reflections

Do Economic Incentives Matter? A Nosey Economist on BAM Financing

Interview with Dr. Steve Rundle

Steve, I know you have been doing some interesting research on BAM in the last few years, can you briefly describe what you have been looking at?

As an economist, I’ve always been interested in the relationship between the structure and governance of a company and its performance. Since the 1990s, when I first started meeting people who were combining business and missions, I naturally asked lots of nosey questions about the company’s financing, revenues, profits, and so on. I was especially intrigued by the role venture capital might play in funding businesses that were not only extremely risky, but were being managed by people who, in many cases, admitted that they weren’t too concerned about profits and that in fact they would be satisfied with just breaking even. I was not surprised to discover that no venture capital firms existed in this space, at that time. Most of these businesses were either donor funded, or in some cases funded with the help of one or two “Angel Investors.”

But this raised lots of new questions about the performance of these businesses. What are the expected outcomes, and how are practitioners incentivized to achieve those outcomes? Practitioners who are affiliated with a missionary sending organization may be discouraged from being too serious about business for fear that it will distract them from their ministry goals. One way to remove that distraction is to require the practitioner to raise donor support, in which case they will not be dependent on the business for income. This might sound logical at first, until you start meeting other BAM practitioners who are entirely dependent on their businesses for their salaries who are having an incredible impact. So I wanted to look at this more carefully by comparing the outcomes of people who drew 100% of their income from donors with those who are 100% business supported.

What did you find? Were there any surprises?

Those who are fully supported by the business have by far a greater impact in terms of job creation, revenue generation, taxes paid to local governments, and donations to social causes in their communities. It wasn’t even close. For example, practitioners whose salaries came entirely from the business reported average cumulative revenue over 3 years of $11.4 million compared to $282,000 for those fully supported by donors. That’s a difference of 40 to 1. The differences were equally stark in terms of jobs created, money and time donated to social causes, etc.

There were a couple of surprises though. One was that there was statistically no difference in the reported spiritual outcomes between the fully donor supported and fully business supported practitioners. This obviously challenges the assumption that donor support allows practitioners more freedom to focus on the spiritual “bottom line” of their business. That might be true, but it doesn’t translate into greater impact. On average, the spiritual fruit of those who are fully supported by the business was no less than those who were fully donor supported.

The other surprise was the number of people who reported being partly supported by both donors and the business. When constructing the survey, I was mainly interested in the two poles – fully donor supported and fully business supported. I knew there were some who drew salaries from both sources, but I was surprised at how many reported doing so. That group turned out to be larger than either of the other groups. If I had a chance to do it again, I’d ask a follow up question along the lines of “was this combination salary arrangement by design or by accident?” In fact, there are many examples of both. Some practitioners start out fully donor supported, but as their supporters gradually drift away, they are able to supplement the loss with income from the business. Others are very intentional about using donations to start the business, but transitioning themselves to a fully self-supporting operation within X years.

In terms of impact, these hybrid businesses outperform the businesses run by fully donor supported practitioners, but do not reach the full potential of the self-supported businesses. My tentative interpretation is that as a business matures and grows, its impact is also likely to grow. If someone wants to start a business in, say, Sub-Saharan Africa, it may be best to start as a donor capitalized and donor supported business. But as it matures and grows, its impact will also grow, as will its ability to sustain itself. Eventually it will be a fully mature and fully self-supporting business. That’s the narrative I have come up with, but more research is required to flesh out all the implications and recommendations.

As you say, further research is needed before we can draw definitive conclusions… However, from this first study, or from your own previous experiences, are there any other observations, principles or good practices you can identify for BAM practitioners?

I should mention that Dr. Paul Lee from Wheaton College has joined me on this project, and has helped find things in the data that might otherwise have been missed. For example, there is a strong correlation between location and impact. Specifically, practitioners in the Middle East and North Africa report much less success in any of the “bottom lines” (economic, social, environmental and spiritual impact). This probably won’t surprise anyone, but until now the evidence has been mainly anecdotal. Also, those associated with manufacturing businesses report better outcomes on average than other types of business, however I’m not ready to recommend that everyone go into manufacturing just yet! It could be that the manufacturing businesses are more obviously “real businesses” and that a nontrivial percentage of the others – consulting businesses for example – are varying degrees of “cover” businesses. If this suspicion is true, then what we’re picking up has more to do with the benefit of being a “real business” rather than necessarily any inherent strengths of manufacturing.

Another finding that is probably much more important than either of the others is the essential role of an independent board of advisors. Many of the survey respondents reported being affiliated with a sending agency or denomination. Many others were not. I assumed at the start of the study that accountability to either a board or an agency was important. I thought they were essentially substitute forms of accountability. I was surprised to discover that they are not substitutes. Accountability to an independent board is strongly correlated with positive impact, but accountability to a sending agency has no apparent relation – good or bad – with impact.

Finally, what would you say to someone coming to you for advice about launching a BAM start up?

It wasn’t directly related to this research project, but I always want to find out the person’s theology of mission. Specifically, is the business merely a clever way to get into a country and does it run the risk of distracting a person from what they really want to do? So many aspiring BAM practitioners try to launch from this very wobbly foundation. Businesses have incredible potential to bless entire communities of people, and if you have trouble seeing that with your own business idea, then you probably should avoid BAM. If, on the other hand, you’re excited about your idea and the impact it can have, then start building a team. Not just a management team, but a group of like-minded advisers who care about you and are willing to walk through this with you.

I am a firm believer in economic incentives, and I strongly recommend some kind of performance-based salary, even if it’s just a small annual bonus, or some other link to performance. Starting and growing a business – especially in the less-developed parts of the world – takes incredible and sustained effort, and I think it’s only fair to reward people for their tenacity.

Finally, I prefer to see people start with a vision from start to finish for a self-sustaining for-profit business, rather than one that is started with and/or sustained by the help of donated capital or labor. It is a healthy exercise to think about how one might start such a company without the help of donors. That’s how it usually works in the real world, and if you’re serious about this being a real business, you should give that serious thought. On the other hand, I’m fully aware that these ventures are often located in some of the most business-unfriendly places in the world with very uncertain prospects for profit. In some cases, starting out with help from donors may be the only realistic way to go. But long term, I hope that even in these cases the businesses can wean themselves off the donor support.

With thanks to Steve Rundle, talking to Jo Plummer

Read some of Steve’s Research Findings here: Does Donor Support Help or Hinder Business as Mission Practitioners

Watch Steve present his study at the BAM Global Congress in 2013.

Dr. Steve Rundle is Professor of Economics at Biola University. His teaching and research interests are focused on the intersection between international economics and world mission. He is faculty advisor for the International Business emphasis and for the Student International Business Association. He also assists and consults mission agencies, churches and businesses that are trying to integrate business and missions. He has published two books Great Commission Companies: The Emerging Role of Business in Missions (Intervarsity Press, now available in Chinese and Russian) and Economic Justice in a Flat World: Christian Perspectives on Globalization (Paternoster Press).