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Innovation: Learning from China’s Banking System

Innovation: Learning from China’s Banking System

In a recent article in Bloomberg Businessweek.com, Ann Lee, adjunct professor at the New York University makes a case that instead of giving large bailouts to financial companies, the US government would do much better to set up an Innovation Bank to fund entrepreneurs instead. Why is it that politicians are willing to throw good money after bad but are not willing to adopt new and innovative methods to restore growth to America?

Ann Lee, an adjunct professor at New York University argues that in these troubled economic times, the US needs to overhaul its banking system on Chinese lines and support entrepreneurs. China has both private and state owned banks, the latter work on policy directions from the government to lend to specified priority sectors. This ensures that focused development occurs and projects which would otherwise have never secured funding can also be executed.

Prof Lee proposes that the US could set up ‘Innovation Banks’ that would take equity in entrepreneurial ventures meeting specified quality guidelines. The government would take its share of the profits based on the equity it holds. This would be very different from giving the entrepreneur a loan which has its own pre-conditions and procedures.

The idea is not so farfetched, especially considering that the US government has given financial bailouts of nearly $5 trillion to its financial institutions. On the other hand entrepreneurs were starved of cash as the initial public offering market vanished and money to fund research at universities had to be slashed.

The government says that the money given to keep banks solvent is eventually coming back to entrepreneurs as loans. However that is not true as most of the beneficiaries of the Troubled Asset Relief Program do not lend to small entrepreneurs. Angel investors and venture capitalists that do lend to them do so out of their own resources and seek to maximize their returns and exit quickly – a strategy that does not suit the entrepreneur. Barely one in five entrepreneurs is able to secure venture capital funding because such funds are risk averse and often reject new ideas because they have not been funded before.

In place of propping up large financial institutions, the government should have supported entrepreneurs who would have developed innovations, industry and generated employment. Prof Lee concedes that there could be corruption in such a scheme but offers a way out by suggesting committees of independent professionals who do not have a conflict of interest and could be rotated among projects.

State intervention in business may not appeal to many Americans, but Prof Lee argues that by offering massive bailout packages, the state is already intervening in business. Politicians have an opportunity to throw good money after bad or opt to choose new models of development.

Note: The preceding is a summary of an article found though our research, and is provided here with editorial comment for members only. Please see the full article at the following link for full original content. http://www.businessweek.com

The New Asia Innovation Team

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