Copenhagen Business School 2016
MSc Soc. Organizational Innovation and Entrepreneurship
Between Economization and Ideals
- Exploring Third Sector Developments in Germany -
Master Thesis 17 May, 2016
Ragnar Martens
Supervisor: Kai Hockerts STU count: 119,884 Page count: 68
Abstract
This thesis explores current developments in Germany’s third sector. In particular, it investigates the factors that influence the increasingly commercial orientation of organizations operating within that sector and the repercussions that this trend has for the organizations’ orientation toward collectivist ideals. Analyzing a large dataset of third sector organizations in Germany with the help of exploratory factor analysis and structural equation modeling, using a partial least squares approach, the study reveals that the dependency on public funding and not the exposure to the competitive marketplace drive increases commercial orientation. Furthermore, it finds that commercial orientation does not necessarily negatively impact an organizations social mission orientation. The findings confirm institutional theories brought forward by DiMaggio and Powell (1983) and provide a better understanding of the inherent trend of “economization” of the sector as described by Priller et al. (2012) and Droß (2013).
Table of Contents
List of figures ... 7
List of tables ... 7
1. Introduction ... 8
1.1 Research questions and scope ... 9
1.2 Structure ... 9
1.3 Motivation ... 10
2. Context ... 11
2.1 Terminology ... 11
2.1.1 Third sector, non-profit sector, voluntary sector? ... 11
2.1.2 Economization and commercial orientation ... 12
2.2 History of the third sector ... 12
2.3 The third sector in Germany ... 14
2.3.1 Historical developments ... 14
2.3.2 Current environment ... 15
2.4 Legal forms ... 17
2.4.1 Eingetragene Genossenschaft (cooperative) ... 17
2.4.2 Eingetragener Verein (association) ... 18
2.4.3 Stiftung (foundation) ... 19
2.4.4 gemeinnützige GmbH ... 20
3. Literature review and Theoretical Framework ... 23
3.1 Bureaucracy and collectivism ... 23
3.1.1 The bureaucratic organization ... 23
3.1.2 The collectivist organization ... 24
3.2 Organizational institutions ... 25
3.2.1 Isomorphism ... 25
3.2.2 The network effect and isomorphism ... 27
3.2.3 Isomorphism and legitimacy ... 27
3.3 Third sector theories ... 28
3.3.1 American and European discourse ... 29
3.3.2 Approaches to defining the third sector ... 30
3.3.3 Discourse in Germany ... 32
3.4 The third sector and isomorphism ... 33
3.5 Theoretical framework ... 33
3.5.1 Application of theoretical framework ... 35
4. Empirical Methodology ... 36
4.1 Scientific approach ... 36
4.1.1 Reliability and validity ... 37
4.2 Measurements ... 38
4.3 Structural equation modeling ... 39
5. Data Description ... 41
5.1 Sampling and response rate ... 41
5.2 Data collection and questionnaire ... 42
5.3 Data set ... 44
5.3.1 Data set limitations ... 44
6. Empirical Analysis ... 46
6.1 Descriptive statistics ... 46
6.1.1 Income sources ... 46
6.1.2 General mission orientation ... 47
6.1.3 Competition ... 48
6.1.4 General descriptive statistics ... 49
6.2 Exploratory factor analysis ... 49
6.2.1 Suitability of data ... 50
6.2.2 Factorization ... 51
6.2.3 Factor rotation using varimax ... 52
6.2.4 Interpretation and factor extraction ... 53
6.3 Structural equation modeling ... 55
6.3.1 Measurement model ... 55
6.3.2 Structural model ... 58
6.3.3 Results ... 59
7. Discussion ... 63
7.1 Private sector competition and commercial orientation ... 63
7.2 Legal form ... 64
7.3 Public funding as the main driver for commercial orientation? ... 65
7.4 Commercial and collectivist orientation ... 66
7.5 Limitations and future research ... 67
7.5.1 Sampling ... 67
7.5.2 Questionnaire ... 68
9. Conclusion ... 69
References ... 71
Appendix I – Stata Script ... 76
Appendix II - Questionnaire ... 81
Appendix III – Correlation Matrix ... 104
Appendix IV – Factor table ... 105
Appendix V – Fornell-Larcker Correlation Matrix ... 106
Appendix VI – Cross loadings ... 107
Appendix VII – SmartPLS Structural Model ... 108
List of figures
Figure 3.1 – Pestoff triangle 30
Figure 3.2 – Roles of the third sector in Germany 32
Figure 3.3 – Theoretical framework 34
Figure 6.1 – General mission orientation 47
Figure 6.2 – Primary competing sector if competition perceived as increased 48
Figure 6.3 – Screeplot of eigenvalues after factor 52
Figure 6.4 – Final structural model 60
List of tables
Table 3.1 – Application of theoretical framework 35
Table 5.1 – Sample Composition and response rate 41
Table 5.2 – Primary organizational activities (Top 7, Other) 42
Table 5.3 – Questionnaire structure (translated from German) 43
Table 6.1 – Mean percentage of income source by legal form 46
Table 6.2 – General descriptive statistics 49
Table 6.3 – Kaiser-Meyer-Olkin values 50
Table 6.4 – Factor variance after rotation 53
Table 6.5 – Rotated factor matrix 54
Table 6.6 – Composition of multi-item latent constructs 57
Table 6.7 – Coefficient determination 58
Table 6.8 – Legal form effects 61
1. Introduction
This thesis explores current developments in Germany’s third sector. In particular, it investigates the factors that influence the increasingly commercial orientation of organizations operating within that sector and the repercussions that this trend has for the organizations’ orientation toward social and collectivist ideals.
In recent years, the third sector, also commonly referred to as the non-profit sector, has enjoyed an increase in attention from both academia and the general public. Concepts such as social enterprise, social entrepreneurship, and social innovation have put a field that has served society for decades back on the map (Defourny & Nyssens, 2008). Emerging, novel approaches to social problems enable organizations to regain their independence from funding and donations with the use of tools and practices common in the free economy. But this trend, termed “economization”
(Ökonomisierung) in German (Droß, 2013), also embodies what Weber (1946) labeled the “iron cage,” an inflation of rationalization and bureaucratization in society. It no longer only traps organizations of the “competitive market place” in systems based on efficiency, rational calculation and control (DiMaggio & Powell, 1983). Social organizations are becoming more similar to their private sector counterparts by aligning their operations with commercially viable practices, exploring new funding mechanisms, and offering products and services at competitive market rates.
