THE BLOG
12/19/2013 03:28 pm ET Updated Feb 18, 2014

Banking on Entrepreneurs: Why an American Development Bank Makes Investment Sense

I recently wrote a memo titled "Banking on Growth: U.S. Support for Small and Medium Sized Enterprises in Least-Developed Countries." The idea behind it is that it is in America's interest to get the most from its development dollars and that one of the smartest ways to do this is to invest in small and medium businesses in the world's toughest and poorest economies.

Opening the gate for America to invest directly in such businesses would pay dividends both diplomatic and financial: it would spur economic development, accelerate progress towards international health and education development goals, and boost stability in fragile economies, all of which furthers U.S. foreign policy goals.

According to the International Finance Corporation (IFC), small and growing businesses account for about 90 percent of businesses worldwide and contribute nearly 30 percent of formal GDP in lower-income countries. Accounting for more than 50 percent of employment globally, these enterprises are key drivers of job creation and market innovation, both of which strengthen economies in societies vulnerable to political and social instability.

Yet despite growing evidence that small business investment yields positive benefits in economic, development and security terms, the United States right now does not have a way to offer entrepreneurs the full benefit of America's entrepreneurial know-how to help them expand their businesses. The Overseas Private Investment Corporation (OPIC) comes the closest to filling this role. But OPIC's effectiveness currently is curbed: it has to work with a U.S. bank when investing in the private sector and cannot offer technical assistance or equity investments. An American development bank that expands and builds upon OPIC's efforts would give the U.S. the flexibility to invest in SMEs abroad without facing the kinds of limitations that currently constrain OPIC's work. And it could be done for no cost to the taxpayers in this era of slimming budgets: for each of the last 36 years, OPIC has returned money to the government -- most recently $426 million. Some of these dollars could be deployed to expand OPIC's skills and scope -- without encountering any new costs.

The memo argues that the U.S. should:

1. Invest in and create a new American development bank that would build on OPIC's framework and provide a "one-stop shop" solution for entrepreneurs in lower-income countries.

2. Encourage the American development bank to invest in locally owned small businesses in order to demonstrate that the SME sector -- which investors often view as high-risk -- is vital to economic growth and stability. Women entrepreneurs would be a focus of such a development bank given the development dividends that come with investing in women.

3. Combine development bank efforts with those already promoting SME creation, including governments, civil society, private sector, UN agencies, international NGOs, and other development finance institutions.

Women entrepreneurs would be a critical part of this development bank push. There are around 8 to 10 million formal women-owned SMEs in emerging markets, and millions more in the informal sector. Women face all the challenges of growing their businesses in risky environments that men face, and more. Seen as high-risk clients, investors are usually reluctant provide women with access to the capital, networks, and support they need to build and expand their businesses. By including women in its services, an American development bank would help women entrepreneurs contribute more to their local economies, and in the process create more prosperous and financially secure communities as well.

The U.S. government stands to reap substantial benefits from launching an American development bank that could invest directly and without current constraints in entrepreneurs in some of the world's toughest economies. In an era where government must do more with less, it is an idea whose time has arrived.