Abstract
State-owned development banks are either seen as solving market imperfections or criticized for crowding out private lenders and encouraging politically motivated lending. We study six development banks—Chile’s Corfo, Brazil’s BNDES, Canada’s BDC, Germany’s KfW, Korea’s KDB, and China’s CDB, analyze the tools they use to address market failures, and create a typology according to their strategic focus. We identify two general strategic orientations of development banks—national-champion oriented (with a focus on large firms and with direct mechanisms of lending and equity investment) and entrepreneurship-oriented (with a focus on smaller firms and with more indirect tools to reduce market failure, such as credit guarantees). We conclude with several suggestions for research and public policy. For instance, we argue that, as local capital markets and institutions evolve, development banks should progressively become more entrepreneurship-oriented, focused on smaller entrepreneurial firms, and use of more indirect mechanisms to promote equity investment and alleviate credit constraints (such as credit guarantees). From a research standpoint, scholars should examine conditions and mechanisms through which development banks help develop novel and valuable private capabilities and how their internal organizational patterns influence the impact of their policies.
