Credit Constraints and Rural Households' Entrepreneurial Performance in China

Based on data from the China Household Finance Survey, this article investigates the relationship between formal sector credit constraints and rural households' entrepreneurial performance. Using an endogenous switching regression model, we find that credit-constrained entrepreneurial households' profits are significantly and positively affected by credit access, which is measured by total formal and informal production loans owed. With an extra RMB 10,000 in credit, constrained entrepreneurial households' average profits would be raised from RMB 10,604 to RMB 10,732 (i.e. by 1.2%). Entrepreneurial profits of households that are not credit-constrained do not depend on loan sizes. Based on our findings, we stress the importance of the development of new-type rural financial institutions, proper compensations for expropriated land, and stimulating savings and investments in different types of assets for improving the performance of rural entrepreneurs.

Automated summary

Based on data from the China Household Finance Survey, this article examines the relationship between credit constraints and entrepreneurial performance among rural households. The findings show that access to credit significantly and positively affects the profits of credit-constrained entrepreneurial households. However, the profits of households that are not credit-constrained do not depend on loan sizes. The study highlights the importance of developing new rural financial institutions, providing proper compensations for expropriated land, and promoting savings and investments in different types of assets for improving the performance of rural entrepreneurs.