It is an open debate whether this trend reflects a positive development that increases the efficiency of the third sector and therefore the positive impact it has on society, or whether new economic realities, reduced government protection, and new private sector competition drive these organizations into Weber’s trap.
1.1 Research questions and scope
Given the discourse outlined above, this thesis investigates the reasons underlying the increases in commercial orientation among third sector organizations in Germany and addresses the following guiding research questions:
RQ1: What factors influence an increase in the commercial orientation of third sector organizations in Germany?
RQ2: Does commercial orientation influence the collectivist and social missions of third sector organizations in Germany?
To answer these questions, this thesis takes an exploratory approach and analyzes a large dataset of third sector organizations in Germany provided by the Berlin Social Science Center (WZB). The research contributes to the literature on the third sector, social enterprises and institutional theories by providing quantitative analysis of the economization trend, building on the works of Priller et al.
(2012) and Droß (2013), who collected the underlying data and provided a first analysis of the phenomenon in Germany.
1.2 Structure
Section two of this thesis contextualizes the analysis by explaining the necessary terminology, outlining historical developments, and describing the current state of the third sector in Germany. In section three, it builds the theoretical framework from literature rooted in institutional, organizational, and third sector theories. Section four describes the statistical methodologies and research philosophy. The fifth section introduces the secondary data used for analysis, while section six outlines the empirical analyses: an exploratory factor analysis and structural equation modeling in SmartPLS (Ringle, Wende, & Becker, 2015). Section seven continues with a critical discussion of the results. Section eight provides conclusions based on the two guiding research questions.
1.3 Motivation
This thesis is motivated by the author’s involvement in social entrepreneurship. Co-founding the social enterprise rootAbility in 2013 exposed the author to the difficulties and challenges in navigating the third sector. The author is especially motivated by his experience with the paradox of securing sufficient funds while maintaining independent integrity; this has motivated the author to explore the topic in great detail for this thesis. It is therefore in the author’s interest to elucidate empirical results that have real-world applications.
2. Context
This section establishes the context in which this thesis operates, inline with the developments of the third sector and the third sector in Germany in particular. Furthermore, it highlights the various legal forms of third sector organizations that are present in Germany and compares them to proxies in other countries.1
2.1 Terminology
2.1.1 Third sector, non-profit sector, voluntary sector?
The third sector and its organizations have enjoyed a rediscovery in the last two decades (Borzaga
& Defourny, 2001). The scientific community has embraced the exploration of different facets of this sector, which led to attribute it to varying concepts and define it with a multitude of terms.
Often, these terms and concepts are used interchangeably by scholars and in general. Wikipedia for example lists it under the name “voluntary sector” but also refers to it as “non-profit sector”,
“community sector” or “not-for-profit” sector (Wikipedia, 2016). As the literature review later explores, these terms have to be used with caution, as they do not all mean exactly the same and subtle differences should be recognized in order to avoid confusion (Birch & Whittam, 2008). The name third sector, however, overlaps or encompasses these terminologies. Other commonly used terms include idealist sector, non-governmental sector, civil society, social economy (Moulaert &
Ailenei, 2005), alternative economy, informal economy, solidarity economy, social entrepreneurship (Moulaert & Ailenei, 2005) or independent sector (Frumkin, 2009). This thesis investigates third sector organizations in Germany. Therefore, all subsequently used terms and definitions reflect the discourse in Western countries and primarily in Europe.
The term third sector will be used as an overarching concept for all of the above-mentioned terms.
Additional explanations and clarifications will be provided if needed. An exact definition and
1 A comprehensive theoretical review of the third sector will be given in the literature review.
conceptualization that reflects the difficulties and nuances when it comes to theorizing the third sector will be established in the literature review and theoretical framework.
2.1.2 Economization and commercial orientation
In regards to recent trends, the term “economization” (Ökonomisierung) enjoys popularity especially in Germany. Economization can be defined as the act of using resources to their best effect. When speaking about economization this thesis refers to the development of the sector as a whole. Commercial orientation on the other hand refers to the developments for individual organization and combines aspects of the organization’s calling with its operations.
2.2 History of the third sector
Elements of what we call the third sector today can be detected almost from the start of recorded history. Defourny and Develtere (2009) assert the beginnings of social economic organizations with the establishment of collective relief funds in ancient Egypt, the formation of religious brotherhoods in Greece and the foundation of guilds in the Roman Empire. Solitary associations for arts, sciences and other topics in medieval Europe then took over the functions of these organizations. With the absence of central government, these associations flourished and were called brotherhoods, guilds, charities, fraternities, merchant associations or masterships. Similar arrangements that provided public benefits existed almost everywhere in the world, for example for agriculture in China or trade in Constantinople (Defourny & Develtere, 2009).
While these types of organizations played an important role for society, they differed significantly from modern type social organizations in Europe that emerged with the arrival of the industrial revolution. These newly established organizations were filling the gap in the intersection between private and public sector, rather than being organizations that stood under formal control of the church or other religious authorities. England’s friendly societies mark the arrival of formally
and insurance against many risk factors that neither their employers nor state agencies would provide them with.
By the middle of the 19th century many European countries and in particular the United States had legal mechanisms in place that allowed their citizens to form associations. While this new freedom was used for the practice of many leisure or science activities, their primary role was in the formation of associations that were informed by ideological motives in the form of worker and peasant associations. It was from this movement that, although not legally recognized as such, cooperatives began to emerge. The dogma by which these organizations were inspired came from the many socialistic and religious tendencies that shaped society until today and carried these organizations into legal recognition during the 20th century.
The emergence of the idea of a third sector that is not part of either government bureau or dependent on private capital ownership is mostly associated with the early 1970s. It spurred from the need for new definitions in a world that was caught between capitalism and state socialism (Borzaga & Defourny, 2001). Frumkin (2009, p. 12) stresses that the foundation of the national trade association in 1979 in the United States marks the understanding of the third sector as autonomous and hence coined the term “independent sector.” He further notes that it became clear very fast that this term couldn’t be used sufficiently as many third sector organizations are dependent on public funding or private sector donations until today.
The 1990s saw a revival of new and innovative ideas that would bring the third sector and terms such as social enterprise or social entrepreneurship into attention. Social entrepreneurs such as Muhammad Yunus, founder of Grameen Bank and allstar social entrepreneurship scholar, emerged and organizations such as Social Enterprise UK were founded or began to rise, such as Ashoka.
