Research On The Impact Of Credit Constraints On Rural Households' Entrepreneurship

The entrepreneurial sector is the key source that fostering entrepreneurship and promoting economic development. The endogenous growth theory also points out that entrepreneurial energy is the foundation of innovation and economic development.Since China initiated its economic reforms in the late 1970s,the expansion of off-farm employment has increased rural welfare a lot by raising income and productivity. During this rural economy transition, off-farm employment indeed played an important role, but entrepreneurship cannot be ignored either. In general, it requires a minimum capital to start a new business. Therefore, financial constraints become the main obstacle that limit individuals with entrepreneurial talent to enter into entrepreneurship. Successful entrepreneurs can realize the optimal start-up investment through accumulating savings to alleviate financial constraints. However,as business grows, financial constraints may cause entrepreneurs to be constrained in operating their business (e.g. invest more in their business), thus restrict their profits.Since 2004, the "Central First Document" has put forward the requirements of rural financial development for consecutive eleven years. The requirements are as follows,promote reform and innovation in rural banking system; improve the quality and level of rural financial service; strengthen financial institutions' responsibility of serving agriculture, rural areas and farmers. In recent years, the "Central First Document" also emphasize to develop diversified rural financial institutions, accelerate the cultivation of new rural financial institutions (i.e. village banks, finance corporation, rural mutual cooperatives), and increase credit for big-specialized-households of crop and animal productions and small and micro business. Then whether credit constraints will restrict rural households' entrepreneurial choice? If credit constraints continue existing,how will it impact rural households' entrepreneurship and entrepreneurial performance? During the new round of rural financial reform, how can rural financial institutions serve rural households with entrepreneurship better?In order to clarify the questions mentioned above, this paper first analyzed the status of rural households' entrepreneurship on the aspect of characteristics, credit demand status and entrepreneurial performance. Second, based on 4405 rural households survey data from China Household Finance Survey (CHFS), we estimated the impact of credit constraints on rural households' entrepreneurial choice.Considering rural households' heterogeneity, we also estimate the heterogeneous impact across rural households' head of different age,education levels and wealth levels' Third, based on 649 rural entrepreneurial households survey data from China Household Finance Survey (CHFS), we estimated the impact of credit constraints on rural households, entrepreneurship. For a robustness check,we also estimated the impact of different types of credit constraints on rural households' entrepreneurship.Fourth, we estimated the impact of credit constraints on rural households'entrepreneurial performance. Finally, we analyzed the impact of financial innovation on rural households' entrepreneurship through case study. The main research contents and conclusions are as follows:Part ?: rural households' entrepreneurship status analysisThis part analyzed rural households' entrepreneurship status by using China Household Finance Survey (CHFS) data. The statistical results show that:On the aspect of the characteristics of rural households' entrepreneurship, benefit from geographical advantage and the support of economic development, the percentage of rural households' entrepreneurship in the east region is the highest. The percentages of entrepreneurs and self-employment in the east region are also higher than those in the middle and west region. In comparison,the percentage of rural households' entrepreneurship in the west region is the lowest. The top five industries of rural households' entrepreneurial choice are wholesale and retail sales,manufacturing, hotels and catering service, residential and other service, and other industries.On the aspect of rural households' entrepreneurial credit demand status, first,entrepreneurial households' participation rates in formal and informal credit market are both higher than non-entrepreneurial households respectively. Moreover, rural households' participation in credit market in different regions also show differences.Rural entrepreneurial households' (both entrepreneurs and self-employment)participation rate in formal and informal credit market in the east region are both higher than those in the west region. Second, entrepreneurial households' access to informal credit market is easier than to formal credit market. The loan receiving rate and average amount of loans in formal and informal credit market are higher for entrepreneurs than for self-employment. Third, the credit constrained rates are higher for non-entrepreneurs than entrepreneurs. The self-employed households are more credit constrained than entrepreneurial households. In addition, rural households'credit constrained status shows difference across different regions. Entrepreneurial households in the middle region are more constrained than those in the east and west regions. Entrepreneurs in the east region are more constrained than those in the middle and west regions. Self-employed households in the middle region are more constrained than those in the east and west regions. When we focus on productive credit constraints, entrepreneurs are the same constrained as self-employed households. Moreover, entrepreneurs tend to be risk constrained and transaction cost constrained, while self-employed households tend to be risk constrained and quantity constrained.On the aspect of rural households' entrepreneurial performance, the gross income,cost and net profit are higher for unconstrained entrepreneurial households than constrained ones respectively. Moreover, the gross income, cost and net profit are all higher for unconstrained entrepreneurs than constrained ones. The gross income and cost are both higher for unconstrained self-employed households than constrained ones, while the net profits are almost the same for constrained and unconstrained self-employed households.Part II: the impact of credit constraints on rural households' entrepreneurial choicesThis part analyzed the impact of credit constraints on rural households'entrepreneurial choices both theoretically and empirically. The results show that:Rural households' entrepreneurial choices are significantly constrained by credit constraints. Moreover, Rural households with more family members, higher labor ratios and more household wealth are more likely to start a new business. While households with older household head, higher risk aversion and larger land sizes are less likely to choose entrepreneurship. In addition, rural households in the east and west regions are less likely to start a new business than those in the middle region.Considering the heterogeneous impact of credit constraints on rural households'entrepreneurial choices, it shows that credit constraints have negative impact on entrepreneurial choices for rural households in the