Finance and Networks in China

Providing much-needed experimental evidence on the impacts of alleviating growth frictions to SMEs, this project evaluates the effects of programs designed to improve access to loans and to expand business networks. 

Growth frictions affecting small and medium enterprises (SMEs) are an important issue in developing countries, yet there is not much experimental evidence available on the impacts of alleviating some of these frictions. This project considers two particular frictions in the context of rural China: financial constraints and frictions in firm networks – the idea that due to inefficient matching, managers do not have access to the right business connections. It will use randomized controlled trials to evaluate two programs designed to target both of these frictions and will attempt to answer: (1) what is the direct effect of improved access to loans? and (2) what is the direct effect of an expansion in business networks?

The first program being evaluated is the introduction of a new loan product to small businesses in rural china – the researchers will introduce random variation in loan availability to measure the effect of financial deepening on small firms and the local economy. The second is the creation of business groups for selected managers and monthly group meetings over the course of two years, effectively an expansion in managerial networks. Additionally, the researchers will examine the interaction between finance and networks, by looking at knowledge spillover and business stealing effects of improved access to finance through firm networks.

Both designs evaluate interventions on which experimental evidence is scarce, filling a gap in the current literature. By focusing on these two interventions, the researchers can also explore the interactions between frictions, as well as generate actionable policy insight as these interventions are commonly used in low-income countries.