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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.

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Bibliographic Info

Paper provided by International Association of Agricultural Economists in its series 2009 Conference, August 16-22, 2009, Beijing, China with number 50334.

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Date of creation: May 2009
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Handle: RePEc:ags:iaae09:50334

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Keywords: Cluster; putting-out; subcontract; industrialization; entrepreneurship; China; Industrial Organization; International Development;

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