation δ(s) = 0.1 (i.e., 10%), and a normal distribution with
kurtosis g2 = 3, the recommended minimum sample size is 51. This sample meets this
condition.
Respondents indicated that of the 699 nonprofit organizations, 550 were formally
registered, and 101 were informal groups; they were unable to classify 48
87
organizations. In 30 municipalities, some nonprofit organizations are members of the
local action group, supported by the LEADER+ program of the EU Common
Agricultural Policy. In 25 municipalities, there were nonprofit organizations that
terminated their activity and do not exist anymore. Of the nonprofit organizations in
this database, 21% are sports clubs, 20% provide public services (mainly fire
protection), 16% are interest and hobby clubs, 12% are engaged in cultural activities,
and 9% pursue environmental concerns (e.g., local hunting associations). Of all the
nonprofit organizations in the database, 60% were in operation during the Communist
period; the rest were established or re-established after the collapse of the Communist
regime.
These and other results of the descriptive statistical analysis enabled the sample to be
quantitatively summarized, revealing the main features. Based on the subsequent
exploratory data analysis, the essential characteristics of the dataset were specified in
order to select analytical tools and recognize patterns. The main use of this database for
this study was for enabling a regression exploring the effects of the socio-economic
characteristics of rural areas and communities in the Czech Republic on the size of the
local nonprofit sector. The number of nonprofit organizations in a rural municipality
were regressed on independent variables describing the local population, local
infrastructure, education and employment of rural residents, local religious activity, and
residents’ satisfaction with the quality of life (Tables 14 and 15). The model is highly
statistically significant and delivers high coefficients of determination (R2 close to
0.58; adjusted R2 above 0.54), i.e., it explains a high proportion of the total variation of
outcomes. The overall significance of the F-statistics confirms that the model is not
misinterpreted. A correlation analysis revealed the need to prevent the adverse effects
of multicollinearity on the significance of the independent variables. Thus, a stepwise
regression was applied that enabled the grouping of independent variables in appropriate
sets by a cluster analysis (Table 14).
88
Table 14 Explanatory variables
VARIABLES EXPLANATION
Number of residents
(ln_nr_residents)
Community size (census data)
Note: the relationship between the number of residents and
the number of nonprofit organizations is non-linear. The
logarithmic form of this explanatory variable delivers
statistically more significant results
Share of elderly people
(share_elderly_people)
Residents over 65 (census data)
Number of public areas
(nr_public_areas)
The state of development of public infrastructure.
Note: these determinants are represented as one explanatory
variable (sum) because of their high cross-correlations
Number of football pitches
(nr_football_pitches)
Number of playgrounds
(nr_playgrounds)
Number of kindergartens
(nr_kindergartens)
Number of primary schools
(nr_primary_schools)
Sewage plant (sewage_plant) Existence of a sewage plant in a municipality
Public water supply system
(public_water_supply_system)
Existence of public water supply system in a municipality
Number of active churches (nr_church) Number of churches in the municipality
Share of religious population
(share_religious)
Residents claiming a religious faith (census data)
Education degree
(share_basic_education)
Human capital (share of population with only a basic
education—highest achieved—census data)
Unemployed residents
(share_unemploeyed)
Unemployment rate in the municipality (census data)
Freelancers (share_freelancers) Share of freelancers/all employed residents (census data)
Share of residents satisfied with social
and cultural conditions in the
municipality
(satisfaction_social_conditions)
Life quality in the community based on mayors’ estimations
of resident satisfaction with social and cultural conditions in
the municipality (% of satisfied residents)
Share of residents satisfied with the
level of provided public services
(satisfaction_public_services)
Life quality in the community based on mayors’ estimations
of resident satisfaction with the level of provided public
services (% of satisfied residents)
Source: Valentinov & Vaceková, 2015
89
A number of the independent variables in the model were significant. Somewhat
unsurprisingly, the data indicate that the number of local nonprofit organizations is
positively affected by local population size. The set of variables including the number
of local public areas, football pitches, playgrounds, kindergartens, and primary schools
also positively related to the number of local nonprofit organizations; the same can be
said about resident satisfaction with the social and cultural conditions of the local
quality of life. The negative relationships between the number of local nonprofit
organizations and the local availability of a sewage plant and a church were surprising.
Table 15 Determinants of the Czech rural nonprofit sector (1)
Dependent Variable: nr_NPOs
b*
(Standardized
partial
regression
coefficient.)
Std. b*
(Standard
error of
b*.)
b (Partial
regression
coefficient)
Std. b
(Standard
error of b.)
p-Value(2)
ln_nr_residents 0.661087 *** 0.076636 2.22511 0.257946 0.000000
nr_public_areas.
nr_football_pitches.
nr_playgrounds.
nr_ kindergartens.
nr_primary_schools
0.290752 *** 0.066268 0.30948 0.070537 0.000019
sewage_plant −0.155593 ** 0.054006 −0.89375 0.310220 0.004427
public_water_supply_system −0.065497 0.051983 −0.78817 0.625540 0.209246
nr_church −0.111434 * 0.056539 −0.60756 0.308261 0.050209
share_elderly_people 0.092872 0.055568 0.06243 0.037352 0.096329
satisfaction_social_conditions 0.121776 * 0.059863 0.01714 0.008428 0.043340
satisfaction_public_services −0.116369 0.061678 −0.01674 0.008872 0.060749
share_basic_education −0.080971 0.054517 −0.05597 0.037693 0.139165
share_unemploeyed 0.060839 0.051123 0.08722 0.073289 0.235536
share_freelancers −0.062381 0.049598 −3.45174 2.744452 0.210063
share_religious 0.056134 0.051904 0.01225 0.011331 0.280873
(1)
R = 0.7579; R2
= 0.57439; adjusted R2
= 0.5471; F(12,187) = 21,031;
(2)
Note: * p < 0.05. ** p < 0.01. *** p < 0.001.
Source: Valentinov & Vaceková, 2015
90
Iliopoulos and Valentinov’s (2009) argument about the demand-side sustainability of
the rural nonprofit sector provides a useful lens into the meaning of these findings. To
these authors, the poor state of rural infrastructure generates a demand for rural services
that can be provided by nonprofit organizations (ibid). The positive relationship
between resident satisfaction and the number of local nonprofit organizations aligns
with the main thrust of this argument, as the services provided by nonprofit
organizations reasonably make the residents more satisfied. Straightforward support for
this argument comes from the revealed tendency of local sewage plants to negatively
correlate with the number of local nonprofit organizations. If the availability of local
sewage plants is taken to indicate a better state of rural infrastructure than their nonavailability,
then their availability likely dampens the demand for nonprofit services,
thereby lowering the number of local rural nonprofit organizations.
What about the relationship between the demand-side and supply-side sustainability
determinants? It does not seem too implausible to suppose that a lack of local sewage
plants is generally indicative of a deficient local capacity to create (i.e., supply) rural
nonprofit organizations. One possible scenario is that the most able and entrepreneurial
individuals, put off by the prospect of living in a locality without a sewage plant,
emigrate and thus deprive the concerned rural areas of the valuable human capital. It is
possible, however, that the supply-side determinants are particularly effective in the
infrastructure revealed by another significant variable or set of variables: the number of
local public areas, football pitches, playgrounds, kindergartens, and primary schools.
The positive relationship of the number of these infrastructure indicators to the number
of local nonprofit organizations appears to contradict Iliopoulos and Valentinov’s
(2009) demand-side argument. However, these infrastructure objects very likely differ
from the local sewage plants in their superior ability to mobilize and the local capacity
to create or get involved with the local nonprofit organizations. It is indeed much more
likely for local residents to get together and discuss their collective strategies in local
public areas and schools than in sewage plants. It is this supply-side identity of the
former infrastructure objects that likely explains why they boost the number of local
nonprofit organizations instead of lowering it, in contrast to sewage plants.
The complexity of the supply-side sustainability determinants of the Czech rural
nonprofit sector is further enhanced by the role of local churches. On the one hand,
these churches present a premier platform for local residents to come together and
improve the local capacity to create or get involved with the local nonprofit
organizations. On the other hand, the churches may act as local nonprofit organizations
in their own right, thus preventing local residents from getting involved in other
nonprofit organizations which are considered in the dependent variable. The negative
91
relation between the availability of local churches and the number of local nonprofit
organizations supports the latter scenario.
In conclusion, it must be noted that each of the statistically significant determinants of
the size of the local nonprofit sector in the selected rural areas of the Czech Republic
reasonably combines demand-side and supply-side identities so that they can only be
disentangled by in-depth case studies. It is also reasonable that the sign of the relation
of these determinants to the size of the local nonprofit sector is conditioned by the
relative roles of these identities. In the proposed interpretation of the empirical findings,
there are several examples of this ambiguity: (a) local sewage plants were able to act as
supply-side sustainability determinants, but they were interpreted as demand-side
determinants; (b) local public areas were able to be demand-side sustainability
determinants, but they were interpreted as supply-side determinants; (c) local churches
were interpreted as nonprofit organizations in their own right rather than as supply-side
sustainability determinants. Accordingly, as the next section explains, it is not the
sustainability determinants as such but rather the complexity and ambiguity of their
demand-side and supply-side identities that emerge as a guidepost for the further
development of the field of nonprofit economics.
The evidence presented in the preceding section casts a new light on the problem of the
disconnection between the demand-side and supply-side determinants of nonprofit
sustainability. Nonprofit economists have tended to see this problem as a theorybuilding
deficit that could be addressed by finding ingenious ways to integrate these
determinants in ever more encompassing conceptual frameworks (Steinberg, 2006;
Hansmann, 1987; Valentinov & Iliopoulos, 2013). The significance of the reported data
on the Czech nonprofit sector, as well as of the numerous empirical studies of the
LEADER program, is that it shows that this disconnection is an empirically valid
phenomenon. In light of this evidence, the relevant research problem is no longer in
conceptually overcoming or explaining away this disconnection, but rather in
reorienting the field of nonprofit economics toward the search for the systematic
reasons that make this disconnection necessary and pervasive.
2.4 Concluding remarks: theoretical vs. empirical
research
The first subchapter advances a novel research project that seeks to revisit the role of
conventional economic approaches in explaining the existence of the nonprofit sector in
modern society. Drawing upon institutionalist ideas, this research project is primarily
92
aimed at identifying the real-world problem-solving potential of the nonprofit sector
rather than at reconciling nonprofit activities with the neoclassical market failure
framework. Accordingly, the normative benchmark underpinning the study is not the
Pareto-optimality of perfectly competitive markets but rather the fulfillment of societal
values with the aim of improving the quality of social life. This benchmark reflects the
fact that the dominant institutional structures of the modern Western world – markets
and hierarchies pertaining to the private for-profit and public sectors – do not permit an
adequate fulfillment of societal values.