This renaissance of the third sector brought about new concepts: the social innovation school of thought was born (Dees & Anderson, 2006).
Today, scholars around the world are still looking to catch the full breadth of what the third sector entails and in many industrialized countries the sector has grown both in size and in the scope of its operations. The third sector still bridges many gaps in societies where both public and private sector fail to provide solutions but it also entails a new dimension. Local boundaries are no longer the limit. For example, programs like the Singularity University2 only engage in ventures that have the potential to positively affect one billion people on the planet. Social entrepreneurship has become a desirable alternative to traditional entrepreneurship for great minds that want to move society away from capitalistic ideologies. The third sector can thus be characterized as an equal partner for the public and private sectors and is moving more and more beyond dependencies with new funding mechanisms and an increased focus on economic independence. Scholars in multiple countries, also in the country that this thesis primarily analyses, Germany (Priller et al., 2012), have observed this trend.
2.3 The third sector in Germany
The third sector in Germany exhibits a variety of unique characteristics that are the result of Germany’s unique historical development and subsequent legal environment.
2.3.1 Historical developments
Its oldest official legal form dominates the third sector in Germany. Already in 1794, the Prussian Landrecht, country laws, established that citizens could meet and unionize. This, however, excluded meetings that were of political nature until the Reichsgesetz betreffend die Grundrechte des deutschen Volkes was passed in 1848. This guaranteed the unconditional right to form these organizations (Hardtwig, 1984). The modern association was born.
2 Singularity University is a California public benefit corporation with a mission to educate, inspire and empower a global community of leaders to leverage exponential technologies to develop solutions to humanity's most difficult
Another form of third sector organization in Germany is the foundation, Stiftung, which originated during the medieval times, often established as monastery organizations by rich donors. Their roots from elite houses enabled them to become long lasting organizations but most of them found their end during the rise of the third Reich or during the ruling of Eastern Germany’s communist government when the National Socialists and the Socialist Union Party force closed most of them or repurposed their activities and especially their financial assets for their own agenda. The Stiftung gradually found its way back into the third sector during the 1950s in West Germany and then into East Germany after the fall of the Berlin wall in 1989 (Strachwitz, 1996).
Cooperatives, or Genossenschaften in German, have their roots in the unification of labor forces as insurance mechanisms. The first ones were founded in the middle of the 19th century in Germany.
Many of them survived both World Wars and the Cold War because their ideologies often coincided with the reigning powers so that some of them even developed into Banks such as the Volksbanken Raiffeisenbanken (Peemöller, 2005).
2.3.2 Current environment
According to projections, today, the third sector in Germany consists of more than 600,000 organizations that engage over 18 million volunteers. Most of these organizations operate in the area of social insurance and health care. With 4.1% of Germany’s gross domestic product, the third sector plays a quite significant economic role that is comparable to Germany’s construction or car manufacturing industry in size (Rosenski, 2012, p. 217). It’s social importance in a country with about 81.5 million inhabitants (Statistisches Bundesamt, 2015) is disparately bigger as this means that almost a quarter of Germany’s population is somewhat volunteering in a third sector organizations with many more being members or participants in related activities.
The majority of third sector organizations in Germany are sport clubs and in particular football clubs. These ca. 90,000 sport clubs, or in German, Sportvereine, therefore make up almost a sixth
of Germany’s third sector landscape and engage more than 23 million members (Statistisches Bundesamt, 2013).
The Bundesverband Deutscher Stiftungen estimates the joint capital holdings of foundations in Germany to exceed EUR100 billion with an average of EUR5.3 million per foundation. The number of foundations in Germany shows a steady increase every year. The last reported statistic for 2014 displays a total of 27,262 foundations. The majority of these foundations mention social purposes as their primary mission with science, education and arts & culture follow right behind (Bundesverband Deutscher Stiftungen e.V, 2014).
Cooperatives, or Genossenschaften in German, contribute the smallest share in terms of number of organizations towards the third sector. In their 2013 published report “Die deutschen Genossenschaften 2013” the BZ Bank pins the number of cooperatives at just below 8,000 with 7,881 operating in Germany at the end of 2012. The smaller number of cooperatives is not surprising due to their nature of acting as overarching organizations for specific regions or industrial sectors. The cooperatives employ about 900,000 people in Germany alone and their largest share acts as commercial organizations (ca. 2,400) (Stappel, 2013).
In addition to these rather traditional third sector organizations, Germany is host to a specific legal form that was instituted in the 1970s when German lawmakers introduced a bill that would allow corporations to obtain charitable status and hence receive a number of tax privileges for activities that benefit the public (Ermgassen, 2006, p. 22). Especially in the early 1990s, when many non- profit organizations had to unify their east-west operations into one legal form and at the same time establish a competitive market position, the term gemeinnützige GmbH (henceforth gGmbH), public benefit corporation or more specifically, limited non-profit company, became widely used. The most famous example being the streamlining of the Malteser emergency service that was formed out of an association and a cooperative into a gGmbH (Ermgassen, 2006, p. 11). It took, however, until 2007 when the first legal form specific additions to law were made that specified what exact
purposes such corporations could pursue to be officially recognized as a gGmbH (Weidmann &
Kohlhepp, 2009, p. 4). Today, Germany has about 9,000 gGmbHs with their majority being founded after the turn of the millennia (Droß, 2013).
2.4 Legal forms
In order to understand the dynamics of the third sector in the specific German context, it is not only important to grasp its historical development but also to fathom the peculiarities of each specific legal form that this thesis analyzes later in the data. This also requires the ability to compare these legal forms to similar forms in other countries. Borzaga and Defourny (2001, p. 5) categorize third sector organizations into three main types, namely cooperatives, mutual type organizations and foundations, that can be found in most industrialized countries. This categorization excludes informal organizations that should not be forgotten as part of the third sector. However, for simplicity and because of the fact that this thesis analyses legally established third sector organization only, this latter category will not be discussed here. This thesis focuses on the legal forms that are present in the dataset, namely, Genossenschaften (cooperatives), Siftungen (foundations) and Vereine (associations). Moreover, it discusses the gGmbH separately in its own category as a corporation with charitable status and compares it to proxy legal forms in other countries.
