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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

  • Roehlano M. Briones


    (Ateneo de Manila University, Quezon City)

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.

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Article provided by University of the Philippines School of Economics and Philippine Economic Society in its journal Philippine Review of Economics.

Volume (Year): 39 (2002)
Issue (Month): 1 (June)
Pages: 103-120

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Handle: RePEc:phs:prejrn:v:39:y:2002:i:1:p:103-120
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