The empirical analysis of the Slovak nonprofit sector identified education, sports, and
welfare as its most important fields of activity. It is in these fields of activity that the
dominant institutional logics of market and bureaucracy are least applicable. The
sizable presence of volunteers is likewise a testimony to the functional limits of the
traditional employment relations in Slovak society, and especially in these nonprofit
fields of activity. A remarkable finding is that the supply-side theoretical approach to
explaining nonprofit organizations has turned out to be most relevant in the Slovak
context. This finding suggests that people use the nonprofit sector to reach those values
that cannot be attained through the dominant for-profit and public institutions.
Furthermore, the confirmed real-world importance of the interdependence theory calls
attention to the complementary nature of the existing institutions which accordingly
work best in concert rather than in mutual isolation. The obtained results are contingent
on regional contexts that differ in terms of their historical and cultural heritage. Finally,
the legal environment in Slovakia has provably left a mark on the motives for the
founding of nonprofit organizations. All the revealed patterns – the shortcomings of
dominant institutions, the importance of societal values, institutional
complementarities, regional variations, and legal peculiarities – are given little attention
in the mainstream market failure theories of the nonprofit sector. Emphasizing these
patterns makes it possible to deepen the understanding of the nonprofit sector as a realworld
institution rather than as a market failure-correcting device. This understanding is
imperative for making the fullest use of the nonprofit sector’s capacity to solve societal
problems.
Based on the second subchapter, if there are possible discrepancies between social
structure and semantics, then such discrepancies are probably well exemplified by the
precarious fitting of the Anglo-Saxon semantics of nonprofit commercialization into the
institutional context of the Czech Republic. While there are few reasons to doubt that
commercial pressures may indeed potentially erode the mission orientation of certain
nonprofit organizations in the Anglo-Saxon world and in the Western hemisphere more
generally, the Czech nonprofit sector still faces the challenge of developing its own
93
independent and distinct institutional identity, an integral part of which is financial
independence from the state. It is true that in Anglo-Saxon semantics, the attempts of
Czech nonprofit organizations to secure their financial independence qualify as
commercialization. In the Czech context, however, this commercialization seems to be
an integral step in the difficult and lengthy evolution of a nonprofit sector that would be
worthy of the name.
This argument informs the Western nonprofit commercialization debate in at least four
respects. First, to the extent that this debate is morally framed and affected by
discrepancies between social structure and semantics (cf. Simsa, 2000), it runs the risk
of shifting from evidence-based reasoning toward potentially misleading advocacy.
Second, the potential for misleading is especially pronounced in the transitional
institutional environment that has largely escaped the attention of many modern
commentators on nonprofit commercialization. Third, in the Czech context, nonprofit
commercialization is institutionally hardwired into the public-private mix of public
service delivery and is particularly common among nonprofit organizations delivering
public services. Fourth, acknowledging the institutional nature of nonprofit
commercialization does not prevent the moral framing of the commercialization debate,
but it does prioritize the institutional ethics standpoint over the individual ethics
perspective.
The last point makes clear that the Czech context defies Weisbrod’s (1998) vision of
commercialization as a moral dilemma of individual nonprofit decision makers who
face the difficult choice between organizational insolvency and abandoning the
mission. For all its impressive dramatism, this dilemma does not seem to be a helpful
description of the Czech realities. The current institutional and regulatory environment
of Czech nonprofit organizations is explicitly favorable toward their self-financing
initiatives, some of which are even integrated into the legal identities of nonprofit
organizational forms (see also Pajas & Vilain, 2004, p. 348). Instead of being a moral
dilemma arising out of the hostility of the economic environment, commercialization or
self-financing in the Czech context is a strategy for complying with the requirements of
the institutional environment, which is favorable, rather than hostile. More than that, it
is a chance to link civil enthusiasm with economic viability so as to revitalize and carry
forward the rich historical traditions of the Czech civil society.
In terms of further research in the field of nonprofit sector studies, the proposed
argument draws attention to the need to seriously view the problematic implications of
the global sociology of knowledge. Raewyn Connell (2009) famously contended that
the concepts and methods of social science tend to be developed in, and geared to the
94
interests of, the global North, while being less helpful in understanding the postcolonial
realities of the global South. The Czech Republic and Central and Eastern Europe more
generally are not a part of the global South, but they do have a distinct cultural history
and identity that have not yet had much bearing on the conceptual foundations of the
nonprofit sector that were developed primarily in the Anglo-Saxon world. Obviously,
improving these foundations is hardly possible without listening to the voices from this
region. It is probable that in the larger scene of the global sociology of knowledge, the
conceptual treatment of nonprofit commercialization is just one issue among many
others that await similar critical adjustments.
The conceptual innovation of the third subchapter is in reconstructing the distinction
between the demand-side and supply-side explanations of the nonprofit sector as the
divergence between the demand-side and supply-side determinants of nonprofit
sustainability. This reconstruction contributes to nonprofit sustainability literature in
three respects that are especially relevant to European rural development. First, the
well-documented and puzzling implementation problems of the LEADER partnerships
present a logical consequence of the divergence between the demand-side and supplyside
determinants of nonprofit sustainability. Second, this divergence informs the
scholarly inquiries into the rurality-specific explanations of rural nonprofit
organizations. Iliopoulos and Valentinov (2009) may be right in pointing out that the
socio-economic attributes of rural communities reinforce the demand-side sustainability
of rural nonprofit organizations; yet the divergence between demand-side and supplyside
sustainability proves that rural nonprofit organizations are highly susceptible to the
unfavorable institutional environment that is often characteristic of rural areas (see
Hagedorn, 2014). Third, in contrast to the literature endorsing a clean distinction
between the demand-side and supply-side sustainability determinants, the reported
evidence from the Czech Republic documents the complexity of these determinants’
intertwining and entanglement.
The broader implication of the presented arguments is that the split between the
demand-side and supply-side determinants of nonprofit sustainability could indicate
a precarious relationship among the economic, social, and environmental pillars of
sustainability in general. While many nonprofit organizations pursue lofty and noble
missions aimed at addressing social and environmental sustainability problems
(Rangan, 2004), these problems stubbornly persist. It seems, then, that the
organizational pursuit of the social and environmental sustainability exacts a price in
the form of the insecure economic sustainability of the concerned organizations. This is
precisely what is happening when the demand-side determinants of nonprofit
sustainability are undermined by the supply-side determinants. Nonprofit organizations
95
may be quite successful in bettering human life and thus be sustainable on the demand
side, but their activity can be hindered by the supply-side sustainability determinants
beyond their control. Further research on nonprofit organizations is accordingly needed
to create the awareness of the complex dialectics of the demand-side and supply-side
determinants of nonprofit sustainability. Toward this end, it is essential to see nonprofit
organizations as arenas for the dynamic interaction between the demand-side and
supply-side stakeholders, an interaction occurring in specific places and communities,
the features of which are particularly salient in the rural context. Furthermore, these
places and communities are themselves embedded in the civilizational regime of
functional differentiation which, as this subchapter proposes, exercises a formative
influence on nonprofit activities, especially in rural areas.
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3 Re-conceptualization of the third
sector
Attempts to go beyond the mainstream explanations of the nonprofit sector in economic
theory inevitably return to the question: “If not for profit, for what?” This question is
also the title of Dennis Young’s pioneering work (1983) exploring a behavioral theory
of the nonprofit sector based on entrepreneurship. More than 30 years ago, long before
widespread research into entrepreneurship in the nonprofit sector was popular, „[this
work] … catalyzed a research stream that also forms the basis for an entire academic
discipline“ (Frank, 2013). The current challenge for nonprofit scholars is to continue to
cultivate this rich field of inquiry in the quest for a better understanding of “how the
society can encourage, support and engage entrepreneurial energies for the public
good” (Young, 2013). However, the field remains difficult to grasp in its entirety, as
researchers use a multitude of similar, yet distinct, key concepts. The considerable
range and complexity of these overlapping notions create major challenges: “Scholars
struggle to position their work in a larger context; it is not easy to build on previous
findings and methodological developments; and research gaps are difficult to identify”
(Maier et al., 2014).
The Third Sector Impact (TSI) project (2016) confirmed the initial impressions of
enormous diversity in the way the term third sector is used. One conception of what
constitutes the third sector can be found in Central and Eastern Europe (CEE), where
the broad overarching concept of civil society is widely used in public discourse. Civil
society consists of formal organizations and informal community-based structures as
well as individual actions taken for the benefit of other people, including improvement
of the community or natural environment, participation in elections or demonstrations,
informal or direct volunteering, and general political participation (Edwards, 2009; ibid,
2011; Zimmer & Priller, 2013; Chambers & Kymlicka, 2002; Cohen & Arato, 1994).
More narrow terms, such as third sector or nonprofit sector, are applied to
organizations with various legal forms, including associations, foundations,
cooperatives, mutual companies, labor unions, business associations, professional
associations, and religious organizations.
The terminology changed during the political transformation following the dissolution
of the Soviet bloc. The term nonprofit sector was very popular in the beginning of the
transformation. However, accession to the EU introduced the concept of social
economy in this region. Recently, the very broad and inclusive term third sector has
98
been gaining popularity. It includes all kinds of civil society activities that have
permanent or formal structures, including cooperatives and mutual associations that
allow profit distribution (Nałęcz et al., 2015; cf. Salamon & Sokolowski, 2016b). This
attempt to propose an extended conception of the third sector, beyond typical nonprofit
organizations, “represents a significant progress at various levels” (Defourny
& Nyssens, 2016). Most importantly, it takes into account some rules and practices that
are found in some cooperatives, mutual associations, and social enterprises. By doing
so, the boundaries of the third sector are expanded, thus allowing the inclusion not only
of nonprofit organizations but also of some social economy organizations (ibid).
3.1 The drivers of re-conceptualization
The world of civil society organizations is becoming increasingly interesting
(Donnelly-Cox, 2015). Even in the early years of the field of nonprofit studies, some
voices were already calling for recognition of the blurred boundaries among sectors
(Billis, 2010). DiMaggio (1987), Langton (1987), Salamon (1987), Wuthnow (1991),
Ware (1989), and Van Til (1988) all agreed that the tripartite distinction between
public, private, and nonprofit could be problematic because this distinction conceals the
interrelationships among sectors. More recently, theoretical frameworks have emerged
that are characterized by a blurry sectoral boundary view. These frameworks recognize
that the sectors can overlap or mix. However, Nobel Laureate Muhammad Yunus,
founder of the Grameen Bank, warns against putting too much faith in hybrid
organizations (see also Pestoff, 2012). “In the real world it will be difficult to operate
a business with two conflicting goals of profit maximizing and social benefits. The
executives of these hybrid businesses will gradually inch toward the profitmaximization
goal, no matter how the company’s mission is designed” (Pestoff, 2007;
p. 33). Hence, hybridization is being examined carefully (Donnelly-Cox, 2015) and
with some concern for its positive effects (see e.g. Dees & Anderson, 2003; Hwang &
Powell, 2009; Jones, 2007). There is evidence that the benefits outweigh the risks
(Brandsen & Karré, 2011) and that hybrids will come to represent the “new normal” of
civil society organizations (Brandsen et al., 2005; Evers, 2005; Donnelly-Cox, 2015).