2.4.1 Eingetragene Genossenschaft (cooperative)
The International Co-operative Alliance (n.d.) defines a cooperative as “…an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly owned and democratically-controlled enterprise.” As legal entities, the individuals controlling the cooperative are usually defined through its statutes as the consumers, producers of a certain product, service or product category or its employees. In Germany, the legal basis for the Genossenschaften was given in 1899 through Genossenschaftsgesetz. This defines the
cooperative’s highest priority as the support of its members through an economic relationship both for individuals and organizations (Deutsches Reichsgesetzblatt, 1899). Cooperatives are often differentiated as either supportive or productive co-operations. The difference between the two is that the first defines its members as the user of its services while the latter is used as commercial vehicle to create profits through selling products or services that then get distributed among its owners. The co-operation is counted as an organization of the third sector because of its primary purpose mentioned above. It does not exist for economic reasons but for the benefit of its members.
The cooperative is listed as eingetragene Genossenschaft (e.G.), meaning incorporated cooperative, and is in many ways very similar to an incorporated association with the distinction that the association is a non-commercial organization and is therefore not eligible to sell products or services on the market. In Germany, the e.G. functions as a legal person and automatically has the status of Kaufmann which means it is entitled to undertake legally binding transactions. The e.G.’s owners are liable for its actions to the extent of their signed share in the organization. The co- operation’s statues can require their members and owners to raise their stakes in the organization in certain situations to avoid bankruptcy. German law requires all cooperatives to join a governing body for cooperatives to control their activities. This has lead to an unusually low insolvency rate among cooperatives in Germany with only 0.06% of Genossenschaften being liquidated due to insolvency in 2012 (Geno Portaltechnologie, n.d.).
2.4.2 Eingetragener Verein (association)
The eingetragener Verein (e.V.) is the legal term for a registered voluntary association and is used in Germany and Austria. Anyone in Germany can found an association but to be registered as a legal entity it must have at least seven founders that create statutes. These must adhere to German law and usually must contain information such as the purpose, the mechanism to become a member,
or the mechanism to institute a board. Similar to the cooperative, the e.V. acts as a legal person.
This also legally establishes the German cooperative as a direct derivative of the association.
German law differentiates between two types of associations. While most of the registered associations pursue non-commercial objectives and gain legal recognition as soon as they are registered in the association registry by a solicitor, the commercial association, wirtschaftlicher Verein, on the other hand, can only gain legal status through recognition by the German state it is located in. The commercial association usually pursues some degree of economic activity and is therefore only partially eligible for tax privileges (Sauter, Schweyer, & Waldner, 2010). The number of commercial associations in Germany is very small. We therefore exclude them from our analysis of third sector organizations.
The association under German law exists to unify its members under its defined purpose. The members gain membership through a contract that defines the terms of membership such as fees or the member’s role. The eingetragener Verein has to grant membership to any person or legal entity that wishes to join but can revoke membership under special circumstances, for example when the member’s actions do not conform with the association’s statues. The member must also be able to terminate her membership without consequences (Reichert, 2010).
The association in this structure finds very similar legal forms in other central European countries such as Austria, Switzerland, France or Belgium. In the United Kingdom and in the United States, the legal definitions are somewhat broader. In both countries, the closest proxy to the German Verein would be the non-profit organization (NPO) or the non-profit corporation. Both of those, however, also include the legal entity known as a foundation that we discuss below.
2.4.3 Stiftung (foundation)
In Germany, foundations can be established as limited companies (GmbH) but are more commonly established as an autonomous (sometimes also non-autonomous) foundation (rechtsfähige Stiftung)
under civil law. They are a separate legal form from associations and would usually be grouped with them under the non-profit umbrella in most Anglo-Saxon countries. The primary purpose of the German foundation must be non-commercial and serve the common good. A certain degree of commercial activity, however, is allowed and in stark divergence from other countries, the foundation in Germany can distribute a certain amount of profits, although heavily taxed, to its owners and their children (Anheier & Daly, 2006).
If a foundation is not charitable it serves a private interest and is not eligible for tax privileges. In general, the foundation exists to pursue a pre-defined goal with its capital. Through economic activity this capital should at least be sustained to ensure the long-run viability of the foundation.
It’s purpose is defined in its charter. The foundation is usually governed by a board and, differently from the association, does not have members. In order to start a foundation there is no minimum capital requirement. Most foundations are started with a capital of at least EUR 50,000 as operations would be rendered useless otherwise (Anheier & Daly, 2006, pp. 172-184).
The broad definition of the foundation in Germany enables it to take many forms. The most common ones include foundations under public law, that are established by the public sector for cultural and conservational reasons, ecclesiastical foundations, family foundations, private use foundations, community foundations and foundations established by private sector companies (Anheier & Daly, 2006). This paper discusses foundations that are part of the third sector and therefore excludes foundations that are not registered as such under German law from the analysis.
2.4.4 gemeinnützige GmbH
So far, we have seen legal forms that are very common to numerous Western countries with rather minor regional differences. The third sector in Germany accommodates the companies with limited liability. The gemeinnützige GmbH (gemeinnützige Gesellschaft mit beschränkter Haftung), or short gGmbH, is an organizational form that is directly derived from the form of limited liability
companies very popular in Central Europe, with the difference of being charitable. This means that the gGmbH formally operates under commercial laws and is listed in the Handelsregister, the commercial register, rather than being categorized with other non-profits. Hence, the gGmbH, just like the GmbH, operates as a legal person, its owners (Gesellschafter) are not liable for the company’s debt and a capital stock (Stammkapital) of at least EUR 25,000 has to be deposited upon foundation. This capital stock can also be build up over the years by starting as an entrepreneurial company (UG) that also has a charitable form (gUG) (Weidmann & Kohlhepp, 2009).
The main difference from the standard limited company lies in its purpose orientation rather than in its profit seeking. The articles of association of this company form have to clearly define the organizations purpose as publicly beneficial in order to receive charitable and thus tax privileged status. This is reviewed by state authorities and then allows the GmbH to call itself gGmbH. The legislative base for this legal form had the aim to enable social purpose organizations to compete better in the market under less rigorous control as for example foundations or cooperatives.
Additionally, the use of economic quantification of success clearly separates this legal entity from its third sector peers. This becomes especially apparent in the way that gGmbHs are governed, just like GmbHs, and in the fact that a supervisory board is required when they exceed the size of 500 employees, using free market mechanisms for control rather than state instituted ones (Ermgassen, 2006, p. 29).
