Legal System, Financial Development, and Industry Clusters

摘要

Using Chinese data, we offer new evidence on industry clusters as a mechanism that may promote relational contracting and facilitate inter-firm financing when legal and financial systems are weak. In particular, we find that industry clusters lower firms’ dependence on courts and bank loans, and financing costs, and in turn improve firms’ profitability. While firms’ propensity of joining clusters increases with less efficient courts and less developed financial markets, industry clusters cannot completely mitigate the negative impact of deteriorated institutions. The impacts of industry clusters are significant even after controlling for the existence of other substitutive mechanisms such as business associations.