Defining the third sector beyond the arenas of the state and the market is probably one
of the “most perplexing concepts in modern political and social discourse,
encompassing as it does a tremendous diversity of institutions and behaviors that only
relatively recently have been perceived in public or scholarly discourse as a distinct
sector, and even then with grave misgivings” (Salamon & Sokolowski, 2016b). Initial
work on this concept focused on what is still widely regarded as its institutional core
99
(ibid). These institutions share a crucial characteristic that makes it feasible to
differentiate them from for-profit enterprises: the fact that they are prohibited from
distributing any surplus they generate to their investors, directors, or stakeholders, and
that they therefore are presumably serving some broader public interest other than
profit. Several European scholars have considered this conceptualization of the
nonprofit sector as being nonprofit institutions as too narrow, arguing that cooperatives,
mutual societies, and, in recent years, social enterprises as well as social norms should
also be included (ibid).
With the article “Beyond Nonprofits: Re-conceptualizing the Third Sector,” Salamon
and Sokolowski (2016b) make an important contribution to the ongoing debate on how
to define the third sector in economic theory. They proposed five key criteria for the
target conceptualization (ibid, p. 1523):
− Sufficient breadth and sensitivity – encompasses as much of the enormous
diversity of this sector and of its regional manifestations as possible, initially in
Europe, but ultimately globally.
− Sufficient clarity – differentiates third sector entities and activities from four
other societal components widely acknowledged to exist outside the third sector,
i.e., government agencies, private for-profit businesses, families or tribes, and
household work or leisure activities. A definition that embraces entities or
activities with too close an overlap with these other components has to be
avoided.
− Comparability – highlights similarities and differences among countries and
regions. This means adopting a set of common standards that could be applied
everywhere. The alternative would be equivalent to using different-sized
measuring rods to measure tall and short people so that everyone appears more
or less equal in height.
− Operationalizability – permits meaningful and objective empirical measurement
and avoids counterproductive tautologies or concepts that involve subjective
judgments rather than objectively observable characteristics. Philosophical or
normative features could usefully guide the search, but their operational proxies
would have to be found.
− Institutionalizability – facilitates incorporation of the ability to measure the third
sector in official national statistical systems so that reliable data on it can be
regularly and reliably generated.
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An alternative definition for the “extended” third sector was proposed by loosening the
“structural-operational definition” (Salamon & Anheier, 1998) and replacing “not profit
distributing” with “totally or significantly limited from distributing any surplus they
earn to investors, members, or other stakeholders,” while keeping the other four
features of the third sector virtually unchanged (cf. Yamauchi, 2016). Salamon and
Sokolowski (2016b) also suggest that not only organizations but also informal and
individual components are important elements of the extended third sector. They
propose five conditions, the first three of which are mandatory, that organizations in the
extended third sector must fulfil to meet the “significant limit on surplus distribution”
requirement. Those are (ibid):
1. an explicitly and legally binding social mission;
2. prohibition from distributing any more than 50% of any profit to outside
stakeholders;
3. a capital lock that requires all retained surplus to be used to support the
organization or to support other entities with similar social purposes;
4. at least 30% of their employees and/or beneficiaries are individuals with
specified special needs;
5. prohibition from distributing any profit they may earn in proportion to capital
invested or fees paid.
This broader concept has remained under-conceptualized in reliable operational terms.
Salamon and Sokolowski (ibid) tried to correct this shortcoming and presented
a consensus operational re-conceptualization of the third sector created by a group of
scholars working under the umbrella of the European Union’s Third Sector Impact
Project (http://thirdsectorimpact.eu/). This re-conceptualization goes well beyond the
widely recognized definition of nonprofit institutions from the Handbook on Nonprofit
Institutions in the System of National Accounts (United Nations, 2003) by including
additional institutions and forms of direct individual activity in a way that meets the
demanding criteria of comparability, operationalizability, and potential for integration
into official statistical systems. The Third/Social Economy (TSE) model proposed by
Salamon and Sokolowski (2016b) “builds on major advances in scholarly work on nonprofits,
volunteering and related concepts and seeks to build the foundation for new
advances. They made a cogent argument for expanding the definition of the sector
beyond the traditional ‘Core’ definition and it helps us understand cross-sector relations
between the TSE and the for-profit worlds” (Grønbjerg, 2016).
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Figure 8 Operational characteristics defining total or significant limitation
on surplus distribution
Source: Salamon & Sokolowski, 2016b
The more challenging and interesting part of the new conceptualization comes when
looking more closely at what happens at the boundaries (Grønbjerg, 2016). Figure
8 illustrates the significant conceptual and definitional work that still remains to be
done. The confusion around the traditional “structural-operational definition” (Salamon
& Anheier, 1998) can be clarified if this definition only applies to organizations that
fulfil the five identity codes and does not apply to other organizations in the in-between
space (Knutsen, 2016).
There has been much relevant research devoted to the “blurring of the [sectoral]
boundaries” (Billis, 2010) in the scientific literature worldwide. However, this does not
hold true for the transitional CEE countries. More than a quarter century after the annus
mirabilis 1989, the study of post-Communist countries has shifted from the question of
democratic transition to the question of democratic consolidation (Green, 1999). The
literature on transition has moved away from a focus on public or private to a study of
the various forms of public and private that are now emerging in the provision of public
services (Swarts & Warner, 2014). In the transitional economies of CEE, this
development has been influenced by ideas on New Public Management (NPM). In the
wake of NPM, it has become common for public services to be performed by
102
organizations operating at the intersection of the market and public sectors (Grossi
& Thomasson, 2015). The type and character of the implemented reforms differ from
country to country (cf. Thomasson, 2009), but with this development a new type of
organization has emerged: hybrid organizations.
Figure 9 Re-conceptualizing the third sector
Source: Salamon & Sokolowski, 2016b
Hybridity is of both theoretical relevance and practical importance around the world,
including in the post-Communist economies. The trend towards emerging hybridization
in the transitional economies of CEE has increased significantly in recent years, while
taking into account the considerable heterogeneity of transitional economies. Even in
the early years after the transition, public services were being delivered by hybrid
organizations operating in the intersections of the market, the civil society, and the
public sector. There are different types of hybrid organizations, for example (Grossi et
al., 2015):
− mixed public and private commercial (for-profit) enterprises, in which both
public and private-commercial owners operate in the public interest (the “mixed
economy”);
− mixed public and private nonprofit organizations, in which a public sector entity
has a strong influence (via funding and regulation), but a private nonprofit
organization delivers public services.
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Many examples of hybrid arrangements can be found in the history of the Czech
Republic, Slovakia and other post-Communist countries, especially in the transitional
phase of development of the concerned economies. These combine public features and
features generally associated with market logic. It appears far easier to find
arrangements that are hybrid than those approximating typical ideal notions (Brandsen
et al., 2005). The privatization of public service provision during the transition was one
cause of the emergence of mixed ownership concepts such as “public-private
partnership” (PPP), which represents one of the most common hybrid forms in the postCommunist
countries of CEE. The sometimes uncritical perception of PPP is reflected
in the growth of PPP projects and the implementation of this concept into the public
service system in post-Communist countries including the Czech Republic and
Slovalia, where individual governments implement this method as something that at
first sight seems to be a completely new approach to the provision of public services,
despite the fact that public services are already routinely provided on a similar principle
(Řežuchová, 2010). Beyond their multiple advantages (cf. Grossi, 2007), utilization of
PPP arrangements entails special concerns (see e.g. Da Cruz & Marques, 2012; Hodge
& Greve, 2010; Marques & Berg, 2010; McQuaid & Scherrer, 2010). But NPM is not
the whole story behind hybrid organizations; in fact, the specific concept of hybridity
remains undeveloped (Denis & Van Gestel, 2015).
Hybridity is not just any mixture of features from different sectors; it concerns
“fundamental and distinctly different governance and operational principles in each
sector” (Billis, 2010). A systematic review (Tranfield et al., 2003) in the V4 countries
revealed the absolute absence of scientific articles and proceedings that would reflect
the phenomenon of hybridization in relation to civil society. Few if any studies go
beyond recognizing PPP. The literature seldom explains how hybrid organizations arise
or what forms they take. But the spanning of sectoral boundaries (Billis, 2010; Dees
& Anderson, 2003; Laville & Nyssens, 2001) is “now perhaps accelerating” (DonnellyCox,
2015), especially with the development of social enterprises that seem to
transcend sectors (Dees & Anderson, 2003). A complex approach that would enable
reflection on the specific nature of hybridity in a transitional context as well as on
current public debates and policy-making discourses on the subject is lacking. The next
subchapter fills this gap while focusing on the broad opportunities that hybridity offers.
Pointing out the challenges and potentials of social enterprises enables illustrative
examples of hybrid organizations in the Czech Republic and Slovakia with a wider
relevance for and application possibilities to other (post-) transitional economies of
CEE.
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3.2 New semantics: Social entrepreneurship, social
enterprise, social innovations
Taking into account the definition of hybrid organizations as those that combine the
characteristics of at least two of the public/ private/ third sectors, the organizations in
the Czech Republic and Slovakia that are considered to possess significant
characteristics of more than one sector are usually social enterprises that can be defined
as private and third sector hybrids. To emphasize this central advancement and discuss
both its strengths and limitations, it is first necessary to return to the very roots of the
social economy concept and underline how its base differs from the core feature of the
nonprofit sector. Against this background, it will be easier to discuss the relevance of
the extended boundaries (cf. Defourny & Nyssens, 2016).
The key period associated with the first mentions of the social economy is the early
21st century, when new problems began to appear for which European countries had to
seek innovative solutions. Social enterprises have developed significantly over the last
decade. Specifically, since the economic crisis in 2008, the interest in social enterprises
has increased and various forms of social enterprises have spread (Gidron & Hasenfeld,
2012). Social enterprises have been characterized as “exemplars of hybrid form which
intertwine within one organization the different components and rationales of market,
state and civil society” (Evers and Laville, 2004). As hybridity becomes increasingly
common (Aiken, 2010), it is important to understand the current state of social
entrepreneurship in transitional countries.
The emergence of social enterprises is associated with the advancement of a civil
society in which corporate altruism is on the rise (ibid). The discourse is quite different
across countries; the definitions of social enterprise are diverse and tend to describe the
functions of different types of social enterprises (cf. Dees, 1998; Dart, 2004; Harding,
2004; Haugh, 2006; Thompson & Doherty, 2006; Hockerts, 2006; Peredo & Chrisman,
2006; Korosec & Berman, 2006; Hartigan, 2006; Masseti, 2008; Emerson & Twersky,
1996; Wronka, 2013). Finding universal criteria for labelling an organization as a social
enterprise is not easy. Narrow definitions may suffer from a tendency to generalize and
oversimplify. Overly broad definitions lack practicality. The primary intention of social
enterprises is usually not related to profit. They are characterized by their performance
of public benefit activities and their contribution is seen in their pursuit of including
people who are in some way disadvantaged in the labor market.
