ADBI's Seminar Series brings eminent persons to ADBI to encourage debate among policymakers, researchers, academics, think tanks and other audiences interested in economic development challenges in Asia, the Pacific and Europe.
The rapid industrialization of the People's Republic of China (PRC), despite the lack of a well-developed financial system, seems to defy the conventional thinking on the role of finance in development. This paper examines this puzzle from the clustering point of view. Clustering reduces the PRC's reliance on external finance because the fine division of labor enables it to work on only one step of the production process at a lower level of starting capital and the easy access to trade credit from customers or suppliers eases their working capital constraints. Moreover, the nature of repeated transactions in a narrowly defined region creates pressure for entrepreneurs to restrain opportunism behavior, making it possible for small business to thrive amid imperfect external institutions. With less reliance on external financing and legal environment, more small firms emerge within clusters, leading to higher levels of export and total factor productivity thanks to the resultant more fierce competition.
Policymakers, academics and the general public.