The Influence of Rural Financial Diversity on Farmer Entrepreneurship

Abstract

The 19th CPC National Congress clearly proposed that to support and encourage employment and business startups in rural areas, and open up more channels to increase rural income” is taken as the important content of pursuing rural vitalization strategy”. Since a new round of rural finance reform in 2006, the institutions of rural financial services have been gradually increasing, and the level of financial diversity has been constantly improving. Is the improvement of rural financial environment helpful in easing rural residents’ financing constraints and increasing rural residents’ probability of being entrepreneurs? To answer this question is helpful to the understanding of economic and social effects of rural financial diversity reform, and the exploration of effective paths to promote entrepreneurship in rural areas. Using the village-level financial diversity data in CLDS2012, this paper studies the effect of financial diversity on farmer entrepreneurship. In theory, financial diversity can promote effective competition between different financial institutions and reduce the information asymmetry in rural credit market. These effects help to ease rural residents’ financing constraints and promote their entrepreneurship. The results suggest that, village financial diversity significantly increases rural residents’ probability of being entrepreneurs, and increases on average by 0.8 percent while the financial diversity increases by one standard deviation. This conclusion still holds after changing key variables and taking the endogeneity into account. Meanwhile, the individual characteristics（such as party membership, age and education years）, family income and village business culture also have significant effects on farmer entrepreneurship. We also find that rural financial diversity has different effects on different styles of entrepreneurship. It comes to the following conclusions: firstly, village financial diversity has promotion effect on employer” entrepreneurship, but no significant effect on self-employed” entrepreneurship; secondly, informal financial institutions have stronger promotion effects on entrepreneurship than formal financial institutions; thirdly, formal financial institutions have promotion effects on employer” entrepreneurship, while informal financial institutions have promotion effects on self-employed” entrepreneurship; fourthly, village financial diversity improves rural residents’ employer” entrepreneurship willingness in future. This paper provides not only the empirical evidence for understanding the micro-mechanism that financial development affects economic growth, but also policy suggestions about promoting entrepreneurship in rural areas. In the future reformation of rural financial areas, the establishment of multi-level rural financial services system, the reduction in rural financial institutions’ barriers to entry, and the improvement of the level of rural financial diversity are helpful in improving rural financial environment and inspiring the enthusiasm of farmer entrepreneurship. These effects provide new drivers for the healthy and sustainable development of rural economy.