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Table 16 Comparison of social economy and nongovernmental nonprofit sector
SECTOR
Characteristic
SOCIAL ECONOMY /
SOCIAL ENTERPRISES
NONGOVERNMENTAL
NONPROFIT SECTOR
Goal fulfillment of social mission – to
serve a local community or specific
groups of citizens
fulfillment of organization’s mission –
to provide social benefits
Institutions a wide variety of organizational
forms, including public benefit
organizations, cooperative
organizations, joint stock companies,
and limited liability companies
formalized and institutionalized
structures, legal form given by law,
usually associations and public
benefit organizations, but also
foundations and nonprofit funds
Autonomy usually created and managed by a
group of people on the basis of an
autonomous business plan
not part of the public administration;
institutionally separated from the state
and have political independence
Non-distribution
constraint
limited distribution of profit to
shareholders or employees and the
obligation to reinvest the profit (or a
substantial part of the profit) to the
social objectives of the enterprise
not founded to generate profit to be
shared among the owners or
managers, any profits are fully
returned to the organization and used
in accordance with its statutes
Voluntarism a combination of volunteers and paid
staff; a minimum level of paid work
voluntary participation in activities; a
high proportion of volunteering
Civic initiatives typically, the result of collective
dynamics involving citizens or
members of groups sharing a
common goal or community need
established by citizens for the purpose
of achieving a mutual or generally
useful purpose/benefit
Entrepreneurial/
business activity
business is a main activity; goods
and services are produced, i.e. they
enter the market and offer their
production for sale
funded under redistribution
mechanisms; entrepreneurship is seen
as a side activity
Funding financial sustainability depends on
the performance of members and
staff and their efforts to ensure
adequate resources; activities are
also funded through financial support
mechanisms from public and private
sources; multisource funding is used
multisource funding is a principle;
this may be a combination of public
(government) sources, private and
individual sources, grants,
membership fees, income from selffinancing,
and business activities
Management participatory governance, decision
making involves all stakeholders
self-governance; they manage
themselves through established
organizational structures; the main
body is usually a general assembly
Registry (for the Czech
Republic and Slovakia)
register of social enterprises at the
Central Office of Labor, Social
Affairs and Family
relevant registers at the Ministry of
Interior
Source: Vaceková & Murray Svidroňová, 2016
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Complications in defining social enterprise occur as a result of the diversity of national
contexts and because they are found in many different sizes and legal forms. Social
enterprises are mainly small and medium-sized companies, including cooperatives.
Innovativeness can be seen in the diversity of goals in multisource financing, in
a different approach to job creation, and in a new type of entrepreneurship that is a way
of bearing risks on the principle of stakeholders and supporters, including partnerships
with the public sector. Social enterprises are required to be stable in two dimensions: in
the ability to survive in the long term and in the intended balance of social contribution
and success in the market over time. Survival and growth are the key motivators for any
organization, whether profit-making or nonprofit. The orientation and character of the
social enterprise is continuously influenced by financial possibilities and environmental
pressure (Vaceková et al., 2015).
Each region produces specific debates. Western European social enterprises “tend to be
based in a social cooperative model and tend to be narrowly targeted on work
integration efforts” (Gidron & Hasenfeld, 2012). The Western European approach also
emphasizes “the participatory aspect of social enterprises” (ibid), a characteristic that
has thus far received relatively little attention in the (post-) transitional countries. The
social enterprises in CEE emerged as a result of the fall of Communism, when
conditions similar to those of Western Europe were established. Later, many states tried
to join the European Union; their accession was conditioned by the requirement to
solve various socio-economic problems. Social enterprises in the transitional economies
of the CEE were at that time relatively underdeveloped in terms of how they were
legally and institutionally defined (Poon, 2011). Social enterprises have developed
significantly over the last decade; specifically, since the economic crisis in 2008, the
interest in social enterprises has increased and various forms of social enterprises have
spread (Gidron & Hasenfeld, 2012).
Social enterprises are typical hybrid organizations, combining a market orientation with
a social mission. This text focuses on specific features of hybridity in a (post-)
transitional context, pinpointing some significant determinants of social enterprise
development in the transitional economies as compared to developed economies, such
as (Korimová & Vaceková, 2011):
− Businesses with a “social” attribute are perceived quite negatively politically
and socially in the transitional economies, as they are reminiscent of socialism.
− Interest groups in the social economy have a different structure in the
transitional economies as future social enterprise employees.
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− In the Czech Republic and Slovakia, as in other former transition countries,
there was already a high percentage of long-term and generational unemployed
people. The younger unemployed people were often illiterate, without any social
contacts; they were socially excluded. Some of them did not want to assume
a mainstream lifestyle.
− In developed economies, social economics and social enterprises were promoted
naturally through experience and the established partnership networks with the
nonprofit sector; in the transitional economies, this sector has just been
established and is still finding its position. Therefore, the time and process shift
is really significant. A certain advantage of this delay is that all entities – not
only nonprofit organizations – have been gradually entering the process of
establishing social enterprises.
This implies that the development of social enterprises cannot be supported simply by
importing Western European approaches. Unless the approaches are embedded, social
enterprises will just be “replications of formulas that will last only as long as they are
fashionable” (Gidron & Hasenfeld, 2012). The concept of social enterprise was almost
unknown some 20 years ago (ibid). In the last decade, it has become a subject of
discussion on both sides of the Atlantic, including in CEE countries. To deepen the
discussion on social enterprises as embodied in Western and Eastern Europe, it is useful
to underline the distinct development these regions experienced.
In the former centrally-planned economies, the social economy was important because
the transformation process and the change of national economic structures created
conditions for an enormous increase in unemployment and social exclusion. The causes
were, in particular: inertia in thinking, reliance on high standards of social state
guarantees, low qualification of the workforce and low productivity, restructuring of the
national economy, loss of sales on soft foreign markets (CMEA), low competitiveness
of products, new labor market demands for jobs with high added value, work process
inefficiency, technological advances in production, and labor market rigidity in
comparison to developed economies. All these factors created a specific historical,
socio-economic, and political environment that differs from Western Europe (Vaceková
et al., 2015).
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Social enterprise domains: Evidence from the Czech Republic and
Slovakia
Many charitable organizations and societies promoting patriotism, science, and the arts
were established in the territory of what is now the Czech Republic as early as in the
19th century. These charitable societies included informal student groups that were
made legal by the “Zákon o právě spolčovacím” (Freedom of Association Act) of 1867.
The end of World War I was an impetus for establishing charitable organizations to
mitigate the consequences of the war. Upon the founding of the Czechoslovak
Republic, the Constitution safeguarded the right to the freedom of assembly and
association. The Action Committees established by the Central Action Committee of
the National Front carried out purges, and the unsuitable organizations were cancelled.
No new legislative regulation was enacted until after 1989 (Dohnalová, 2006).
Table 17 Key events in the field of social entrepreneurship in the Czech Republic
KEY EVENTS IN THE FIELD OF SOCIAL ENTREPRENEURSHIP
2009 The thematic network for social economy TESSEA
2010 The principles of social enterprise compiled by TESSEA
2011 Project about social enterprise as a way of thinking in Ostrava
2012
A questionnaire survey of a hundred social enterprises in the Czech Republic (P3 – People,
Planet, Profit o.p.s.)
2013 ČSOB announced a new grant program with the aim of helping working social enterprises
2014
A set of indicators for a social enterprise and social integration company (P3 – People,
Planet, Profit o.p.s.)
2015
1st
quarter - outline of a bill on social entrepreneurship in the Czech Republic
4th
quarter - paragraph version
Source: Vaceková & Murray Svidroňová, 2016
Associations, societies, mutual aid movements, foundations, and charities were
considered to be traditional entities of the social economy. The first družstva
[cooperatives] were established in the 1840s, with the First Cooperatives Act being
passed concurrently and coming to force in the 1870s, when production cooperatives
were established in profusion. The first cooperative on the territory of the Czech
Republic was established in 1847 and was called “Pražské potravní a spořitelní” (The
Prague Food and Saving Society). The cooperatives were distinguished by solidarity
and cooperation in the social and material arenas. They were continuously expanding,
and therefore it was necessary to create a legislative framework, which was declared
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during the Austro-Hungarian Empire. The system of cooperatives reached its peak
in then-Czechoslovakia in the interwar period. By 1937, around 15,000 democratic
economic benefit cooperatives operated in Czechoslovakia, employing about a quarter
of the population (Dohnalová & Průša, 2011). After World War II, the production
of many cooperatives slowed; after 1989, their number decreased rapidly (Hunčová,
2007).
The entities of the social economy also included spolky [societies], which began to
emerge at the time of the national revival. In 1867, Act No. 134/1867 was amended,
which enabled establishment societies. The first such society was Oul, the workers’
benefit society, which was founded in 1868 by a representative of mutual aid efforts
of the workers’ movement, Dr. František Ladislav Chleborád. The most prosperous
period for societies was the period between the world wars; around 300 were
established, mostly assembly, workers, sports, political, and literary societies
(Dohnalová & Anderle, 2002). The operation of societies was terminated in 1951, when
Act No. 68/1951 on voluntary associations and societies was enacted
in Czechoslovakia. Those entities that did not terminate their operations had to change
their form. Until 1989, societies had operated under the association of political parties
of the National Front led by the Communist Party of Czechoslovakia. The best-known
societies that were re-established after 1989 and had been in existence at the time of the
national revival include Hlahol and Havlíček (Dohnalová & Průša, 2011).
Mutual aid movements emerged in the mid-19th century, aiming to support sole traders
and small entrepreneurs. Their solidarity and mutual aid strengthened the principles of
social policy. Kampeličky [cooperative savings societies] emerged, to lend money first
to their own members in the form of short-term personal credit, and later to others. The
first cooperative savings society was “Občanská záložna” (The Civic Savings Bank),
founded in 1858 in Vlašim. Later, protection against adverse life situations was
provided by insurance companies, and the Imperial Letters Patent issued in 1819
permitted the establishment of private insurance companies in the Habsburg Monarchy.
Insurance companies were not allowed to become public-law institutions until 1821.
The first Czech mutual insurance company was established in Prague in 1827.
It collected finances from its members and created insurance funds from them,
managing and disposing of them according to predetermined rules. During the reign
of Joseph II, many monasteries were abolished and their property was confiscated, to be
received by secular foundations and charities that were established primarily for
humanitarian purposes. The number of charitable societies, foundations, and civil
associations began to grow most after 1918 (ibid).
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In the Czech Republic the social enterprises have been much discussed but little
understood (Vaceková et al., 2015). There has not yet been legislation that would
define a clear legal framework for the operations of social enterprises in the Czech legal
context. The number of social enterprises in the Czech Republic has rapidly increased
in the last decade, as can be confirmed by the following analysis of their development
(Vaceková & Murray Svidroňová, 2016). The first four social enterprises were
established in 1992.There were no dramatic changes in their development before 2007.
