become reduced. In the meantime, having substitutes leads competitors to enhance transaction
efficiency. Therefore, the formation and development of specialized markets not only addresses
issues such as “product market” and “information” but also effectively reduces the transaction cost
incurred due to the underdeveloped credit system and legal environment at the beginning of
China’s opening and reform, improve transaction efficiency and boost the formation of Wenzhou’s
shoemakercluster.
6. Lessons from this case
China is an important counterexample to the findings in the law, finance and growth literature:
neither its legal nor financial system is well developed by existing standards, yet it has one of the
fastest growing economies (Allen, Qian, and Qian, 2005). As an area of fast growth in China’s
private economy, Wenzhou provides an example for both China and the rest of the world. Using a
field survey on Wenzhou’s footwear cluster, we find that due to adverse conditions, such as a large
population and relatively little land, and lack of resources, a great number of residents were forced
to either leave home and find work elsewhere or became engaged in the production of small
commodities. They thereby developed a strong market sense and accumulated a good financial
basis. After China’s opening and reform, Wenzhou’s entrepreneurs took advantage of market
opportunities based on the information they obtained outside of Wenzhou; they overcame a range
of barriers in technology, capital and system, and made remarkable development. From this case,
the following lessons emerge:
The study of the formation and evolution of the Wenzhou footwear cluster contribution to
economics in terms of theoretical models. Law, private property rights and effective markets are
often viewed as prerequisites for economic development. However, the formation of the cluster
shows that well specified and developed property rights, the rule of law, a judicial system that
enforces contracts, well financial system are important to economic development but are not
necessary preconditions. In some sense, these factors are the consequences of economic
development rather than its prerequisites. The role of the informal system can also not be
neglected. The innovations made by the entrepreneurs with respect to informal systems, such as
“circumventing the red traffic light” and other informal norms of behavior may make up for
deficiencies in the formal system and facilitate economic development. As a matter of fact, the
process of economic development itself is a process of continuous confrontation with new barriers
and identification of new problems. The innovations of the entrepreneurs can overcome these
barriers and problems overtime and lead to greater development of the economy.
The forming process of the footwear cluster shows that whereas an initial disadvantageous
environment restricts economic development it also creates opportunities. Wenzhou’s inconvenient
location and poor transportation hindered economic development in Wenzhou. However, these
adverse conditions (the lack of natural resources and inconvenient location) forged a unique
regional social culture in Wenzhou such as a mercantile culture, pioneering and adventurous,
hardship enduring spirit, valuing local relationship, etc. These factors played a significant role in
the formation of the footwear industry in Wenzhou. The establishment of the “Wenzhou Mode” is,
in a sense, the result of being cornered by disadvantageous factors. The large numberof farmers
and relatively insufficient arable land in rural areas (per capita arable land of less than 0.5mu,
equal to 333.34m2) resulted in an oversupply of labor in Wenzhou. Meanwhile, the development
of rural collective enterprises was low due to the lack of vigorous support from modern industry
which was also very weak.
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