All of these features enable the gGmbH to run just like any other business with the difference that all profits have to be reused for its organizational and social purpose and cannot be paid out to its owners. Ermgassen (2006) notes that this purpose orientation also bears some problems for the gGmbH, as it limits the company in its flexibility to change its purpose orientation or pivot the business model entirely. Nonetheless, the gGmbH has been subject to an extraordinary growth rate in the past decades as many social entrepreneurs see it as the perfect tool to combine their ambitions in a hybrid organization.
In many other countries, such a discrete legal form for social enterprises does not yet exist, or can only be found in the form of repurposed established legal forms. In France for example, corporations can gain charitable status if they (1) exist for an objective, (2) display democratic governance and (3) use profits for supporting their social objective. This, however, does not result in a new legal form definition but the company is formally allowed to communicate itself as part of the social economy (l’économie sociale) (Wilkinson, 2014).
The closest proxy to and American legal entity would be the rather new L3C, a low-profit limited company that has now been recognized as an official legal form in nine states and the benefit corporations. Other than the gGmbH, L3Cs are actually allowed to make a small profit and distribute it to its shareholders. This, although under very restricted rules, allows the L3C to receive outside investments and thus make it more competitive in the market (Galpin & Bell, 2010). The benefits corporation, Società Benefit in Italy, operates very similarly but is not taxed privileged.
Lawmakers are still exploring the possibilities of combining social purpose with profit seeking in new ways. Studying these new organizational forms both in light of the third sector and the private sector, will be a deemed imperative for researchers in countries that seek to improve their legislation. We will discuss the trend of commercialization in operations and orientation in the literature review but the brief third sector snapshot above already provides a point of departure for our research questions. New legal forms such as the gGmbH are evidence that the third sector is shifting its modus operandi towards a more professional, commercially oriented approach. Hence, we aim to investigate these trends and their underlying theoretical concepts.
3. Literature review and Theoretical Framework
This thesis’ empirical analysis takes the sociologic theories of institutional isomorphism that DiMaggio and Powell (1983) established and collectivist organizational theories, famously formed by Rothschild-Whitt (1979) as point of departure. It links these concepts to the broad set of theories of the third sector and provides a solid basis for the underlying research framework that aims to give the explorative nature of this study a solid foundation.
3.1 Bureaucracy and collectivism
DiMaggio and Powell (1983) base their institutional theories on Weber’s theories about bureaucratization of public sector organizations. Weber argued that bureaucratization stems from different sources that are interrelated. DiMaggio and Powell (1983) summarize them as
“competition among capitalist firms in the marketplace; competition among states, increasing rulers' need to control their staff and citizenry; and bourgeois demands for equal protection under the law.” Bureaucratization after Weber can be understood as the formalization of procedures such as the hiring of managers with recognized qualifications, the establishment of clear rules and guidelines, training, specialization and hierarchies. This bureaucratization and professionalization would trap organizations inside an iron cage, a system of teleological efficiency, rational calculation and control. (Weber, 1946, pp. 196-198).
3.1.1 The bureaucratic organization
The bureaucratic organization sees rational behavior as the organizational goal and operates under the principle of “sine ira ac studio.”3 For Weber (1946, pp. 215-218), bureaucratization was a simple necessity that provided the backbone for a more “complicated and specialized modern culture.” He also saw it as a necessity under legal considerations as public apparatus needed to
3 “without anger and fondness”: making decisions free from emotions.
make consistent decisions that were not based on tradition. Hence, Weber’s line of argumentation is not necessarily applicable today. Although it has been widely argued that the causes for these rationalizations have changed (DiMaggio & Powell, 1983), the concept of bureaucratization provides an important point of departure because it serves as a case in point where organizations tend to become more similar under environmental influences. The pros and cons of bureaucratization have been widely discussed through different lenses. It is important to note that this study does not try to argue in favor or against this process but merely sees it as a point of reference for the analysis of third sector organizations. In addition to this, it is important to differentiate the bureaucratic, “dehumanized” (Weber, 1946) organization from Rothschild-Whitt (1979) “collectivist” organizations.
3.1.2 The collectivist organization
The collectivist organization as characterized by Rothschild-Whitt (1979) provides a stark contrast to the bureaucratic organization of Weber. Also termed the “alternative” or “democratic”
organization, this organizational form is differentiated in eight aspects: “authority, rules, social control, social relations, recruitment and advancement, incentive structure, social stratification and differentiation” (Rothschild-Whitt, 1979). In summary, these dimensions provide a set of characteristics that help the organization achieve its multitude of goals by binding its workforce to it through a rather moral approach, and provide incentive mechanisms that make it possible to engage voluntary workers. Since most of these organizations tend to also be client and service focused, this organizational form is dominant in the third sector as it puts the benefit of the community above the benefit of the individual. Collectivist organizations function well outside of the iron cage, but institutional theory predicts the convergence of organizations. This theoretical consideration leads to the question whether the collectivist attitude of third sector organizations can be sustained in light of increasingly pressuring organizational institutions from the free market.
3.2 Organizational institutions
Organizational theory was first exposed to the idea that outside forces influence and shape the structure, culture and activities of the organization when Selznick (1948) started to introduce the term “institutionalization.” An institution in the context of organizational theory should not be misunderstood. In sociology, an institution concerns intangible “stable, valued, recurring patterns of behavior” (Huntington, 1965, p. 394). A more precise definition is given by Scott (1995) who describes institutions as following: “Institutions consist of cognitive, normative, and regulative structures and activities that provide stability and meaning to social behavior.” Hence, institutional theory is not concerned with categorizing or defining organizations but rather investigates the processes and causes behind the question why organizations organize the way they do. Porting this definition into the context of the third sector, the question arises whether one can observe the trend of increased commercialization. Meyer and Hannan (1979) find that organizations with the same purpose tend to converge towards the same organizational characteristics, a finding that was underlined by DiMaggio and Powell (1983), who argue that as soon as an organizational field becomes well established “there is an inexorable push towards homogenization.” Their famous 1983 paper “The Iron Cage Revisited” then continues to establish the concept of isomorphism. This is important for the later analysis as the trend by which non-profits and public agencies have been converging because of public funds and regulation has been widely observed (Laville, Young, &
Eynaud, 2015, p. 154). Moreover, it is important to establish the institutional field, in this case the third sector, in which organizations operate to be able to observe the trend of convergence.
