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Clustering as an organizational response to capital market inefficiency: evidence from microenterprises in Ethiopia

Clustering as an organizational response to capital market inefficiency: evidence from... Absence of a well-developed capital market has been listed as a key obstacle to industrialization in developing countries in the development literature. In this paper, we show that industrial clusters, through specialization and division of labor, can ease the financial constraints of microenterprises even in the absence of a well-functioning capital market. By using data from more than 17,000 microenterprises in four sectors and four regions of Ethiopia, we find that clustering lowers capital entry barrier by reducing the initial investment required to start a business. This effect is found to be significantly larger for microenterprises investing in districts with high capital market inefficiency, indicating the importance of clustering as an organizational response to a credit constrained environment. The findings highlight the importance of cluster-based industrial activities as an alternative method of propagating industrialization when local conditions do not allow easy access to credit. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Small Business Economics Springer Journals

Clustering as an organizational response to capital market inefficiency: evidence from microenterprises in Ethiopia

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References (68)

Publisher
Springer Journals
Copyright
Copyright © 2014 by Springer Science+Business Media New York
Subject
Economics / Management Science; Management/Business for Professionals; Microeconomics; Entrepreneurship; Industrial Organization
ISSN
0921-898X
eISSN
1573-0913
DOI
10.1007/s11187-014-9555-7
Publisher site
See Article on Publisher Site

Abstract

Absence of a well-developed capital market has been listed as a key obstacle to industrialization in developing countries in the development literature. In this paper, we show that industrial clusters, through specialization and division of labor, can ease the financial constraints of microenterprises even in the absence of a well-functioning capital market. By using data from more than 17,000 microenterprises in four sectors and four regions of Ethiopia, we find that clustering lowers capital entry barrier by reducing the initial investment required to start a business. This effect is found to be significantly larger for microenterprises investing in districts with high capital market inefficiency, indicating the importance of clustering as an organizational response to a credit constrained environment. The findings highlight the importance of cluster-based industrial activities as an alternative method of propagating industrialization when local conditions do not allow easy access to credit.

Journal

Small Business Economics – Springer Journals

Published: Feb 20, 2014

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