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Credit Constraints, Organizational Choice, and Returns to Capital: Evidence from a Rural Industrial Cluster in China

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  • Ruan, Jianqing
  • Zhang, Xiaobo

Abstract

Traditional economic theory posits that a well functioning capital market is a necessary condition for industrialization and economic growth. However, in reality it is observed that micro and small enterprises are ubiquitous because entrepreneurs can set up business in low-return activities with minimal barriers to entry. Using a cashmere sweater cluster in China as an example, this paper shows that organizational choice can overcome the prohibitive cost of investment. Facing credit constraints, firms are more likely to concentrate in divisible production technologies in the form of industrial clusters. With clusters, a vertically integrated production process can be decomposed into many small incremental stages, making them more accessible for small entrepreneurs widely available in rural China, even without a well functioning capital market. The observed rate of returns to capital is closely related to the organizational choice under credit constraints.

Suggested Citation

  • Ruan, Jianqing & Zhang, Xiaobo, 2009. "Credit Constraints, Organizational Choice, and Returns to Capital: Evidence from a Rural Industrial Cluster in China," 2009 Conference, August 16-22, 2009, Beijing, China 50334, International Association of Agricultural Economists.
    • Handle: RePEc:ags:iaae09:50334
    DOI: 10.22004/ag.econ.50334
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    References listed on IDEAS

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    Cited by:

    1. Natasha Agarwal & Chris Milner & Alejandro Riaño, 2011. "Credit Constraints and FDI Spillovers in China," Discussion Papers 11/21, University of Nottingham, GEP.
    2. Xu, Chenggang & Zhang, Xiaobo, 2009. "The evolution of Chinese entrepreneurial firms: Township-village enterprises revisited," IFPRI discussion papers 854, International Food Policy Research Institute (IFPRI).
    3. Merima Ali & Jack Peerlings & Xiaobo Zhang, 2014. "Clustering as an organizational response to capital market inefficiency: evidence from microenterprises in Ethiopia," Small Business Economics, Springer, vol. 43(3), pages 697-709, October.

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