3.2.1 Isomorphism
DiMaggio and Powell (1983) identify three reasons why isomorphism occurs in the organizational field. Coercive isomorphism results from political influence and legitimacy problems; mimetic isomorphism usually occurs as a response to uncertainty, and normative isomorphism can be understood as the result of professionalization.
Coercive isomorphism is well illustrated with an example that is also relevant to this thesis. When non-profits adhere to laws that require the compliance with specific accounting procedures and hire accountants for that task, there is a formal pressure exerted by the government. This pressure can also be informal or exerted by other organizations on which the organization is dependent upon.
Informal pressure may be felt as a result of cultural adherence. Thus, coercive isomorphism can be summarized as the result of authority leading to a need for legitimacy. DiMaggio and Powell even continue to mention that voluntary organizations have a need to resemble the structures of organizations that they receive funds from, may they be public or private. Moreover, the lack of legal barriers for collusion may further enhance the structuration of that sector (DiMaggio &
Powell, 1983).
Mimetic isomorphism concerns processes that arise from another pressure than authority.
DiMaggio and Powell (1983) characterize it as the result of uncertainty that occurs, for example, when an organization’s goals are unclear, when it does not understand its organizational mechanics or when the environment shows signs of uncertainty. They continue to introduce the term
“modeling” as a way to copy, consciously or unconsciously, the behavior and characteristics of other organizations, and call it a convenient way out. Another critical component of this modeling behavior is the fact that, oftentimes, the variety of characteristics to choose from are rather small as seen before with four legal forms to choose from in Germany’s third sector. It is just natural to adopt best practices and model ones own organization after successful organizations when uncertainty is high. Especially large, visible organizations are then mimicked (Haveman, 1993).
Normative isomorphism is the result of the need for professionalization. In other words, for DiMaggio and Powell (1983) it is the standardization of procedures such as hiring specific types of employees with similar, usually academic, backgrounds or receiving similar training and insights from the organization’s network. For example, all organizations that act within the same trade union are exposed to such influences or all organizations that receive consulting services from the same
In the institutional view of isomorphism, decisions made by organizations tend to not be informed by rational behavior but rather by standardly presumed actions that are “taken for granted” and seen as a logical next move (Haveman, 1993). A critic of this standpoint is that organizations do show signs of resistance to these forces, although they usually only occur in environments that are characterized by low uncertainty (Oliver, 1991).
3.2.2 The network effect and isomorphism
Isomorphism often occurs when organizations look for role models they can resemble and usually comprise organizations from the same industry that are perceived to be successful (Haveman, 1993). Galaskiewicz and Wasserman (1989) find these mimetic forces to be especially strong when the organization has close ties to the organization it tries to resemble. Without going into details of the “network-effect”, it is pivotal to note the main findings concern individuals and not organizations but that tie strength and level of connectivity are the most important characteristics (Borgatti & Foster, 2003). This concept can be ported to the case at hand where close cooperation between third sector organizations and private or public sector organizations creates isomorphism.
In turn, DiMaggio and Powell (1983) tie into this effect with their hypothesis A-1, that explores the effect of dependency on another organizations, suggesting a strong tie between the mimicking and the mimicked organization. Westphal, Gulati, and Shortell (1997) find empirical evidence of network effects on institutionalization in their study of TQM adoption in hospitals where network ties decreased conformity to normative pressures for early adopters while they increased for late adopters.
3.2.3 Isomorphism and legitimacy
The concept of legitimacy results out of the institutional view that organizational change occurs due to an organization’s desire to conform to key stakeholder’s expectations rather than the need to perform better. Legitimacy can stem from pragmatism, or self-interest based on the organization’s
audience and morality (Suchman, 1995). In the case at hand, the development of the third sector can be seen through a similar lens as the developments of the public sector. What Weber (1946) described in his essays as the iron cage, the trap of homogenization of organizational characteristics of the public sector, has been observed extensively in the literature. One concept in particular is interesting when assessing an organization’s response to isomorphic pressures for legitimacy.
Conformity, as characterized by Ashworth, Boyne, and Delbridge (2009), can result from compliance and convergence. The first describes the achievement of formal legitimacy that is achieved by compliance to laws and regulations. In the third sector this is usually recognized through particular legal forms or the awarding of tax privileges. For example, cooperatives in Germany are legally forced to join an umbrella organization. This showcases a compliance form of gaining legitimacy that clearly results in exposure to what DiMaggio and Powell (1983) call the explicit diffusion of models for mimetic isomorphism. The latter form of achieving legitimacy by convergence can be understood as the development in a field when organizations become more similar over time. This effect can be observed in separation of compliance (Ashworth et al., 2009).
It is important to make this distinction, as the theoretical model incorporates both types of conformity for legitimacy.
The theoretical approach will not assess legitimacy as a separate factor, but define it as a resulting factor of isomorphism as it has been observed in the literature (Deephouse, 1996). This is the result of both. the reason that legitimacy is hard to measure empirically and the fact that legitimacy can be seen as cause or effect (McEwen & Maiman, 1986).
3.3 Third sector theories
In order to theorize the third sector and distinguish between organizations along the spectrum of public, private, and the so-called third sector, one has to first define the sectors individually. While this has found wide agreement for the first two, the latter still spurs significant debate and an
international definition would mask national differences that have developed due to varying interaction between the public and private sectors due to differences in the political economy (Evers
& Laville, 2004, p. 12). For simplicity, this thesis therefore takes an institutional4 approach to these definitions and first defines public sector institutions along the lines of Lane (2000, p. 1) as institutions that constitute “politics, government and bureau[x].” In this regard, private sector institutions are all organizations that are operated by individuals, for profit and, not owned (or operated) by the government. Hence, the third sector must be composed of all other organizations.
Unfortunately, it is not all that easy. One clearly is dealing with an overlapping spectrum of organizations. In the following this thesis will present different attempts to define the third sector. It will move from a rather negative definition (as above) of what third sector organizations are not towards a positivist definition and accept that the third sector as such is by definition an imprecise construct.
