Innovation: Learning from China's Banking System

Taking a page from China's policy banks, the U.S. could set up "innovation banks" that focus on supporting entrepreneurs—and job growth

By Ann Lee

Wouldn't it be great if you could walk into your local bank branch not to get a loan to help fund your new business idea but to get an equity investment? You wouldn't have to mortgage your house to get the money. Instead, you would only need a great idea and a business plan showing how you would make your idea work.

A new type of American bank should be created to fulfill such a need. The U.S. government may want to take a page from China's banking model. Chinese banks are divided into different categories. Some are private, while others have large stakes owned by the government. The policy banks are state-owned and have been carrying out specific government mandates since 1994. The China Development Bank, for instance, was set up to make loans for infrastructure projects, and the Agricultural Bank of China made loans directed at farmers. While it took a confluence of factors to spur the largest economic development in human history, Chinese policy banks did play a central role [in that growth] by funding such strategic government initiatives as construction of the Three Gorges Dam, the largest dam in the world. Such feats wouldn't have been possible had the banks simply been allowed to make loans to individuals and small companies based on short-term profit.

Likewise, the U.S. could set up banks that focus on specific U.S. policies such as job growth through innovation. Innovation bank branches could be opened across the country in offices vacated by bankrupt companies. Unemployed workers in every sector could finally get a shot at becoming entrepreneurs with an equity investment from the government. The government would in turn receive a share of the profits.

Banks Investing in Entrepreneurs

Does this sound too good to be true? Not really. Angel investors and venture capitalists have been making investments in entrepreneurs for decades. From Fairchild Semiconductor (FCS) to Facebook, these entrepreneurs with venture capital investments have generated millions of jobs for Americans by turning their ideas into some of the biggest and most influential companies in the world. Innovation and the entrepreneurial spirit have made America great and the envy of every nation.

Now that the world is in a financial crisis, we need more innovation and entrepreneurial spirit than ever before, inventing new ways to prolong life, save energy, clean the environment, and create the millions of other products and services that people want and need. However, just as the world needs more researchers, inventors, and entrepreneurs to carry out such important roles, the money available to them is small compared with the recent government bailouts of failed financial institutions such as Citibank (C). The initial public offering market, a way in which many young companies get badly needed financing to operate and grow, completely evaporated at the end of 2008. Money to fund research at major universities has been slashed as endowments such as Harvard's lose a third of their value. Yet roughly $3 billion in 2008 was invested in the green technology sector, which comprises alternative energy, recycling, power supplies, and conservation companies funded through venture capital. By comparison, the total cost of the U.S. government bailouts of the U.S. financial institutions have amounted to about $5 trillion.

Tim Geithner and others (such as Hank Paulson) have argued they are propping up insolvent banks so that they can lend to such entrepreneurs.