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

only managed to legalize their private enterprises, but also to effectively enlarge fund resources.
Local government was also not negligible in this process as their acquiescence and even support
towards these private innovations (Zhang Renshou, Li Hong, 1990) enabled Wenzhou shoemakers
to break through the then system barriers and circumvent the crucial ownership risk.

5.2 Reduce Contract Performance Risk

The efficient functioning of markets requires that some organization enforce contracts and
property rights. To be credible, the organization that enforces contracts and property rights must
have the power to force people to adhere to its decisions.( Haber, North & Weingast, 2003
However, given that the legal system is incomplete and a credit system has yet to be set up, the
cost of enforcing contracts by legal means, such as by courts, is very high and often impractical
because the value of unit transactions is small relative to the litigation cost (Hayami, Kikuchi and
Marciano, 1998). Therefore, in this situation, it is very impractical to rely only on the system to
improve market efficiency, reduce performance risk and transaction cost. In our survey, we
examine the issue of how Wenzhou shoemakers generally solve contractual conflicts among
enterprises. Table 10 presents the results of this analysis.

Source: Calculated according to the data collected by author’s field survey.

Among the 140 investigated enterprises, 94 explicitly express that they usually solve
contractual conflicts through out-of-court negotiation, and only 4 would like to “go to court”.
Due tothe incomplete legal system, going to court costs not only money but also energy in China.
Furthermore, even though a party wins a lawsuit, it may not help much. Consequently,
negotiation out of court is used as a substitute for formal contract performance. Under these
circumstances, how do Wenzhoushoemakers deal with performance risk? We find that resorting to
market force, i.e. the creative establishment of various specialized markets, e.g. Footwear
Accessories & Ornamental Materials Market, Original Leather Market, Leather & Footwear
Machine Market, and Leather Chemical Market etc., to facilitate concentrated transaction, may be
an important aspect. Sonobe et al. (2002) argue that the local marketplace, where enterprise
managers can easily purchase materials and sell products to local traders, plays a critical role in
stimulating the entry of new enterprises in the early stage of cluster development. Specialized
markets not only facilitate transaction, but also help to maintain pressure on transaction partners,
and consequently reduce risk of transaction failure. (Yang Xiaokai, Huang Youguang, 1999) The
more potential transaction partners on the market, the more replaceable the transactions become.
In this case, even though the original partner fails to perform the contract, the loss incurred would

committees were said to “wear a red hat”. (Tsai, 2002)

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