THE U.S. GOVERNMENT has a crush — on entrepreneurs.

In June, President Barack Obama gave a speech in Cairo, Egypt, calling for a 2010 Summit on Entrepreneurship to deepen ties between the United States and Muslim communities around the world. Secretary of State Hillary Clinton followed up, in early November, with a spate of new program announcements focused on encouraging entrepreneurship and job creation in Muslim communities. The United States Agency for International Development , which provides need-based aid to the developing world,  and the State Department are helping coordinate efforts between entrepreneurship-focused nonprofits working in developing nations. Even the Department of Defense recently reached out to Endeavor, a business development group in New York, for insight into how Iraq could better support its entrepreneurs.

The idea here seems to be that entrepreneurial activity can promote economic growth, and, during a time of a global downturn, keep regions stable.  But there are plenty of small-business advocates who say the government has no place inserting itself into any entrepreneurial activities -- be they at home or abroad. “I’m not belittling the overall idea,” says Raymond J. Keating, the chief economist at the Small Business & Entrepreneurship Council, a lobbying group in Oakton, Va. “But I’m not quite sure this is a role the Fed needs to be playing; there are groups doing this already,” he says.

Grover Norquist, the president of the Washington, D.C.-based antitax advocacy group, Americans for Tax Reform, agrees. “There are plenty of private sector entities that are working on these things,” he says. Moreover, “it is a massive misuse of funds,” says Norquist. “Where in the U.S. constitution does it say ‘help out entrepreneurs in Uzbekistan’?”

There’s also some who question the soundness of investing in businesses in the developing world. Two recent research papers by leading development economists associated with MIT’s Jameel Poverty Action Lab suggest that in developing countries microlending (the practice of making very small loans to businesses) has proved underwhelming for businesses on average. “In microfinance, there is a large focus on repayment rates, which can offer a blurred success rate for entrepreneurs in the developing world,” says Matt Mitro, the president of Houston’s Indego Africa, a nonprofit training and skills-building organization that operates in Rwanda. “They will repay even if they haven’t had success."

Supporters of the new initiatives say that entrepreneurship can foster both economic and political stability in regions.  “Capitalism and business development [can] lead to job growth, which leads to increased prosperity, as well as peacefulness,” says Dennis J. Ceru, a professor of entrepreneurship at Babson College’s Arthur M. Blank Center for Entrepreneurship. As the global downturn threatens business survival, many worry that the reverse is also true — that economic volatility can lead to social unrest. Under that theory, encouraging entrepreneurship in developing and war-torn countries is critical now.

In the first half of 2009, business exits surged in each of the eight countries that released data, according to a recent reportby the Ewing Marion Kauffman Foundation, a Kansas City, Mo., entrepreneurial-research organization. While firm exits are a normal occurrence in any economic period, the declines from 2008 into 2009 were sharp, says Dane Stangler, a senior analyst at the Kauffman Foundation. In addition, new firm formations also plunged, according to the study. Such a drop in entrants and exits could have significant implications for job creation — and, eventually, peace and stability in weaker nations, he says.

In spite of this worry, there have been some notable successes. Take the sub-Saharan country of Rwanda, for example. In 1994, the nation was gripped by warring factions and mass killings. However, in recent years, President Paul Kagame has fostered a strong business environment. In September, Rwanda became the world’s top reformer based on the number and impact of business-sector improvements ushered in between June 2008 and May 2009, according to the World Bank’s 2010 annual Doing Business study. Among other things, the study determined that a Rwandan entrepreneur can, with just two procedures, start a business in three days. Transferring property also takes less time thanks to a reorganized registry and statutory time limits.

Even Iraq has witnessed positive results. In November, the embattled country wound up its first Baghdad International Fair since the U.S.-led invasion in 2003. Of the 396 companies that exhibited their wares at the event, few firms were from the U.S., according to Hashem Mohammed Haten, the director general of Iraq’s state fair company.

The trade fair’s slogan? “Construction and investment in new Iraq represent Iraqis' peaceful willingness and their resumption of civilized progress and construction.”
 
—Write to Diana Ransom at dransom@smartmoney.com

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