Interlinked Credit Relational Contracting and the Spread of Rural-Based Manufacturing: The Case of Garment and Metalcraft Industries in the Philippines

Roehlano Briones ()

Philippine Review of Economics, 2002, vol. 39, issue 1, 103-120

Abstract: Subcontracting arrangements based on relational contracting between urban traders and rural-based manufacturers provide an important means for spreading manufacturing in rural areas. Within these arrangements, the payment of advances is a form of credit interlinking that addresses the isolation of rural-based enterprises from the formal finance sector. This viewpoint motivates specification of a testable hypothesis: advance payments are greater the more remote a rural-based subcontractor is from the urban center. The paper shows that such a hypothesis can be derived from a simple principal-agent model of the subcontracting relation. Moreover, the hypothesis is empirically confirmed by multivariate analysis of data from a case study of garment and metalcraft industries in the Philippines. The finding supports the view that subcontracting arrangements may be an organizational form appropriate to rural industrialization.

Keywords: Interlinked contracts; rural industrialization (search for similar items in EconPapers)
JEL-codes: F13 G20 O19 (search for similar items in EconPapers)
Date: 2002
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