Capital is the building block of any business and a key factor in launching and scaling businesses that can catalyze private sector development and economic growth in emerging economies. Small and Medium Enterprises[1] (SMEs), in particular, play a significant role in such economies. The World Bank estimates that formal SMEs in emerging economies are responsible for about 60% of total employment and 40% of national income.[2] Taking into account the informal SMEs, the impact is much larger. Yet, the cost of capital, defined as the rate of return expected by those who provide the capital, can be prohibitively high for SMEs. One of the main reasons for the high rate of return required by investors is the cost associated with moral hazard – the party receiving the investment doesn’t have the same incentives as the investor to ensure its profitable use and the behavior and performance of the recipient is costly to monitor for the lender. The International Financial Corporation (IFC) estimates that the credit financing gap for formal SMEs in developing economies is close to a trillion dollars.[3]

The Financial Sector Development (FSD) Initiative identifies and implements ways for financial institutions to profitably lower the cost of capital available to SMEs in emerging economies. FSD’s current research focuses on using remittances to lower the cost of capital for SMEs by mitigating the costs associated with the moral hazard problem

Remittances – the transfer of money by a foreign worker (remitter) to people, primarily friends or family, in his or her home country — amounted to $429 billion in 2016 according to the World Bank.[4] The use of remittance money by the recipient can be for personal consumption and/or for investments in their businesses. In this case the lender (the remitter) has knowledge about the character of the person to whom the remittance money is sent to and has the social mechanisms to influence the recipient’s behavior which is outside the reach of formal lending institutions. Thus, remittances represent not only a transfer of capital but also a transfer of information about the behavior of the recipient. By addressing the moral hazard problem, remittances can lower the cost of capital to SMEs and create a new, financially viable market for lenders.


FSD engages in independent research to understand the investment interests and aspirations of diaspora for their home countries. We also work with faculty and students at the University of Michigan’s Stephen M. Ross School of Business on projects designed to develop innovative mechanisms that can lower the cost of capital. We seek to partner with institutions that are working to create innovative financial mechanisms using remittances and other private capital flows to benefit the SME sector in emerging economies.

We have developed a mechanism, Leveraging Remittances as Information (LRI), that uses remittances to increase access to finance for SMEs in emerging economies. We are looking for financial institutions in emerging economies and diaspora organizations in the United States to partner with us to develop a proof of concept. Click on the graphic below for more information about LRI.

For more information about our FSD Initiative and/or to seek partnership opportunities, please send an email message.




Programs & Projects

Knowledge Sharing

  • The Role of Business: Positive Lens vs. Profit Maximizing

    Knowledge Resource: Education/General Management

    November 2017

    Within the Ross School of Business, a debate took place a few years back that continues today regarding the role of business. It was sparked by discussion surrounding a “Positive” Pillar as a part of the school strategy. More of…
  • Multinational Firms, Labor Market Discrimination, and the Capture of Competitive Advantage by Exploiting the Social Divide

    Knowledge Resource: Economic Development/Growth, Finance/Microfinance


    The organizational theory of the multinational firm holds that foreignness is a liability, and specifically that lack of embeddedness in host-country social networks is a source of competitive disadvantage; meanwhile the literature on labor market discrimination suggests that exploiting the…
  • Cross-Border Reverse Mergers: Causes and Consequences

    Knowledge Resource: Finance/Microfinance


    We study non-U.S. companies that have used reverse mergers as a means to adopt U.S. corporate law (and sometimes U.S. securities law as well). Early adopters of cross-border reverse mergers and those firms that hired a Big Four auditor exhibited…
  • A Reexamination of Tunneling and Business Groups: New Data and New Methods

    Knowledge Resource: Finance/Microfinance


    One of the most rigorous methodologies in the corporate governance literature uses firms’ reactions to industry shocks to characterize the quality of governance. This methodology can produce the wrong answer unless one considers the ways firms compete. Because macro-level shocks…
  • Egalitarianism and international investment

    Knowledge Resource: Economic Development/Growth, Finance/Microfinance


    This study identifies how country differences on a key cultural dimension—egalitarianism—influence international investment flows. A society’s cultural orientation toward egalitarianism is manifested by intolerance for abuses of market and political power and a desire for protecting less powerful actors. We…
  • Labor Market Institutions and Global Strategic Adaptation: Evidence from Lincoln Electric

    Knowledge Resource: Economic Development/Growth, Finance/Microfinance


    Although one of the central questions in the global strategy field is how multinational firms successfully navigate multiple and often conflicting institutional environments, we know relatively little about the effect of conflicting labor market institutions on multinational firms’ strategic choice…
  • Can foreign firms bond themselves effectively by renting U.S. securities laws?

    Knowledge Resource: Finance/Microfinance


    The study tests the functional convergence hypothesis, which states that foreign firms can leapfrog their countries’ weak legal institutions by listing equities in New York and agreeing to follow U.S. securities law. Evidence shows that the SEC and minority shareholders…



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