THE BLOG
06/28/2010 12:40 pm ET | Updated May 25, 2011

Pay Nonprofits an "R&D" Fee

At social investment conferences, an oft-heard conceit is the reverential extolling of the marketplace as "the best" route to large scale economic development (good-bye NGOs, good-bye government). A corollary, and mostly unchallenged, assertion implies "intrinsic inefficiencies" in the nonprofit world.

In truth, nonprofits, NGOs, charitable donors, foundations and governmental funding have, in large measure, built the platforms, distribution channels, infrastructure and research upon which for-profit social entrepreneurs depend. For-profit social enterprises inherit -- at no cost -- the expensive trial and error R&D that nonprofits have successfully conducted, implemented and sustained.

The sneering, even snarky, inference that nonprofits are institutionally less worthy or undeserving of "serious" financial backing is not only wrong-headed, it is also dangerous to the growth of social investments as an asset class. By touting for-profit solutions as somehow better (whatever that may mean remains another mystery), pro-market do-gooders are not only perpetuating a delusional and bogus reality, they are undercutting the R&D funding pipeline that the social sector, both for-profit and nonprofit, so desperately needs.

In the private sector, research and development costs are financed (repaid, if you will) from future profits. In the social sector, for-profit social enterprises should be required to do the same, that is, pay back R&D costs.

Before social investors and shareholders realize financial returns from "doing good," perhaps they should "share" their financial booty with the nonprofits that financed the R&D, took the speculative risks and built out the capacity and infrastructure. The fair analogy are the public taxes paid by business to repay society at large for an educated workforce, basic research, good roads to transport products and so on.

For-profit social investors deserve to be rewarded for their financial risk-taking, their innovation and their industry. Agreed. But, should they also receive financial rewards for work and risks they did NOT undertake?

The principal of "knowledge inheritance" is well-established (see Unjust Deserts by Gar Alperovitz and Lew Daly). We are all free riders on the ground-breaking thinkers, scientists, experts, inventors, etc. on whose intellectual and business shoulders we stand. The same is no less true for social enterprises vis-à-vis nonprofit organizations.

Don't nonprofits have a moral claim on some share of the profits created from their pioneering work? Will someone please invent a patent system or repayment mechanism so profitable social enterprises are tapped to invest (voluntarily or otherwise) in nonprofit-led R&D?