In 2007 and 2008, nine social enterprises were established, and the number of emerging
social enterprises continuously increasing until the economic crisis (2008-2009). From
2009 until the first quarter of 2014, it was possible to draw grants from the ESF and the
ERDF and, therefore, the number of social enterprises increased rapidly, with a record
of 45 new social enterprises established in 2012. With the end of the entitlement to the
subsidy, the number of newly established enterprises was also limited, and so only 10
enterprises came into existence in 2014. The total number of registered social
enterprises as of January 2016 is 211.
Figure 10 Social enterprises in the Czech Republic classified by their legal form
(Source: Vaceková & Murray Svidroňová, 2016)
Most social enterprises have the legal form of an s.r.o. [limited liability company].
Toward the end of 2014, 94 of social enterprises then in existence had this legal form;
the second most numerous group were public benefit corporations, 56 of which were
established at that time. However, because this legal form has been cancelled, it is
predictable that they will assume a different legal form. Twenty-three social enterprises
had the legal form of o.s. [civic association], 14 were self-employed, and 12 were
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cooperatives. Five social enterprises marked their legal form as “other”. Two of these
businesses have the “social cooperative” legal form, which has not been specified in the
directory yet, or they indicated “other” as their legal form but belong to one of the
specified forms.
The transitional economies of CEE are known to struggle with incomplete legislation
and the weak enforcement of existing laws (Brhlíková, 2004). This holds true
especially for nonprofit laws, which do not provide sufficient protection against the
misuse of the nonprofit status (Frič et al., 1999), and hence attract for-profits-indisguise
(Weisbrod, 2004).
Table 18 Key events in the field of social entrepreneurship in Slovakia
YEAR EVENT
2002 The first scientific and research contacts in Slovakia – conferences and consultations
with foreign players in the social economy
2002 The center of research and development of the social economy and social
entrepreneurship established at the Faculty of Economics, Matej Bel University, Banská
Bystrica
2005 Based on the number of publications and research activities to define the conditions of
social economy in transition economies (particularly in Slovakia), social
entrepreneurship at the macro and microlevel was defined
2005 - 2006 Workplace training (as a social enterprise) for people with disabilities, PHARE project,
funded by the EU
2005 - 2008 The first international project on social economy and social enterprises in Slovakia
(Slovakia-Flemish project: SE in Central Slovakia)
2008 - 2010 The second international project “Development and support for strong and sustainable
social economy network in Banská Bystrica region”
2008 - 2011 Thematic Network for the Development of Social Economy - Operational Programme
Human Resources and Employment, international project
2008 On the legislative level, social enterprise is defined in the Act on Employment Services,
creating the Register of Social Enterprises
2008 The accredited course “Social Enterprise Manager” was successfully tested; in 2008
there were 36 successful graduates
Source: Vaceková & Murray Svidroňová, 2016
These “false” nonprofits may maximize profits that they then “distribute in disguised
form (as higher wages and perks), or they may maximize revenues that lead to power
and prestige for their managers. They are lured into the nonprofit sector by the tax and
subsidy advantages that they gain therefrom” (James, 2000). Social enterprises have
already been legislatively defined to a certain extent in several V4 countries, Poland
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and Slovakia are examples of good practices in other transitional economies. Such a
legislative definition has not yet been provided in the Czech Republic; these states
could serve as inspirations. In Italy, the UK, the USA, Belgium, and Finland there are
also policy initiatives to support this type of business.
The positive development of social enterprises in Slovakia was interrupted by nontransparent
legislation in 2008 and funding that led to the preferential treatment of some
social enterprises while others were unable to continue in their activities. Therefore, the
officially registered social enterprises, as defined in the Act on Employment Services,
are not viewed very favorably in Slovakia, as can be seen in the following text
presenting the number of social enterprises, which is much lower than in the Czech
Republic. The publicly available register of social enterprises presents a basic overview
of social enterprise characteristics in Slovakia. It includes characteristics such as legal
forms, economic activities within the social business, addresses, etc.
Figure 11 Social enterprises according to their legal form
Source: Vaceková & Murray Svidroňová, 2016
The register of social enterprises is maintained by the Central Office for Labor, Social
Affairs, and Family; the most recent data are from March 2014. At that time, there were
registered 44 active enterprises, 8 suspended enterprises, and 42 cancelled social
enterprises that carried out social entrepreneurship in Slovakia in various legal forms.
Generally, social entrepreneurship is not much widespread in Slovakia. Taking into
account all the economic subjects and social enterprises, social enterprises have only a
minor share of the total number of economic subjects (0.01%, Table 19).
52%
23%
16%
7% 2%
Ltd.
municipality
natural entity
public benefit organization
civic association
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Table 19 Summary of economic entities and social enterprises by legal form
LEGAL FORM
NUMBER OF
ENTITIES
ACTIVE
SOCIAL
ENTERPRISES
SHARE OF
ACTIVE SE
OF THE
LEGAL FORM
Limited liability company 177,261 23 0.01%
Self-employment 337,182 7 0.00%
Cooperative 1,542 6 0.39%
Subsidized organization 659 4 0.61%
Civic association 39,740 1 0.00%
Public benefit organization 1,630 3 0.18%
TOTAL 558,014 44 0.01%
Source: Vaceková and Murray Svidroňová, 2016
Within the different legal forms, the number of social enterprises represented by
nonprofit organizations is also very low. In the past, there were more public benefit
organizations; in the current register there are nine social enterprises with the legal form
of a public benefit organizations. Only three of those social enterprises are active; two
are recorded in the register as suspended and four as canceled. The register of social
enterprises publishes information about the economic activities of Slovak social
enterprises according to the statistical classification SK NACE (Statistical
Classification of Economic Activities in the European Community). The economic
activity of social enterprises in Slovakia is relatively widely diversified. The most
prevalent activities are administrative and support services, manufacturing,
construction, accommodations, food service, human health services, and social work
services.
Social Innovations
Social enterprises are generally regarded as bearers of social innovations. Actually, the
concept of social innovation is not new (see Godin, 2012). The global crisis has made it
clear that most of the challenges faced today have taken on an increasingly social
dimension. At a time when resources are limited, new solutions must be found. The
roles of social enterprises in terms of social innovations can be observed from certain
domains in which an impact can be expected. Moulaert et. al. (2005) state three of
them:
− satisfaction of human needs that are not currently satisfied (content dimension);
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− changes in social relations, especially with regard to governance, but also
increases in the level of participation (process dimension);
− increasing the socio-political capability and access to resources needed to
enhance rights to satisfaction of human needs and participation (empowerment).
Probably because they are recent and try to cover a wide range of initiatives, current
conceptions and theories of social enterprise/social entrepreneurship/social innovations
do not form an integrated body, but rather a cluster of theories in which different
schools of thought can be identified (Defourny & Nyssens, 2010). Brandsen and Pestoff
(2011) discuss several aspects of social innovations and some alternative definitions.
One definition maintains that social innovations are new ideas and models for products
and services that can both effectively meet some basic social needs and create new
social relationships or promote collaboration between professional providers and their
clients (cf. Pestoff, 2012). However, he notes that social innovation is context specific,
and what is new in one context may not always be new in another context (ibid).
Table 20 Schools of thought with their respective links to the social innovation debate
SCHOOL OF THOUGHT CHARACTERISTICS
The “Earned Income”
School of Thought
− refers to the use of commercial activities by nonprofit
organizations
− distinction between an earlier “commercial nonprofit approach”
and a broader and more recent “mission-driven business approach”
− focuses on strategies for starting a business that would earn income
in support of the social mission of a nonprofit organization and that
could help diversify its funding base
− no link is explicitly made with social innovation - implicit
dimension of social innovation
The “Social Innovation”
School of Thought
− emphasizes social entrepreneurs in a typical Schumpeterian
perspective
− tends to underline blurred frontiers and the existence of
opportunities for entrepreneurial social innovation within the
private for-profit sector and the public sphere
− social entrepreneurship is more a question of outcomes than a
question of incomes
− satisfaction of human needs is at the core of this school; the key
actors of innovation are seen in a rather individualistic perspective
- the issue of relations between different social groups is not part of
the debate
Source: Author, based on Defourny & Nyssens, 2013
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Social innovations are broadly discussed at the international level (BEPA, 2010). The
concept of social innovation was developed in the course of seeking new ways to
combat the most challenging social problems (Baturina & Bežovan, 2015). Following
the work by Young (1983) and Badelt (1997a,b), the Schumpeterian typology of
innovation was reinterpreted to identify innovating dynamics in the third sector
(Defourny, 2001). Several theoretical and empirical works show that third sector
organizations have often invented new types of services to take up the challenges of
their time (Salamon, 1987; Defourny & Develtere, 1999). Many of these organizations
can thus be said “nowadays as in the past, to be born or have been born from an
entrepreneurial dynamic” (Defourny & Nyssens, 2013). Legal frameworks tend to
shape, at least in part, the objectives and practices of social enterprises as bearers of
social innovations. In Europe, the process of the institutionalization of social enterprise
has often been closely linked to the evolution of public policies. If this dynamic can be
seen as a channel for the diffusion of social innovation, “the key role of public bodies in
some fields of social enterprises may also reduce them to instruments to achieve
specific goals which are given priority on the political agenda, with a risk of bridling
the dynamics of social innovation” (ibid). This also holds true for (post-) transitional
countries, especially regarding the real-world challenges nonprofit organizations have
to face.
3.3 The nonprofit response to real-world challenges
Since 2015, European Union governments and societies have been desperately
grappling with the dramatic surge in the number of refugees and economic migrants
heading to the EU across the Mediterranean Sea and the Balkans from Africa and the
Near and Middle East. In 2015, more than 1.25 million first-time asylum-seekers
applied for international protection in the EU member states, with the bulk of
applications submitted for asylum in Germany, Hungary, Sweden, and Austria. The
2015 data from the Standard Eurobarometer confirm that European citizens think of
immigration as the most serious political challenge, ahead of concerns with the
economic situation, unemployment, and terrorism.
Some of the debates that have been sparked by the migration crisis are related to the
role of the nonprofit sector. There seems to be a scholarly consensus as well as political
hopes that the nonprofit sector holds considerable potential for offering a wide array of
services to immigrants as well as for facilitating the protection of their rights (Vaceková
& Bolečeková, 2015; cf. Chowdhury, 2015). Yet, in view of the recent origin of the
migration crisis, there is a dearth of research on how nonprofit organizations can
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actually come to terms with this daunting task. In their study of immigration to Italy
and Spain, Carella et al. (2007) drew attention to the positive relationship between the
number of immigrants and the size of the nonprofit sector. In the United States, Mason
and Fiocco (2016) found that nonprofit responses to the migration challenge are likely
to require specialized investments in organizational capacity building. A recent research
report produced by the Competence Center for Nonprofit Organizations and Social
Entrepreneurship at the Vienna University of Economics and Business provides
extensive details on how nonprofit organizations have assumed the brunt of the
organizational challenges arising from the massive inflow of immigrants to Austria in
2015 (Simsa et al., 2016). It seems likely that these studies will be supplemented by
many more in the near future, especially given that NGOs are generally acknowledged
as legitimate actors in the international policy processes (Gordenker & Weiss, 1995).
