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

enterprises tend to use delayed payment which is a common practice among upstream and
downstream enterprises based upon trust and commitment. These enterprises have formed a
relatively stable friendship relation after long term business cooperation. As they are engaged in
the same products, well aware of the credit of each individual and pf enterprise development, and
have a multilateral default penalty mechanism which has been formed within a community,
enterprise owners can use credit to pay various expenses, hence financial support and circulation
gradually comes into existence. Table 9 examines whether the 140 enterprises can purchase on
credit goods provided by upstream enterprises. In fact, most investigated enterprises may do so
within a credit term of no longer than 3 months. This shows that delayed payment has become an
important channel for Wenzhou shoemakers to overcome their working capital shortage. On the
other hand, banks are more willing to lend to those which can mortgage the fixed assets in which
they invested during the start-up period. Therefore, some enterprises prefer bank loans when they
need working capital.

Source: Calculated from authors’ field survey.

5. System Barrier Breakthrough

The formation of the Wenzhou shoemaker cluster was also a process of exploration and
deepening of China’s opening and reform policies. At the beginning of this period, the founders of
the Wenzhou shoemaking enterprises faced two system barriers: ownership risk caused by
under-protection of private ownership; performance risk caused bya lagging legal system.

5.1 Avoiding ownership risk

At the beginning of reform and opening, China had no market economy system in place. As a
result, the property rights system was still constrained by politics especially since the then top
government leaders still disagreed on the direction of reform. Consequently, private economic
activities in this period were often branded as “illegal market activities” and suppressed by the
police. Questions as how to circumvent ownership risk and obtain individual economic liberty
were the main problems for the new shoemakers at this time. In order to avoid direct conflicts with
the then current system and ideology, seek for legal political protection, and reduce the high
transaction cost and efficiency loss caused by the branding, many private enterprises resorted to
some makeshift practices such as “Attaching them to a legal enterprise or organization” or wear a
“red hat” ¹⁴-collective owned enterprise- to avoid ownership risk. Through these practices, they not

¹⁴ Those that become affiliated with public enterprises were called “hang-on household enterprises” (or called
“guahu qiye”), since they attached themselves to state-owned enterprises by paying to use their name, stationery,
receipts, and account numbers. Those that chose to register as collectives with neighborhood or village

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