Finance and Cluster-Based Industrial Development in China

A study was conducted to examine how clustering of small-medium enterprises (SME) contributed to the quick industrialization of China despite the existence of a weak formal financial system. Informal finance may have played a substitute role in the development of SMEsby making production technologies more divisible and lowering the capital entry barriers of SMEs. Evolution of the Puyuan cashmere sweater industrial cluster in China is one prime example of how clustering leads to industrialization. The small enterprises depend more on relatives and friends as their major means of informal financial backup. Yarn dealers, family weaving workshops, printing workshops, ironing workshops, and sweater shops relied heavily on relatives and friends to improve their working capital constraints. This emphasizes the prime role of social networks in offering informal financing and reducing the working capital constraints, especially for SMEs.