Finance and Cluster-Based Industrial Development in China

China's rapid industrialization over the past several decades, which has occurred in the absence of well-functioning financial markets, seems to defy conventional wisdom on the causal role of finance on industrialization. By conducting an in-depth case study on a fast-growing cashmere sweater cluster in China, we show that through clustering an integrated production process can be divided into many incremental steps. As a result, there is a wide range of investment options in the cluster, and in many types of production, capital barriers to entry are modest. Within clusters, enterprises can often acquire trade credits from upstream or downstream firms and obtain informal financing from friends and relatives, which are used to mitigate working capital constraints. Local governments can play an active role in providing necessary public goods and promoting cluster growth. (c) 2009 by The University of Chicago. All rights reserved..