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The Ethical Dilemma in Hybrid Organizations: A Production Function Approach to Credit Expansion in Microfinance

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Kjetil Andersson at University of Agder
Kjetil Andersson
Bert D’Espallier at KU Leuven
Bert D’Espallier
Roy Mersland at University of Agder
Roy Mersland
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Abstract

We derive and estimate a production function for microfinance institutions to provide empirical evidence of the ethical dilemma of balancing social and financial logics in hybrid organizations. A worldwide panel dataset of microfinance institutions is utilized and a production function augmented by average loan size is estimated using the control function approach. We show how this framework can be used to quantify the tradeoff between social outreach and financial sustainability in relation to the expansion of microfinance institutions’ credit operations. The study reveals that expanding the extensive margin (increasing the number of loan clients) requires on average more than twice as many inputs as expanding the intensive margin (increasing the average loan size) to achieve the same growth in assets. Beyond the case of microfinance our production function illustrates that as hybrid organizations expand, they will inevitably face an ethical dilemma as the laws of economic efficiency exert pressure on their social missions.
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Vol.:(0123456789)
Journal of Business Ethics
https://doi.org/10.1007/s10551-024-05892-9
ORIGINAL PAPER
The Ethical Dilemma inHybrid Organizations: AProduction Function
Approach toCredit Expansion inMicrofinance
KjetilAndersson1· BertD’Espallier2 · RoyMersland1
Received: 5 February 2024 / Accepted: 23 November 2024
© The Author(s), under exclusive licence to Springer Nature B.V. 2024
Abstract
We derive and estimate a production function for microfinance institutions to provide empirical evidence of the ethical
dilemma of balancing social and financial logics in hybrid organizations. A worldwide panel dataset of microfinance institu-
tions is utilized and a production function augmented by average loan size is estimated using the control function approach.
We show how this framework can be used to quantify the tradeoff between social outreach and financial sustainability in
relation to the expansion of microfinance institutions’ credit operations. The study reveals that expanding the extensive
margin (increasing the number of loan clients) requires on average more than twice as many inputs as expanding the inten-
sive margin (increasing the average loan size) to achieve the same growth in assets. Beyond the case of microfinance our
production function illustrates that as hybrid organizations expand, they will inevitably face an ethical dilemma as the laws
of economic efficiency exert pressure on their social missions.
Keywords Ethical dilemma· Hybrid organizations· Credit expansion· Microfinance· Production function· Efficiency
analysis
JEL Classification D24· D22· L31
Introduction andConceptual Frame
In this paper, we estimate a production function which ena-
bles us to quantify the primary ethical dilemma faced by
hybrid organizations: Balancing their dual logics of pursu-
ing social and financial goals simultaneously. Although the
literature describes well the ethical dilemmas of balancing
different institutional logics in hybrid organizations from
a conceptual viewpoint (Bull & Ridley-Duff, 2019; Davies
& Doherty, 2019), there is little empirical research aiming
to quantify the ethical challenges that hybrid organizations
face.1
We use data from Microfinance Institutions (MFIs),
which are typical examples of hybrid organizations (Bat-
tilana & Dorado, 2010) to estimate the parameters of a pro-
duction function in order to quantify how different strategic
choices for expanding the business of an MFI lead to differ-
ent outcomes. We argue that these strategic expansion strat-
egies represent a core ethical dilemma for MFIs and serve
as examples for other hybrid organizations when planning
their growth strategies.
MFIs, offering small-scale financial services to vul-
nerable clients, have two main options when it comes
to expanding the credit supply to their clients. They can
issue additional loans to new clients or provide larger
* Bert D’Espallier
bert.despallier@kuleuven.be
Kjetil Andersson
kjetil.andersson@uia.no
Roy Mersland
roy.mersland@uia.no
1 School ofBusiness andLaw, University ofAgder,
Kristiansand, Norway
2 Faculty ofEconomics andBusiness, KU Leuven, Leuven,
Belgium
1 In regular businesses, the core ethical consideration is distinguish-
ing between ethical and unethical business practices (Islam and
Greenwood, 2021). Due to their inherent social logic alongside finan-
cial sustainability objectives, one may argue that hybrid organizations
are inherently ethical. Greenwood and Freeman (2017) argue that this
view is narrow as business practices in hybrid organizations can differ
greatly. In line with this, we take the position that hybrid organiza-
tions, even though they have an inherent social bottom-line, encoun-
ter ethical challenges in their business operations.
Content courtesy of Springer Nature, terms of use apply. Rights reserved.
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