In Developing Economies, Equity Beats Microfinance

Wednesday, April 20, 2011

A new effort is underway to advance entrepreneurship in the developing world. The U.S. State Department recently launched a program to promote business creation in emerging markets known as the Global Entrepreneurship Program. Leading entrepreneurs, investors, and corporations in the public and private sector met in Washington to discuss the best ways to achieve social and economic impact in underserved markets. This included mobilizing capital, scaling businesses, and working with large corporations. These initiatives are beginning to transform the way many think about economic development abroad.

Over the past decade in the developing world, microfinance institutions (MFIs) attracted an increasing number of private equity investors. It was believed that these organizations, which have multiplied over recent years, were the answer to stimulating economic activity. In just the past three years, an estimated $300 million has been invested in MFIs.

However, while MFIs do play an important role in development, there is an even greater need to support small and medium-sized enterprises (SMEs), which have shown to have the greatest potential for job growth in most places around the world. These businesses can act as the catalysts for sustainable economic development, employment, and the production of affordable goods and services in both developed and developing countries.

SMEs provide over 30% of total employment and generate 16% of GDP in low-income countries. In middle-income countries, SMEs capture an even larger share at 57% and 39%, respectively. But they are often considered too risky for commercial investment and need much more investment capital than can be provided by microfinance.

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