Informal capital sources and household investment: evidence from Taiwan

Abstract

The purpose of this paper is to investigate the importance of informal financial channels in capital accumulation by household investors. The focus is on the link between borrowing from informal financial institutions and households' investment in capital stock. The empirical evidence is drawn from micro-data from Taiwan for the period 1977–1992. During this period, Taiwan emerged rapidly as an industrialized economy despite of its relatively underdeveloped formal financial sector. The data show that informal financial channels were heavily relied on by small business entrepreneurs in Taiwan. It is found that informal financial institutions as a source of funds are important for small investors' capital accumulation.