Public Subsidies and Private Donations: A Typology and Application to Microfinance

This article provides three contributions to the literature. First, we construct a new typology of subsidy instruments based on financial characteristics and transparency features. To this end, we extend and transpose the... [ view full abstract ]

This article provides three contributions to the literature. First, we construct a new typology of subsidy instruments based on financial characteristics and transparency features. To this end, we extend and transpose the governmental subsidy typology of Schwarz and Clements (1999) to account for private sector donors, who are supplementing traditional charitable activities such as grant-making with an expansive toolbox of financial instruments including loans, guarantees, quasi-equity, social impact bonds and equity (Salamon, 2014). Second, we use our typology to examine the institutional logics and motivations that govern public subsidies and private donations and then identify how private donations may crowd out, or complement, public subsidies. To this end, we employ institutional logics, which are sets of shared beliefs that rationalize the value of particular goals and interests (Thornton, Ocasio, & Lounsbury, 2012). Broadly, public subsidies have been associated with a development logic (Cobb et al., 2016) or a public accountability logic (Mullins, 2006) while private donations are more closely believed to balance a financial logic (Pache & Santos, 2010) and social return maximization logic (Scarlata et al., 2012). Facing a hybridization of markets in which public subsidy and private donation compete with each other are questions concerning the degree to which welfare states should or are able to fund and/or provide public goods.

The third contribution is the application of our conceptual framework to microfinance. The microfinance industry represents an ideal case to analyze competing institutional logics (Battilana & Dorado, 2010) and one that also highlights the interactions between public subsidies and private donations given the diverse range of institutional profiles active in the industry, including government, nonprofit and for-profit actors (D’Espallier, Hudon & Szafarz, 2016). Initially, microfinance institutions (MFIs) were primarily nonprofit, non-governmental organizations (NGOs) focused on poverty alleviation that required substantial subsidies to accomplish their social objectives (Hudon & Traca, 2011). Today, however, the industry has experienced a movement out of donor-supported initiatives and embraced a more commercialized approach where MFIs adopt market-based principles and manage on a business basis as part of the regulated financial system (Armendáriz & Morduch, 2010). Nonetheless, subsidies still account for a large proportion of funding to the industry (Cull et al., 2016). Institutional theorists have also recently begun to investigate the logics of microfinance funders, but have so-far been concerned with differences between fully commercial funders, who employ a financial logic, and public funders who adhere to a development logic emphasizing the health and efficacy of a country’s microfinance sector (Cobb et al., 2016).  

References

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