The rise of migration as a novel topic in the field of nonprofit studies raises some basic
issues related to the conceptualization of the nonprofit sector (cf. Valentinov et al.,
2015). What is needed here is a conceptualization that would both do justice to the
multifaceted nature of the migration challenge and explicate the ability of the nonprofit
sector to deal with it. At the risk of beating a dead horse, it may be worth suggesting
that the traditional theoretical approaches of market and governmental failure are not
likely to suffice here, primarily because their stylized nature falls considerably short of
the real complexities of the global world. In a broader sense, the governments are
indeed failing, but it seems more appropriate to connect this failure with the
overarching risks and problems of a functionally differentiated society (Roth, 2015;
Roth & Schütz, 2015; Valentinov et al., 2016). The emerging governance deficits create
a niche for nonprofit organizations whose problem-solving potential often rests on their
“intermediary” location (e.g. Evers & Laville, 2004), e.g. between individuals and the
state (Bauer, 1997), between member interests and public interests (Mayntz, 1992), and
between different institutional logics (Olk et al., 1995).
Austria and Slovakia were confronted with the immigration challenge to markedly
different degrees, with Slovakia having been considerably less burdened than Austria.
Yet, in both countries, the nonprofit responses to this challenge reveal two common
patterns. First, in line with the findings of Carella et al. (2007), nonprofit organizations
and NGOs use the migration challenge to scale up and improve their resource base, in
ways that conjure an image of social systems continually seeking ways to secure and
expand their own autopoietic self-reproduction (e.g., Ferreira, 2014). Second, these
processes provide a boost to the autonomy of the nonprofit sector from its societal
environment. The subsequent sections of this chapter address the specific nature of
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these patterns in Austria and Slovakia and discuss the ambivalent impacts of these
tendencies on the ability of the nonprofit sector to alleviate the migration crisis.
The recent experiences of the Austrian nonprofit sector that are of relevance for the
present paper are documented in the report prepared by the Competence Center for
Nonprofit Organizations and Social Entrepreneurship at the Vienna University of
Economics and Business (Simsa et al., 2016). Drawing on surveys, problem-centered
interviews, and participatory observations, the report describes the response of the
nonprofit sector to the migration crisis in August 2015. The central finding is that the
role of the sector has indeed been crucial. The authors convincingly show that, in the
absence of a civil society engagement in the reported period, Austria would have
suffered a humanitarian disaster (ibid, p. 1). Nonprofit organizations have been offering
food, medical aid, living space, legal advice, translation work, administrative support,
and a broad array of other services that have been extremely valuable not only to
immigrants themselves but also to Austrian public agencies and citizens in general
(ibid).
Three specific findings of the report stand out as particularly illuminating. One is
related to the role of turbulence, information deficits, institutional fluidities, and legal
uncertainties, as well as instances of violations of laws and regulations (ibid). These
phenomena underscore the considerable complexity of the task environment, and more
generally of the societal environment in which the concerned nonprofit organizations
were embedded. Another finding is the substantial flexibility and fluidity of nonprofit
organizational structures. These features facilitated the self-organization initiatives and
enabled high responsiveness to rapidly changing conditions. Third, there is evidence of
inefficiency and waste of resources, such as the supply of unnecessary food and clothes.
Some of these problems were evidently unavoidable due to planning difficulties,
occasionally unclear organizational structures, fluctuations of volunteer supply,
difficulties of volunteer administration, occasional mismatches between tasks and
competences, and occasional problems of communication and coordination (cf. Xu et
al., 2016).
These findings suggest a modern revision of Wolfgang Seibel’s (1992, 1996) influential
theory of nonprofit organizations as “successful losers”. Central to his argument were
the problems of inefficiency, waste, and irrationality that were tolerated and even
desired in nonprofit organizations conceived of as enclaves in which the validity of
goal- and norm-rationalities could be suspended (cf. Valentinov et al., 2015). Seibel,
however, did not believe that the nonprofit sector could solve problems effectively and
successfully. It seems true that the Austrian nonprofit organizations dealing with
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immigrants were burdened by the problems mentioned by Seibel. Contrary to Seibel,
however, this fact by no means prevented the nonprofit organizations from making real
and crucial contributions to alleviating the migration crisis. Moreover, it seems
plausible that the very tolerability of these problems within the nonprofit sector made
real problem-solving possible in the first place. Seibel may have been right in the sense
that inefficiency, waste, and irrationality would hardly be acceptable in the public and
private for-profit sector to the same extent. A turbulent, uncertain, and highly complex
environment evidently makes these problems inevitable. The ability of the nonprofit
sector to live with such challenges turns out to be its unique strength and advantage
over other societal sectors. This seems to be what has been happening in Austria.
In the European comparison, Slovakia stands out as the country that has been least
affected by the migration crisis. Out of 1,255,600 first-time asylum seekers who applied
for international protection in the EU member states in 2015, only 330 chose Slovakia
as a destination. The reasons for the country’s low attractiveness to immigrants are
probably related to its geographical location and its socio-economic conditions. Unlike
Hungary, Slovakia is not situated along a frequent migration route. Unlike Austria,
Slovakia has not yet established an image of a well-developed European state, despite
the passage of more than 25 years since the collapse of communism. Furthermore, for
nearly half a century, Slovakia has been isolated from international migration flows,
and presently features one of the lowest immigration rates within the EU. Under these
circumstances, it is unsurprising that Slovakia has the image of a country which does
not welcome immigrants.
Of particular relevance to the present research is the fact that in 2015, the Slovak
government authorized assistance to NGOs dealing with the refugee and migration
crisis. In cooperation with the Slovak Investment and Trade Development Agency
(SARIO), the Ministry of Economy offered business training to both immigrants and
Slovak citizens exploring business development opportunities. One project currently
pursued by this Ministry is the introduction of “start-up visas” that could be granted to
people who have the skills to establish new innovative projects (start-ups).
Furthermore, the national lottery company (“TIPOS”) has allotted 500,000 Euro to
support NGOs providing emergency humanitarian aid and legal advice for refugees
(e.g., People in Need, the Human Rights League, Magna – Children in Need, the Order
of Malta, the Evangelical Church of the Augsburg Confession, Caritas Slovakia, and St.
Elizabeth College of Health Care and Social Work). The Ministry of Education also
recently announced plans to open a fund that would enable Syrian students to study at
Slovak universities.
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Within this project, my colleagues and I have conducted interviews with the relevant
Slovak NGOs in order to collect more details on how they deal with immigrants. In the
first round, we approached all the NGOs brought together under the Platform of Nongovernmental
Development Organizations and the Platform of Volunteer Centres and
Organisations in Slovakia. We asked them whether they had any migration-related
activities linked to the current crisis or that had been in place before the crisis. In the
second round, we sent an e-mail or called the ones who had activities related to the
crisis. In addition, we monitored the media to complete the information extracted from
interviews, and we analyzed the websites of NGOs and public institutions. In the first
round, 49 organizations were contacted, of which 36 gave satisfactory responses. Seven
organizations were interviewed in the second round.
In Slovakia and abroad, the activities of the examined NGOs included the collection of
donations (primarily clothing and sanitary and hygienic items), volunteer labor (e.g., in
cooking), and medical humanitarian assistance. Within Slovakia, the NGOs were
additionally engaged in advocacy activities, such as increasing public awareness and
organizing discussions and public happenings. The overall finding is that the examined
NGOs perceived their own activities to be quite effective. Most of these NGOs
expressed satisfaction with the effectiveness of their cooperation with the public sector,
with their coordination, communication, organizational flexibility, and response speed,
and with the intrinsic motivation of staff and volunteers. To be sure, in comparative
terms, the positive self-assessment of NGOs in Slovakia must be seen as occurring
against the backdrop of considerably lower turbulence and a lower complexity of task
environment than was the case in Austria.
Another interesting finding is that only some of the NGOs currently dealing with
immigrants had been engaged in migration-related activities before the outbreak of the
crisis. Most of these activities were concerned with increasing the public awareness of
migration issues. At the same time, not all of the NGOs who had been previously
involved in such activities got engaged in the current crisis. For some of them,
migration is not a key area of interest; others did not have a sufficiently pronounced
humanitarian orientation. For those NGOs that had focused on providing humanitarian
aid before the present crisis, active engagement with the incoming immigrants was
natural. Added to these NGOs, of course, are others that had not had experience with
migration-related work and humanitarian aid before the crisis. Relevant examples of
such organizations include the civic association “Emergency Medical and Rescue
Assistance Slovakia” that was created by several rescuers commuting daily to Hungary
as volunteers. (TASR, 22.12.2015) Another example is the NGO “EDUMA” which
pursues the “creation, development, verification and implementation of Online Living
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Library as an innovative tool of inclusive education into the practice”. This NGO seeks
to eliminate negative attitudes towards immigrants that were created among Slovak
youth after the refugee issue was misused in election campaigns, and to thereby
improve the climate in society.
While the experiences of Austrian and Slovak nonprofit organizations differ
substantially, they do nevertheless permit the identification of several common patterns.
The first of these patterns is inspired by Seibel’s (1996) pessimistic theory. Despite
unavoidable irrationalities, inefficiencies, and coordination problems, the problemsolving
by the nonprofit sector, both in Austria and Slovakia, is real and seems to be
taken seriously by all the concerned stakeholders. To be sure, the fact of the good
overall performance of the nonprofit sector is more impressive in the Austrian case than
in the Slovak one, as the Austrian nonprofit organizations had to deal with an enormous
inflow of immigrants in an environment that was often turbulent and uncertain. Yet, it
is clear that Slovak nonprofit organizations likewise exhibited expertise which seems to
have been acknowledged by the public authorities that sought cooperation with the
nonprofit sector.
The second pattern involves the massive resource inflows to specific nonprofit
organizations as a response to the migration crisis. The sharp rise in the amount of
public funding and donations from private and corporate donors as well as the
availability of new volunteers clearly improved the resource base of the concerned
organizations. This fact can be thought of in terms of the expansion of their selfreproduction.
If securing and expanding this self-reproduction constitutes the primary
concern of social systems, then it becomes clear why a considerable number of
nonprofit organizations, both in Austria and Slovakia, have been quite willing in overall
terms to get engaged in helping immigrants. A very important caveat here is that the
imputation of the self-reproduction interest to specific nonprofit organizations by no
means disparages the noble and altruistic motives of the numerous involved
individuals, such as nonprofit staff members and volunteers. At the core of this thinking
is the distinction between the societal and individual levels of reality. Taking this
distinction seriously means discerning the societal imperatives behind individual
motives and intentions, however strong and sincere those motives and intentions may
be.
The third pattern is that in both Austria and Slovakia, the nonprofit sector’s problemsolving
activities related to the migration crisis can hardly be characterized as radical.
