Business Finance as a Tool for Development (final book)

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This file, titled “BUSINESS FINANCE AS A TOOL FOR DEVELOPMENT,” is a 1992 publication by The Aspen Institute’s State Policy Program. Authored by Deborah Markley with Katharine McKee, it examines the evolution and best practices of state development finance programs. The document highlights the shift in state economic development strategies from “smokestack-chasing” (subsidized relocation) in the 1960s-70s to fostering homegrown businesses in the 1980s. The “Third Wave” approach of the early 1990s emphasizes innovation, market knowledge, and public-private partnerships.Key takeaways from the document include:

• Definition of Development Finance: Providing capital to individuals, firms, or communities to stimulate development that supports public goals (e.g., increased income, employment opportunities, equitable access to resources) while generating economic activity. It takes a longer-term view than conventional investment.
• Capital Gaps: The need for development finance stems from a lack of capital, particularly for entrepreneurs and small businesses, and conventional lenders failing to allocate capital to viable businesses. These “capital gaps” can be private (market inefficiency) or public (market failing to consider social returns). Rural areas often face more acute capital gaps due to specialized economies, low population densities, and lender risk aversion.
• Establishing Programs: Creating or improving state development finance programs involves several steps:
  1. Analyzing the State’s Capital Market: Identifying the supply and demand for capital, assessing capital gaps, and involving private financial institutions in the process.
  2. Establishing Program Objectives and Targets: Defining specific goals (e.g., promoting self-employment for low-income individuals) and targeting particular industries, regions, or business types.
  3. Determining Key Program Design Features: Programs should be market-driven, flexible, include technical assistance for both bankers and businesses, be run by professional managers, and have built-in evaluation and monitoring systems.
• Roles of the State: The document outlines three primary roles for the state in development finance:
  1. Regulator or Inducer: Using “carrots” (inducements like linked deposit programs) or “sticks” (regulations like Community Reinvestment Act requirements) to encourage private sector lending. The Michigan Capital Access Program (CAP) is highlighted as a successful risk-pooling model.
  2. Investor: Actively creating and capitalizing new institutions (e.g., Michigan’s BIDCO program) or passively investing in existing ones (e.g., the Minnesota Community Reinvestment Fund, Self-Help Credit Union in North Carolina, Southern Development Bancorporation in Arkansas, or Revolving Loan Funds like CEI’s day care RLF in Maine).
  3. Direct Provider: A less desirable but sometimes necessary role where the state directly provides capital to high-priority groups or regions when market failures persist (e.g., Massachusetts’ Community Development Finance Corporation or Illinois’ subordinated debt financing program).

The document stresses that successful programs leverage public funds to attract private capital, are demand-driven, foster competition, and prioritize monitoring and evaluation of both financial and developmental impact. Technical assistance is repeatedly emphasized as crucial for both borrowers and lenders.