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Interlinked Credit Relational Contracting and the Spread of Rural-Based Manufacturing : The Case of Garment and Metalcraft Industries in the Philippines

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  • Roehlano M. Briones

    (Ateneo de Manila University, Quezon City)

Abstract

Subcontracting arrangements based on relational contracting between urban traders and rural-based manufacturers provide an important means for spreading manufacturing in rural areas. Within these arrangements, the payment of advances is a form of credit interlinking that addresses the isolation of rural-based enterprises from the formal finance sector. This viewpoint motivates specification of a testable hypothesis: advance payments are greater the more remote a rural-based subcontractor is from the urban center. The paper shows that such a hypothesis can be derived from a simple principal-agent model of the subcontracting relation. Moreover, the hypothesis is empirically confirmed by multivariate analysis of data from a case study of garment and metalcraft industries in the Philippines. The finding supports the view that subcontracting arrangements may be an organizational form appropriate to rural industrialization.

Suggested Citation

  • Roehlano M. Briones, 2002. "Interlinked Credit Relational Contracting and the Spread of Rural-Based Manufacturing : The Case of Garment and Metalcraft Industries in the Philippines," Philippine Review of Economics, University of the Philippines School of Economics and Philippine Economic Society, vol. 39(1), pages 103-120, June.
    • Handle: RePEc:phs:prejrn:v:39:y:2002:i:1:p:103-120
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    File URL: http://pre.econ.upd.edu.ph/index.php/pre/article/view/57/562
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    Keywords

    Interlinked contracts; rural industrialization;

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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