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Abstract
The traditional literature emphasizes the causal role of finance in promoting industrial growth. China’s
rapid industrialization over the past several decades, which has occurred in the absence of well-functioning
financial markets, seems to defy the conventional wisdom. By studying a cashmere sweater
cluster in China, this paper argues that rural industrial clustering, as a new business model, lowers the
entry barriers of initial capital investment through the division of labor. Within these clusters, enterprises
can often acquire trade credits from upstream or downstream firms and obtain informal financing from
friends and relatives, and use these funds to mitigate constraints of working capital. These findings help
explain China’s rapid industrialization in the absence of an efficient financial market.