3.3.1 American and European discourse
In addition to the difficulty of defining dimensions along which to analyze the third sector, we already explored earlier that regional differences in the third sector have a huge impact on its composition and operation. For example, according to Laville et al. (1999) one of the most famous definitions of the third sector, the one established by the Johns Hopkins Comparative Nonprofit Sector Project, carries an “American bias” as it has the criterion of non-redistribution of profits for an organization to be categorized as third sector. It therefore excludes mutual-aid societies and cooperatives, while the European definition draws the line at “private acquisition of profits”, a subtle, yet an important difference. (Laville et al., 1999). The underlying message here is that the third sector cannot be theorized along one or even two dimensions. The discourse itself reflects, in a way, the theory of the third sector itself. In order to draw a clear-cut line in the definition, this thesis continues with discussing the third sector from a European perspective and includes all
4 Note: Now the term “institutional” is used ain the political sense as an organization that serves a public service.
organizations in the definition that possess a legal status that “places limits on private, individual acquisition of profits” (Laville et al., 1999).
3.3.2 Approaches to defining the third sector
Billis (2010) identifies “five core elements” along which organizations can be characterized. He names ownership, governance, operational priorities, human resources and other resources. These dimensions are partly reflected in the work of van de Donk (2001), who characterizes third sector along the dimensions of being private (not government owned), nonprofit and formal. Salamon and Anheier (1992) add the dimensions of governance, by arguing that third sector organizations should be self-governed, and voluntary contribution. Their definition requires a certain level of voluntary contribution either in the form of work (volunteers) or money (donors).
Figure 3.1 – Pestoff triangle
Source: Simplified from Pestoff (1992)
Formal Non-profit
STATE
MARKET COMMUNITY
Informal For-profit
Public Private ASSOCIATIONS
Mixed organizations /institutions
Another approach stresses analysis between two principles. The definition via legal form, that was discussed above and a normative approach that defines a third sector organization along the principles it operates in. These principles are “the aim of serving members or the community”,
“independent management”, “a democratic decision making process”, and “the primacy of people and labour over capital in the distribution of income” (Borzaga & Defourny, 2001). A more broad definition of third sector organization is “organizations not seeking profit maximization for those who control them” (Defourny & Nyssens, 2008). Note how a similar set of dimensions is applied to all of these definitions. These approaches are nicely summarized by Pestoff (1992) triangle (Figure 3.1) which builds upon the welfare triangle (Evers, 1990). It nicely shows how organizations can lie within any combination of public, private or community and combines the stakeholder view with the process view of interaction between these stakeholders in terms of resource exchange. (Borzaga
& Defourny, 2001).
An alternative advance towards defining the third sector is presented from an economical standpoint by Birch and Whittam (2008) in their analysis of the influence of social capital on regional development. They define the third sector as the “social economy” meaning, “economic activity performed by organizations that are neither for-profit nor state-run organizations and are, therefore, within the ‘Third Sector’.”
Finally, Corry (2010) delivers an approach that sees the third sector as a “process of interaction or communication between the different sectors.” This can result in the emergence of new ventures that then find themselves in between the lines of state, market and the society. It then depends on each organizational identity to define where it lies exactly within those spectrums. He concludes that theorizing the third sector distinctly always leads to the danger of ignoring important elements.
3.3.3 Discourse in Germany
The discourse in Germany is an interesting one. The discussion is mainly driven by the roles the third sector executes. Nevertheless, the roles delivery of services, lobby and social integration, as depicted in Figure 3.2 are all informed by the stakeholders that benefit from them. Social integration, for example, is a clear indicator of state influence on the sector as this policy objective has been pushed heavily through grants and subsidiaries for organizations by the German government (Priller & Zimmer, 2007). It is also notable that the debate in Germany is very much centered on local impact of initiatives in the civil society. In this way the third sector has made its way into recognition as an equal actor among market and state. In conclusion, the discourse is characterized by definitions that are derived from descriptive statistics on legal forms and societal roles of the sector (Birkhölzer, Klein, Priller, & Zimmer, 2015, p. 10).
Figure 3.2 – Roles of the third sector in Germany
Source: Adapted from Priller and Zimmer (2007, p. 55)
Another quite astonishing development in Germany is the fact that academia and politics have largely ignored new terms such as social enterprise and or social entrepreneurship. Although this
THIRD SECTOR ORGANIZATIONS Delivery
of services Lobby
Social integration
has slightly changed in recent years, it clearly reflects Germany’s German focused academic landscape and the fact that the social economy approach that was pushed forward after World War II aimed to solve most social problems without the need for new solutions (Defourny & Nyssens, 2008). This can be seen as one of the reasons why theoretical approaches towards a third sector in Germany tend to emphasize process and roles.
3.4 The third sector and isomorphism
The impact of isomorphism on the third sector has been part of the literature from the start.
DiMaggio and Powell (1983) mention the “voluntary sector” in their examples and many scholars mention institutional theories and isomorphism in their theoretic explorations of the sector (Anheier
& Seibel, 1990; Defourny & Nyssens, 2008; Laville et al., 1990). Empirical contributions to the field often assess a specific part of the third sector. For example, isomorphic forces on cooperatives (Bager, 1994) or non-profit organizations (Claeyé & Jackson, 2012). Their findings and theoretical contributions emphasize a development towards more commercialization and bureaucratization and paint a general picture of convergence towards professionalized public organizations and especially private sector companies (Priller et al., 2012). Hence, one can draw the circle back to Weber’s iron cage terminology and combine the theories of the third sector, with a particular focus on Germany, and the institutional theories around DiMaggio and Powell (1983).
3.5 Theoretical framework
The literature review above has shed light on the underlying concepts of this research and provides a basis for this exploratory study. The institutional theories in combination with the context and theories about the third sector in Germany result in the framework below and are applied through the two guiding research questions and the subsequent hypotheses that are specified in Table 3.1.
First, the literature review identified that competition can lead to an increase in mimetic isomorphism, in this case the convergence of third sector organizations with private sector
companies (H1). This effect is theoretically stronger when the organization is exposed to a higher number of individuals either as their employees or their customers (DiMaggio & Powell, 1983).
Second, uncertainty induced through laws and regulations leads to mimetic isomorphism (H2) (Ashworth et al., 2009). Third, strong ties resulting from dependence on particular organizations can lead to convergence with the organization that is depended upon (DiMaggio & Powell, 1983).
This concept is applied through H4 that explores the dependence of third sector organizations on the public sector. Finally, the process view of the third sector that defines it primarily along the lines of its roles in Germany (Priller & Zimmer, 2007) in connection with Rothschild-Whitt (1979) view of the collectivist organization build the foundation for the second research question and allow for an objective assessment of the role of third sector in Germany.
