The Formation of Wenzhou Footwear Clusters: How Were the Entry Barriers Overcome?

4. Overcoming the capital barriers

4.1 Entry barriers of start-up capital investments

The lack of access to adequate start-up capital has been recognized as an important deterrent
to small enterprise development and growth. Many authors (Otero and Rhyne, 1994; Pretes, 2002;
Schreiner and Woller, 2003; Hernandez-Trillo etc., 2005) stress that it is very difficult for most
small enterprises to obtain support from formal financial institutions. This is especially true when
the founders setting up small and medium sized enterprises often lack sufficient mortgages or
guarantee. In these cases, banks are generally cautious in issuing start-up loans. This has also
emerged in our investigation. Among the 140 enterprises we surveyed, only two had obtained
bank loans. One was founded in 1996 with an investment of 500,000 yuan, including a 40% bank
loan; the other was founded in 2000 with an investment of 500,000 yuan, including a 20% bank
loan. How did Wenzhou shoemakers overcome capital shortages when formal financial aid could
not be obtained in order to meet start-up fund requirements? Among the 140 enterprises we
surveyed, 20 failed to respond or give clear answers and 2 were new enterprises. If we deduct
these 22 enterprises from the total, 118 enterprises remain upon which we based our analysis.

These 118 enterprises made a combined initial investment of 19,701,100 yuan, with each
making the average investment of 160,700 Yuan. Table 6 shows that the enterprises differ
significantly in terms of start-up capital, ranging from 500 to 3,567,400 Yuan¹² as a result of
different start-up capital and production link choices. In terms of the minimum, maximum and
average values in different periods, the total start-up fund increases over time, showing that
whereas the industry threshold rises, the minimum investment requirements for different periods
remain relatively low. This shows that access capital requirements were still quite small and that
average households can enter at an appropriate scale matching their accumulated fund plus the
informal finances.

Table 6 Start-up funds required for 118 enterprises during different periods
( ’000 yuan)

Note: All the initial investment values are revised by the price index of fixed capital investment of Zhejiang
province which is obtained from the Zhejiang Statistics Yearbook and the China Statistics Yearbook.

Note: Among all the enterprises founded in 1996-2000, two enterprises have a start-up fund of 3,567,400 and
3,095,700 yuan respectively. If these two enterprises are excluded in our calculation, then the average start-up
funds of the two periods are only 139,000 and160,700 yuan respectively.

Source: Calculated from data collected by authors.

¹² The Kangnai Group had an initial investment capital of only 500 yuan when it was found in 1980, and now it
becomes one of the biggest and also most outstanding shoemakers. At present, it owns 14 advanced automatic
production lines and output reached 1.2 billion yuan in 2004.

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