Industry Clustering and Financial Constraints: A Reinterpretation Based on Fixed Asset Liquidation

Industry clustering has attracted much attention in explaining the fast economic growth of China, where a well-developed financial system is lacking. Various mechanisms have been put forward to illustrate that the real financial constraint is less prohibitive for firms in clusters. The crucial concept in this mechanism is the market liquidation value of a firm?s fixed assets. Using a theoretical model with asymmetrical information between firms and banks, we demonstrate that a firm?s external borrowing is limited by the discounted market value of fixed assets pledged to banks.