Valentinov et al. (2013) propose viewing the service delivery activities of the nonprofit
sector as a kind of palliative alleviation of human suffering caused by dysfunctional
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institutions, while nonprofit advocacy concerns advancing the ideas on how the
dysfunctional institutions themselves can be reformed. Advocacy in this sense presents
an attempt at radical problem-solving. Forced migration is obviously caused by
dysfunctional institutions which require radical problem-solving aimed at removing
their underlying causes. Yet, in both Austria and Slovakia, this does not seem to have
been a serious concern of the nonprofit sector. Instead, nonprofit organizations excelled
at the “palliative” service delivery to immigrants. Some advocacy activities were
undertaken as well, but directed at improving the operational conditions of the
nonprofit sector and the public attitude to immigrants. The institutional and structural
conditions that caused the forced migration in the first place thus remained
unaddressed. At the same time, the lack of attention to these conditions seems
consistent with the interest of nonprofit organizations in their own self-reproduction,
which could be curtailed if the migration crisis were radically resolved. The problem
solving by these nonprofit organizations has been real, but more palliative than radical.
One of the traditional ways of understanding the nonprofit sector involves drawing
a distinction between its demand-side and supply-side determinants (Young, 2013;
Jegers, 2011; Steinberg, 2006). Whereas the demand-side determinants refer to the
societal needs requiring nonprofit action, the supply-side determinants specify the
managerial preferences and capacities on the basis of which nonprofit organizations act.
The present subchapter has shown that this distinction does not translate well into the
context of the migration crisis. It is difficult to speak meaningfully of well-articulated
societal needs in societies that are polarized and even predominantly skeptical toward
immigrants. Managerial preferences and capacities likewise are shaped not by
individual idiosyncrasies, whether opportunistic or ideological (cf. Young, 2013), but
rather follow the resource flows triggered to the nonprofit sector by the current sociopolitical
situation in Europe (cf. Kazakov & Kunc, 2016).
3.4 Outlook on trends and imperatives
The global crises that have struck Europe in recent years have prompted “outstanding
discussions on the search for new paths, creating new approaches and concepts of
social and economic policies” (Crouch, 2011). The 21st century civil society faces the
challenges of achieving social cohesion in a society marked by deep transformations
and the emergence of new social risks (Baturina & Bežovan, 2015). The new social
risks have emerged as a result of economic and social changes associated with the
transition to a post-industrial society (Andersen et al., 2002; Taylor-Gooby, 2004).
Changing trends, including demographic changes, changes in family structures, climate
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change, changes in the labor market, rising inequality, growing differences between
cities, and now in Europe the migration issue, demand social innovations. The literature
on new social risks (Taylor-Gooby, 2004; Bonoli 2005; ibid, 2007) suggests that social
needs are now more pressing. The global crisis has made it clear that most of the
challenges faced today have taken on an increasingly social dimension (Baturina &
Bežovan, 2015).
Perspectives on the future of nonprofit organizations are “dependent on the observers’
worldviews and their interpretation of past and present dynamics” (Casey, 2016). Peter
Drucker (1994) predicted that “voluntary organizations and nonprofit organizations
would increasingly drive the knowledge economy” (Casey, 2016) and the 21st century
would be the “Nonprofit Century” (ibid; Eberly, 2008; Smith, 2010). Recently,
nonprofit scholars took note of a possible paradigm shift in the field of nonprofit sector
studies prompted by debates on its definitions in economic theory (Van Til, 2008;
Kramer, 2000; Wagner, 2012; Evers, 2013). Most researchers distinguished “an
America-led, non-distribution, constraint-based positivist non-profit ‘sector’ paradigm
from a ‘new’ paradigm, emphasizing the blurry sectoral boundary, voluntariness, and
normative values” (Knutsen, 2016).
“From a modern philosophical view” (Knutsen, 2016), good science needs both
metaphysical theorizing and empirical testing; in fact, they are inseparable (ibid;
Plotkin, 1994; Alexander, 1982). Alexander (1982) suggests viewing empiricism and
metaphysical theorization as extremes on an epistemological continuum, and accepts
that both are important. Plotkin (1994) concludes that: “Science … proceeds by
guessing at the nature of the world (theorizing) and then disciplining and revising those
guesses by testing how they fit with the experienced world (observation and
experimentation); in a sense, science combines rationalist and empiricist philosophies
into an inseparable world” (ibid, p. 19). From this perspective, the nonprofit paradigm
largely takes on an empiricist orientation (Alexander, 1982). The new paradigm should
take on an orientation towards metaphysical theorization (Knutsen, 2016).
There are several key related issues that go beyond the scope of this habilitation thesis
and could further develop this theorization. Clearly, no single researcher or even team
of scholars can master the field or its complexities (see also Grønbjerg, 2016). As
discussed by Defourny and Nyssens (2016), first and foremost, it would be quite
relevant to revisit the “rationale of the third sector” through which Gui (1991) theorizes
the third sector as pulling together all private organizations whose beneficiary category
(i.e. to which the net surplus is allocated) is composed of stakeholders other than
investors. The third sector then gathers “mutual benefit organizations” (in which the
123
stakeholder-dominant category that has the ultimate power is also the beneficiary
category), and “public benefit organizations” (in which the beneficiary category is
different from the dominant category). “Such theorization might offer strong grounds to
assemble broad sets of organizations that are clearly different but nevertheless share
enough common features to form the third sector of modern economies” (Defourny
& Nyssens, 2016, p. 1551). This calls for further research efforts in order to better
understand the great diversity within the third sector and in the fast-developing
landscape of (post-) transitional economies.
Further research could be based on the assumption that the ongoing transformation of
the horizontal cross-sectoral linkages in the rendering of public services is a topic for
discussion not only in the Anglo-Saxon environment. Hybridization is a phenomenon
that is highly topical and hitherto insufficiently explored in the (post-) transitional
economies. The existence of a mix of utility providers (e.g. in the areas of education,
health, water and energy management, and transport) and various hybrid models (e.g.
for example purchaser-provider models, contracting out, outsourcing / commissioning,
corporatization, and public-private partnerships) bring new problematic issues that
require systematic solutions at the theoretical and practical levels.
These problematic issues should be further examined in research that is expected to be
of benefit in particular in finding the share of hybrid organizations in selected sectors of
utilities and in comprehensively evaluating the current state of hybridization under the
conditions of (post-) transitive economies. By measuring the impact of hybridity on
utility providers, focusing on a particular dimension of this impact, for example the
availability, expense-to-revenue ratio, impact on the labor market, or responsiveness to
the needs of target groups, it would be possible to quantitatively and qualitatively
assess the attributes of the “mixed enterprises” collaboration, taking into account the
legal, economic, and institutional environment, and eventually forecast potential
changes for the hybridity phenomenon in (post-) transitional economies.
As suggested by nonprofit scholars gathered for the Voluntas Symposium at the ISTR
Conference 2016: “The key challenge … continues to be how to build these empirical
efforts into (national) systems of accounts and other routine data collection efforts. This
is a technical, a political and a conceptual challenge. It is technical in the sense that
much data is of questionable quality, designed for administrative purposes only and
stored in formats that are not easily linked to other data. It is political in the sense that
the producers and owners of the data are not easily convinced that refinements or
additions are needed or cost-effective. It is a conceptual challenge because it requires
careful efforts to define the unit of analysis—individuals, groups/collectivities,
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organizations (not always easily distinguished from groups) and networks” (Grønbjerg,
2016).
Against this background, Salamon and Sokolowski (2016b) suggest that such data can,
for example:
− boost the credibility of the third sector by demonstrating its considerable scale
and activity;
− expand the political clout of third sector institutions by equipping them to
represent themselves more effectively in policy debates;
− validate the work of third sector institutions and volunteers, thereby attracting
more qualified and committed personnel, volunteers, and contributors;
− enhance the legitimacy of the third sector in the eyes of key stakeholders;
− deepen sector consciousness and cooperation;
− facilitate the sector’s ability to forge partnerships in support of its central
missions.
The picture that emerges is of a TSE sector workforce of approximately 28.3 million
workers, including the full-time equivalent work of volunteers as well as the paid
workers of the in-scope associations, foundations, cooperatives, and mutual
associations. This means that the TSE sector workforce is the third largest of all
industries in Europe, behind manufacturing and trade, although well ahead of such
industries as transportation and finance and insurance (ibid). Data concerning the size
and the scope of the third sector is a huge topic of interest. Many activities at national,
European, and even global levels concern themselves with this aspect of visibility. The
adoption of the project’s TSE sector definition in the new UN Statistical Handbook
(2003) opens the door to the possibility that such data will now be produced on
a regular basis throughout Europe, which will help boost third sector visibility
significantly (for more details see also TSI project), especially in the (post-) transitional
context. This could support empirical research into the re-conceptualization of the third
sector.
There is a major practical issue that remains open in the Czech Republic, Slovakia, and
other post-Communist economies – nonprofit governance. Improving governance
would mean reducing opportunistic behavior in a broad range of forms. Following
Hansmann (1980, 1987), we define a nonprofit organization as one that is precluded, by
external regulation or by its own governance structure, from distributing its financial
surplus to those who control the use of organizational assets. “Nonprofit boards have
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some ownership rights, such as the right to direct the use of resources, but not others,
such as the rights to profit from that use of resources and to sell these rights to others
for a profit” (Ben-Ner & Jones, 1995). Non-distribution has the additional virtue of
defining things in terms of what they are rather than what they are not (Lohmann,
1989), even if the label “nonprofit” does not immediately bring the non-distribution
definition to mind. Hansmann’s definition has the further virtue of defining an
organizational type by the structure of its control rights rather than by a possibly
inaccurate self-statement of purpose (Steinberg & Powell, 2006).
Hansmann’s conceptualization supposes that the non-distribution constraint functions
as a tool against opportunism. However, problems of opportunistic behavior may occur
even when nonprofits are defined in terms of the non-distribution constraint (see
Bilodeau & Steinberg, 2006). Opportunism can have many faces. To Hansmann,
opportunism means managers cheating consumers; other examples include the abuse of
donations, inflated salaries, and deceitful information to stakeholders. The nondistribution
constraint does not solve all of these problems. More comprehensive
governance codes are needed. One of the current forms of opportunism in the Czech
Republic and even more broadly in Slovakia is the widely-discussed problem of the
abuse of power in nursing homes (e.g. the scandalous cases of Hronovce in 2009;
Bratislava in 2013; Zemianske Podhradie in 2013; Lutin in 2015) in the form of staff
neglecting their duties to vulnerable clients. Anheier and Ben-Ner (2003) have focused
on cases in which for-profits misbehave. However, as the cases of opportunistic
behavior in nursing homes and other opportunistic examples show, it is necessary to
focus on the misbehavior of nonprofits as well. Such opportunism demonstrates that
Hansmann was only partially right: the affected organizations have nonprofit status, but
their non-distribution constraint does not prevent opportunism.
