Determinants of the profitability of Sheltered Workshops: efficiency and effects of the COVID-19 crisis

The socio-labor inclusion of people with disabilities is a significant challenge in Europe, particularly Spain. Sheltered Workshops (SWs), a type of Work Integration Social Enterprise (WISE), provide employment opportunities for individuals with disabilities, offering support throughout the integration process. SWs' financial viability is crucial for their continued social contribution. This study addresses the limited research on SW profitability, particularly during crises like the 2008 financial crisis and the COVID-19 pandemic. The research question focuses on identifying the determinants of SW profitability in Spain, exploring the role of efficiency (operational and social) and the impact of the crises. The study's importance lies in providing insights for policymakers to develop sustainable growth policies for SWs and for practitioners to improve decision-making. The study uses a resource-based view (RBV) to explore how internal firm characteristics and resources influence profitability, acknowledging the dual (financial and social) objectives of SWs.

Existing literature highlights the challenges faced by individuals with disabilities in entering the labor market and the role of SWs in addressing this. While SWs have demonstrated resilience during economic downturns, their sustainability is threatened by reliance on public funding, especially during crises. Empirical research on social enterprise profitability is scarce, with few studies focusing on SWs and none comprehensively analyzing the impact of the COVID-19 pandemic. Existing studies primarily use ratio analysis and overlook the potential link between management efficiency (operational and social) and profitability. Some research suggests an inverse relationship between social efficiency and profitability in social enterprises, a dynamic this study aims to explore further. This research contributes to the literature by utilizing DEA to measure both operational and social efficiency and examining its relationship with profitability, considering the impact of legal form (for-profit vs. non-profit) and the COVID-19 crisis.

This study employs a mixed-methods approach using panel data from 1133 Spanish SWs (8546 observations) from 2010 to 2020, sourced from the SABI database. Data envelopment analysis (DEA) is used to calculate operational and social efficiency scores, considering inputs (fixed assets, total liabilities, total equity, operating costs) and outputs (operating revenue, other operating revenue—including subsidies). A static panel data model (random effects) and a dynamic panel data model (Generalized Method of Moments, GMM system) are employed to assess the relationship between efficiency and profitability (measured as Return on Assets, ROA). The models include control variables: Altman's Z-score (financial risk), liquidity ratio, leverage ratio, tangibility ratio, size (log of total assets), age (log of years since founding), sector (services vs. manufacturing), and location (regions with high disability employment rates). Interaction terms explore the moderating effects of legal status (for-profit vs. non-profit) and the COVID-19 crisis (2020). Robustness checks are conducted using alternative efficiency measures and the GMM system to address potential endogeneity issues. The study employs Mann-Whitney tests for univariate analysis and linear regression for panel data analysis.

Descriptive statistics reveal that most SWs operate in the services sector, with non-profit (NP) SWs having higher average asset value and age than for-profit (FP) SWs. ROA and Return on Equity (ROE) were generally lower for NP SWs, potentially indicating a prioritization of social mission over profit maximization. Both ROA and ROE decreased significantly in 2020 due to the COVID-19 crisis. DEA analysis shows high overall efficiency (81.4%), with FP SWs exhibiting slightly higher operational and financial efficiency but lower social efficiency. The panel data regression analysis confirms Hypothesis 1 (positive relationship between operational efficiency and profitability) and Hypothesis 2 (negative relationship between social efficiency and profitability). The positive effect of operational efficiency significantly outweighs the negative effect of social efficiency, resulting in a net positive impact of overall efficiency on profitability. Control variable analysis indicates positive effects of low financial risk (high Altman Z-score), long-term debt, and size on profitability. Negative and significant effects were found for liquidity, tangibility, and age. Legal status, sector, and location were not significant predictors of profitability. The COVID-19 crisis significantly reduced profitability, but the positive association between efficiency and profitability persisted during this period. Interaction terms suggest no significant moderation of the efficiency-profitability relationship by legal status. However, the positive effect of operational efficiency on profitability was stronger during the COVID-19 crisis, supporting Hypothesis 4.

The findings address the research question by demonstrating that efficiency, particularly operational efficiency, is a key driver of SW profitability, even during times of crisis. The positive relationship between operational efficiency and profitability highlights the importance of effective management practices in ensuring the financial sustainability of SWs. The negative impact of social efficiency, although outweighed by the positive effect of operational efficiency, suggests a trade-off between social mission and profit maximization. This trade-off may be less pronounced in NP SWs, where social mission is prioritized. The resilience of SWs during the COVID-19 crisis suggests their capacity to adapt and optimize operations under challenging economic conditions. The findings' relevance lies in their implications for policymakers and practitioners seeking to improve SW performance and sustainability. The results indicate the need to support SWs through policies that encourage efficiency improvements and financial stability.

This study contributes significantly to understanding SW profitability by demonstrating the crucial role of efficiency and identifying key factors influencing financial performance. The findings highlight the need for balanced policies that support both social mission and economic viability. Future research could explore cross-country comparisons of SW performance, investigate the impact of specific support policies on SW profitability, and further refine the measurement of social value created by SWs.

The study focuses solely on Spanish SWs, limiting the generalizability of the findings to other contexts. The data used may not fully capture the nuances of social value creation, as the measurement of social efficiency relies on quantifiable indicators. Further research with more comprehensive social value measures is needed. The sample is unbalanced which might affect findings in some aspects.