Harness the power of community networks to stimulate private enterprise
EDI research provides evidence of how community networks can help fill institutional gaps that constrain industrial entrepreneurship.
A new EDI working paper and policy brief are now available to provide insight and evidence arising from a case study on the role of community networks and private enterprise in contemporary China.
The research derives from a need to understand both constraints and new pathways to the growth of private enterprise. While it is widely agreed that slow entry into industrial entrepreneurship inhibits growth in underdeveloped countries in Asia and Africa, not much is known about the factors determining patterns of entry. Amongst current debates around the role of the state in stimulating industrialization, discussion of the role of community networks is often ignored. These networks can substitute for missing institutional ingredients underlying successful market or state based industrialization, involving access to credit, know-how and contract enforcement mechanisms.
China has witnessed the same degree of industrialisation in three decades as Europe did in two centuries. Strikingly, this has occurred without the preconditions that are generally believed to be necessary for economic development: effective legal systems or well-functioning financial institutions. In order to better understand the role played by birth-county-based community networks in the growth of private enterprise in China, EDI researchers developed a network-based model that generates predictions for the dynamics of firm entry, concentration, and firm size across birth counties with varying social connectedness (measured by population density). They were then able to verify these predictions over the 1990-2009 period with administrative data covering the universe of registered firms.
In this study, Ruochen Dai, Dilip Mookherjee, Kaivan Munshi and Xiaobo Zhang found that competing non-network-based explanations can explain some, but not all, of the results. They conclude that community networks have indeed played a significant role in the development of private enterprise. The analysis helps understand both strengths and weaknesses of community-based industrialization experiences in one of the fastest growing developing countries in the world today. Structurally estimated parameters of the model enable the authors to estimate that community networks contributed about 40% to capital invested during the industrialization process, and to explore the implications of industrial policies which subsidize entry via interest rate subsidies.
This is relevant to other countries by illustrating the potential for community institutions to contribute to growth, a potential which can be realized if these communities are sufficiently large, homogenous and cohesive. This is likely to have valuable implications for predicting future industrialization experiences of other underdeveloped countries in Asia and sub-Saharan Africa, as well as the role of industrial policy in affecting these experiences.
The newly released publications are based on an EDI project that takes China and India as case studies to examine entry into private enterprise. Findings from the research in India will be published in due course.
Find out more:
- Case Study: https://edi.opml.co.uk/research/community-networks-industrial-entrepreneurship-india-china-casestudy/
- Working Paper: https://edi.opml.co.uk/resource/community-networks-growth-private-enterprise-china/
- Policy Brief: https://edi.opml.co.uk/resource/policy-brief-community-networks-private-enterprise/