The cases of opportunism in nonprofit organizations demonstrate that it is time to think
more broadly of Hansmann’s institutional economics: Valentinov and Chatalova (2014;
2016a; 2016b) did so in their thesis of the weakening of incentives in nonprofit
organizations. However, it is necessary to go beyond their conceptualization in order to
develop governance codes that would specify and apply the idea of the weakening of
incentives to the broad range of relevant behaviors, with the intended effect that the
cases of nursing home misuse and similar cases would be addressed. It is obvious that
these problems of opportunism have not been prevented by the non-distribution
constraint of the concerned nonprofits; hence the weakening of incentives must be more
comprehensive and apply to the whole range of problematic staff behaviors. Better
regulation, better self-regulation, and better governance are all needed to ensure that
these behaviors are weakened or dampened along the lines suggested by Hansmann and
126
by Valentinov and Chatalova. This could be the direction in which the reconceptualization
in (post-) transitional countries and further research into this issue
may move.
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Conclusions
“The nonprofit sector is dead. Long live the nonprofit sector!”
(Knutsen, 2016)
The academic field of nonprofit sector studies has been firmly gaining ground in recent
decades. Nonprofit organizations are widely acknowledged to “play a variety of social,
economic, and political roles in society. They provide services as well as educate,
advocate, and engage people in civic and social life” (Boris & Steuerle, 2006;
Kuhlmann, 2010). They also act as initiators of innovation in public services delivery.
To Salamon et al. (2013, p. 1), the rising prominence of non-profit organizations
constitutes a global “associational revolution,” i.e., “a major upsurge of organized,
private, voluntary and non-profit activity [that] has been under way around the world
for the past thirty years or more” (ibid). Under these circumstances, it is only natural
that social scientists have started a creative search for theories and models that would
explain the evolution and societal functions of the nonprofit sector and help to
productively harness its policy potential.
The aim of this habilitation thesis was to critically reflect on the current scientific
discourse in economic studies focused on researching nonprofit organizations, and then,
on the basis of the ascertained situation, to test nonprofit theories in the (post-)
transitional context and develop a re-conceptualization of the third sector as a new
paradigm for researching nonprofit organizations under new conditions. With respect to
this scientific aim, a comprehensive set of research questions was defined (see
Introduction). In order to address these research questions and hence to fulfil the
objectives, this habilitation thesis reviewed the international definitional and theoretical
approaches to the nonprofit sector originating in the Anglo-Saxon environment with
a view to assessing their applicability in the (post-) transitional context and identifying
the elements of their integrative conceptual core. Based on the results of an empirical
inquiry regarding nonprofit theories, nonprofit commercialization, and nonprofit
sustainability, the thesis draws attention to the ongoing conceptual, organizational, and
political redefinition of the Czech and Slovak nonprofit sectors with possible
implications for other (post-) transitive countries. Thus, it can be stated that the
scientific aims of this habilitation thesis are fully achieved: the thesis provides clear
answers to the research questions and widely contributes to nonprofit theory and
practice in the (post-) transitional context and in other contexts, suggests policy
implications for nonprofit organizations resulting from real-world challenges, and
opens space for further research on the topic.
128
In addressing RQ1, this habilitation thesis adds to the definitional clarification of the
conceptual foundations of the nonprofit sector. The historical background of the
development and understanding of civil society in the Czech Republic and Slovakia
were considered in order to explain the critical and distinct aspects of the Czech and
Slovak experience in comparison to the historical patterns and developments in AngloSaxon
countries. The emphasis of the civil society discourse on dissidence in
transitional countries provided a basis for investigating the generally positive,
normative, and heuristic analysis associated with its democratizing role. The fault lines
and definitional problems concerning nonprofit theory led to a logical questioning of
whether it can even be legitimately claimed that such a thing as an identifiable
nonprofit sector exists. Is there actually a sector? Perhaps a pure epistemological
answer must be that there is not (see also Casey, 2016a): a sector should, after all, be
defined by its boundaries, and the nonprofit sector, particularly when examined from an
international and global perspective, has ambiguous and permeable margins that are
almost impossible to discern. Moreover, the nonprofit sector of every country is the
result of its particular social, economic, and political history (Casey, 2016b). The
origin, function, and mode of operation of the nonprofit sector in each country reflect
the unique circumstances of that country (DiMaggio & Anheier, 1990; James, 1989;
Kramer, 1981; McCarthy et al., 1992; Pryor, 2012; Salamon & Anheier, 1997; Salamon
& Sokolowski, 2010; Skocpol, 2011). This habilitation thesis helps to clarify this
taxonomic debate and provides some new definitions that consider the (post-)
transitional context of CEE.
In addressing RQ2, this habilitation thesis re-assesses mainstream economic theories in
light of the changing positions and functioning of the nonprofit sector and nonprofit
organizations. Recently, nonprofit scholars took note of a possible paradigm shift in the
field of nonprofit sector studies prompted by debates on its definitions in economic
theory (Van Til, 2000; Kramer, 2000; Wagner, 2012; Evers, 2013). Nonprofit
organizations are chiefly explained by neoclassical economists in terms of their ability
to address market failure (Jegers, 2008; Steinberg, 2006). The limitations of this
explanation are, however, widely recognized (see Steinberg, 2006). Specifically, the
market failure explanation does little to include the motivational phenomena, such as
ideological commitment, altruism, social values, and mission-drivenness, that are
critical for the effective operation of the nonprofit sector (Rose-Ackerman, 1996).
Furthermore, the demand-oriented assumption that makes perfect sense in the context
of the Western world is less applicable to the transitional context of the Central and
Eastern European countries, the institutional structure of which is still in the process of
emerging and forming. In the (post-) transitional context, it seems more plausible to
hypothesize that the societal determinants of the nonprofit sector, at least in the short to
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medium term, will be mainly related to supply-side rather than demand-side factors,
with the supply-side factors including public funding, public regulation, and the legal
environment of the nonprofit sector. Valentinov has proposed numerous approaches for
identifying an integrated vision; this habilitation thesis further develops the dichotomyinformed
approach to the integrative understanding of the nonprofit sector.
In addressing RQ3 and RQ4, this habilitation thesis contributes to scientific theory and
practice by conducting an empirical inquiry into theories, commercialization
phenomenon, and sustainability issues in the (post-) transitional context. It contributes
to the revision of the mainstream economic theories of the nonprofit sector by reflecting
empirical evidence and socio-economic reality. This habilitation thesis advances
a novel research program that seeks to revisit the role of conventional economic
approaches in explaining the existence of the nonprofit sector in modern society. One
remarkable finding is that the supply-side theoretical approach to explaining nonprofit
organizations has been most relevant in the Slovak context. This finding suggests that
people use the nonprofit sector as means of fulfilling those values that cannot be
attained through the dominant for-profit and public institutions. Furthermore, the
confirmed real-world importance of the interdependence theory calls attention to the
complementary nature of the existing institutions which accordingly work best in
concert rather than in mutual isolation. The obtained results are contingent on regional
contexts that differ in terms of their historical and cultural heritage. Finally, the legal
environment in Slovakia has provably left a mark on the motives for the founding of
nonprofit organizations. All the revealed patterns – the shortcomings of dominant
institutions, the importance of societal values, institutional complementarities, regional
variations, and legal peculiarities – are given little attention in the mainstream market
failure theories of the nonprofit sector. By emphasizing these patterns, it is possible to
deepen the understanding of the nonprofit sector as a real-world institution rather than
as a device for correcting market failure. This understanding is imperative for making
the fullest use of the nonprofit sector’s capacity to solve societal problems (see also
Murray Svidroňová, Vaceková & Valentinov, 2016).
Regarding the commercialization issue, if there are discrepancies between social
structure and semantics, then such discrepancies are probably well exemplified by the
precarious fitting of the Anglo-Saxon semantics of nonprofit organizations becoming
business-like into the institutional context of the Czech Republic. While there are few
reasons to doubt that commercial pressures may indeed potentially erode the mission
orientation of certain nonprofit organizations in the Anglo-Saxon world and in the
Western hemisphere more generally, the Czech nonprofit sector still faces the challenge
of developing its own independent and distinct institutional identity, an integral part of
130
which is financial independence from the state. It is true that in Anglo-Saxon semantics,
the attempts of Czech nonprofit organizations to secure their financial independence
qualify as commercialization. In the Czech context, however, this commercialization
seems to be an integral step in the difficult and lengthy evolution of a nonprofit sector
that would be worthy of the name. The Czech context defies Weisbrod’s (1998) vision
of commercialization as a moral dilemma of individual nonprofit decision makers.
Instead of being a moral dilemma arising from the hostility of the economic
environment, commercialization or self-financing in the Czech context is a strategy of
complying with the requirements of the institutional environment which is favorable
rather than hostile. More than that, it is a chance to link civil enthusiasm with economic
viability in such a way as to revitalize and carry forward the rich historical traditions of
the Czech civil society (see also Vaceková, Valentinov & Nemec, 2016).
The conceptual innovation of the issue of nonprofit sustainability is in reconstructing
the distinction between the demand-side and supply-side explanations of the nonprofit
sector. This reconstruction contributes to nonprofit sustainability literature in three
respects that are especially relevant to European rural development. First, the welldocumented
and puzzling implementation problems of the LEADER partnerships
present a logical consequence of the divergence between the demand-side and supplyside
determinants of nonprofit sustainability. Second, this divergence informs the
scholarly inquiries into the rurality-specific explanations of rural nonprofit
organizations. Iliopoulos and Valentinov (2009) may be right in pointing out that the
socio-economic attributes of rural communities reinforce the demand-side sustainability
of rural nonprofit organizations, but the divergence between demand-side and supplyside
sustainability proves that rural nonprofit organizations are highly susceptible to the
unfavorable institutional environment that is often characteristic of rural areas (see
Hagedorn, 2014). Third, in contrast to the literature endorsing a clean distinction
between the demand-side and supply-side sustainability determinants, the reported
evidence from the Czech Republic documents the complexity of these determinants’
intertwining and entanglement (see also Valentinov & Vaceková, 2015).
In addressing RQ5, this habilitation thesis contributes to the scientific discussion of the
new real-world challenges the (post-) transitional nonprofit sector has to face. It also
suggests trends and imperatives that should be reflected in policies for nonprofit
organizations. Perspectives on the future of nonprofit organizations are “dependent on
the observers’ worldviews and their interpretation of past and present dynamics”
(Casey, 2016a). Drucker (1994) predicted that “voluntary organizations and non-profits
would increasingly drive the knowledge economy” (Casey, 2016b) and the 21st century
would be the “Nonprofit Century” (ibid; Eberly, 2008; D.H. Smith, 2010). The rise of
131
migration as a novel topic in the field of nonprofit studies raises some basic issues
related to the conceptualization of the nonprofit sector (cf. Valentinov et al., 2015).
What is needed here is a conceptualization that would both do justice to the
multifaceted nature of the migration challenge and explicate the ability of the nonprofit
sector to deal with it. This habilitation thesis provides the nonprofit response to these
novel real-world challenges. It also identifies a major practical issue that remains open
in the Czech Republic, Slovakia, and other post-Communist economies: nonprofit
governance. Improving governance would mean reducing opportunistic behavior in
a broad range of forms. This could be the direction in which the re-conceptualization in
(post-) transitional countries and further research into this issue may move.
133
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