lowest wealth quartile, the third and the highest wealth quartiles, and the negative impact is especially high for households in the lowest wealth quartile. In addition, the negative impact of credit constraints on entrepreneurial choices is also higher for households with older household head and lower education levels.Part III: the impact of credit constraints on rural households' entrepreneurshipThis part analyzed the impact of credit constraints on rural households'entrepreneurship both theoretically and empirically. The results show that:Credit constraints have significant and negative impact on rural households'entrepreneurship. Moreover, the age of the household head,risk preference,household size and household assets also have significant impact on households'entrepreneurship.Considering different types of credit constraints may have different impact on rural households' entrepreneurship, we classified credit constraints into quantity constraints, transaction cost constraints and risk constraints. We found that rural households' entrepreneurship are significantly constrained by quantity constraints,transaction cost constraints and risk constraints. Moreover, quantity constraints have larger impact on rural households' entrepreneurship, while transaction cost constraints have lower impact on rural households' entrepreneurship.Part ?: the impact of credit constraints on rural households' entrepreneurial performanceThis part analyzed the impact of credit constraints on rural households'entrepreneurial performance both theoretically and empirically. The results show that:Increasing loans for households can significantly raise constrained rural entrepreneurial households' profits, but not for unconstrained ones. For constrained households, an extra loan of RMB1000 can significantly raise rural entrepreneurial households' profits by 0.25 percentage points. While for unconstrained ones, an extra loan of RMB1000 can raise rural entrepreneurial households' profits by 0.05 percentage points (but not significantly). Therefore, the marginal returns are higher for constrained households than unconstrained ones.Credit constraints have significantly negative impact only on constrained households' profits, but not for the whole sample households. Due to credit constraints,constrained rural household would suffer a profit loss of RMB646 per household per year, which accounts for 18.95 percentage points of households' average profits.Part V: Case study of the impact of financial innovation on rural households'entrepreneurshipThis part first analyzed the impact of financial innovation on rural households'entrepreneurship theoretically. Then we study foreign and domestic cases of the support of financial innovation on rural households' entrepreneurship. The results show that:The innovation of Grameen Bank is the adoption of group loans which alleviate inverse selection and moral hazard problems in the credit market. In this way, the Grameen Bank provides credit for the entrepreneurs who have good entrepreneurial project but feel hard to get loans from banks. Thus, it alleviates quantity constraints and risk constraints effectively. Moreover, developed from the Grameen Bank, the micro credit institutions also provide non-credit service for entrepreneurs, like education, technological guidance, leadership training and so on. These non-credit service also helps a lot in supporting entrepreneurship. Considering the successful practices of the development of micro credit in developing countries, we can see that these countries modified group loans technology according to local economic development and social characteristics when applying the Grameen model. Therefore,we should also modify the group loan technology according to local economic and social development across different regions in China. For example, rural financial institutions can innovate micro credit technology on the aspect of mortgage and guarantee technology, considering that entrepreneurs are wealthier than common rural households, thus they can provide legal mortgage and guarantee when applying for loans. In this way, rural financial institutions can alleviate quantity constraints, risk constraints and transaction cost constraints that rural households are faced with.American community banks have common characteristics with rural financial institutions in China. For example, first, the banks are of small scales, and only provide financial service for households in the community; second, the core savings come from households in the community, and the banks would provide loans for households in the community by using these savings; third, based on the advantage of geographical relationship and popularity, these banks adopt relationship lending strategy. As rural financial institutions are prototype of community banks, developing rural community banks, providing rural community financial service and using relationship-based lending strategy are essential for alleviating quantity constraints,risk constraints and transaction cost constraints.German IPC micro credit technology was first adopted in the program of commercially sustainable micro and small business finance in China in 2005. The IPC micro credit technology supported large-scale credit lending to small and micro enterprises effectively. Since then, many rural commercial banks and cooperative banks introduce this lending technology. Different from micro credit which focus on the poor,IPC lending technology adopts mass processing method in the loan processing, thus plays an important role in serving small and micro enterprises and supporting entrepreneurship. The promotion and application of IPC micro credit technology among rural financial institutions would alleviate transaction cost constraints or risk constraints effectively.Jiangsu Minfeng Rural Commercial Bank introduced German IPC micro credit technology into small and micro enterprises lending. It also made some modifications according to local small and micro enterprises' credit demand. It solves small and micro enterprises' financial problems through initiative loan marketing, standardized loan management, serialization of financial products, diversified guarantee methods,flexible price of interest rate. Jiangsu Shuyang Dongwu County Bank support the development of small and micro enterprises through innovation of financial products,extension of channels of financing and guarantee, flexible price of interest rate.During the new round of rural financial reform, to serve small and micro enterprises better and build nice entrepreneurial atmosphere, rural financial institutions should take advantage of geographical relationship and popularity, and indentify good entrepreneurial households by using relationship lending strategy. On the other hand,rural financial institutions should also innovate financial products and lending technology according to entrepreneurs' credit demand, thus solving the credit constraints faced with rural entrepreneurial households.Based on these conclusions, this paper suggests that relevant departments should innovate financial products and lending technology according to the market; cultivate rural community financial institutions and promote financial resources communalization; accelerate rural credit system construction, cultivate financial ecological mechanisms; build risk compensation mechanism.