Figure 3.3 – Theoretical framework
Source: Own creation
Commercial orientation Uncertainty
Competition Income
source Control
variables
+H1 +H2 +H3
Institutional theories RQ1
RQ2
-H4
Third sector theory
Collectivist/social missions
3.5.1 Application of theoretical framework
The application of the theoretical framework above can be summarized in the table below.
However, the exploratory nature of this study will only build on this framework and use it as a starting point. For example, the underlying dataset measures competition both in terms of competing sector and the kind of competition the organization is subject to. Both of these factors will be explored but only the relevant factors will be included in the final model.
Table 3.1 – Application of theoretical framework
Research Question/Hypotheses Theory stream Analytical result RQ1: What factors influence an increase
in the commercial orientation of third sector organizations in Germany?
Institutional
isomorphism Identifies factors that positively correlate with organization’s commercial orientation.
H1: The greater the organization’s perceived competition, the greater the degree of commercial orientation.
Coercive isomorphism H2: The greater the organization’s
perceived uncertainty the greater the degree of commercial orientation.
Mimetic isomorphism
H3: The greater the organization’s income from public funding the greater its commercial orientation.
Isomorphism and network effects RQ2: Does commercial orientation
influence the collectivist and social missions of third sector organizations in Germany?
Process view of third sector, collectivist organizational model
Identifies how the observed trend of increased commercial orientation impacts the
collectivist missions of third sector organizations in Germany.
H4: The greater the organization’s degree of commercial orientation, the smaller the degree of collectivist mission orientation.
Source: Own creation
The next sections will illustrate how this theoretical framework is applied to the dataset obtained from WZB.
4. Empirical Methodology
This chapter discusses the methodology of this empirical master’s thesis and highlights the scientific approach in terms of research philosophy as well as the statistical methods that were applied in order to answer the underlying research questions. The chapter closes with the explanation of the main method: structural equation modeling with SmartPLS (Ringle et al., 2015).
Due to the fact that the data that was used in this thesis is of secondary nature, this chapter does not contain the methodological details of survey design and data collection. These components are discussed in the next chapter.
4.1 Scientific approach
There are two different approaches that can be used to assess the research questions. The positivist approach to social science emphasizes an objective view on the world while a relativist approach sees the world from a subjective point of view. The positivist researcher strongly believes that the collection of data can lead to an accurate view of the world while the relativist would engage in in- depth interviews with people to construct her worldview. Hence, it is also called a constructivist methodology (Easterby-Smith, Thorpe, & Jackson, 2012).
This study takes a quantitative approach towards social science phenomena and is rooted in a heavily positivistic methodology by analyzing a large dataset with more than 3,000 responses to test existing theories and hypotheses that were constructed from these theories. Secondary analysis has both advantages and disadvantages (Bryman, 2012, pp. 312-316). This study suffers from the shortcomings in that it does not have control over the quality of the data and the fact that it misses some key variables that would have been helpful in the analysis. Furthermore, considerable time was spent considerable understanding and cleaning the data.
Nevertheless, engaging in secondary analysis has its advantages. First, the data obtained from the Social Science Research Center Berlin (WZB) is very likely to be of higher quality both in terms of
sampling and collection methodology as in scale and scope of the collected data than any data that would have been possible to collect in the timeframe of this thesis. Second, using secondary analysis means saving cost and time that can be spent on analysis rather than data collection.
Finally, this study can expand the depth of the descriptive analysis of the data by Priller et al.
(2012) and build upon the statistical results of Droß (2013) (Bryman, 2012, pp. 312-315).
It is also important to note that this study carries some features of a rather inductive, exploratory approach, as latent constructs through use of an exploratory factor analysis will be identified.
Therefore, this thesis does not follow the “standard path” of positivist research but combines the two views to make the best use of the existing data.
4.1.1 Reliability and validity
Two key concepts are important to justify the choice of methodology and its resulting findings. The reliability of results assesses their stability over time and the internal reliability of the latent constructs. Due to the limitation that only cross-sectional data was available, one cannot test for stability but has to be aware that the collected data is almost five years old and results from more recent data may lead to different results (Bryman, 2012, pp. 168-170). Internal reliability of the latent variables is tested with Cronbach’s Alpha, Composite Reliability and Average Variance extracted for each construct. It is usually desirable to only work with constructs that display a Cronbach’s Alpha above 0.8. However, the measure usually rewards the inclusion of many factors, a luxury that this study does not enjoy. In addition to this, the exploratory nature of this study allows to accept constructs with Alpha’s around 0.6 (Bryman, 2012, p. 170). Furthermore, to ensure reliability, low Cronbach Alphas are only accepted when the other reliability measures show good results.
The validity of the model is ensured through two measures. First and foremost, it is ensured that all relationships and constructs show sufficient face validity. That its, the construct makes logic sense.
In the process of writing this thesis, the model was discussed with the supervisor who acted as an expert that can ensure face validity (Bryman, 2012, p. 171). More importantly, measurement validity is ensured by deduction concepts such as “competition” from theory. This form of validity is also called construct validity and is concerned with the question that constructs really determine what they are intended to measure.
4.2 Measurements
The measurements extracted from the data were obtained following a four-step procedure that was implemented as a result of combining the methodology suggested by Hair, Hult, Ringle, and Sarstedt (2014) for building a structural equation model using partial least squares and exploratory factor analysis as described by (Thompson, 2004).
First, the questionnaire was scanned for interesting variables, variables that could potentially measure the desired constructs and control variables. Second, the dataset was checked to audit the chosen variables for criteria such as distribution, the way the different variables were coded and potentially missing data. The chosen variables were then renamed or generated using Stata. The complete, annotated Stata script can be found in Appendix I. Third, exploratory factor analysis was used to determine factors that could be used as latent constructs in the structural equation model.
Fourth, the latent constructs were built and tested for reliability in SmartPLS before they were included in the model.
The main challenge with this approach was the design of the questionnaire and the resulting variety of variable types. A lot of variables were coded as dichotomous variables that needed to be re-coded into categorical variables. Many questions that could have achieved interval variables were asked in ways that only made ordinal ranking possible. For example, income had to be indicated in a range that was coded into the dataset in a way, which combined all organizations with an income up to EUR 100,000, meaning 1586 organizations ended up in the same category, rendering the variable
