but their development has been constrained by limits on loans,restricted access to inputs,and environmental and other regulations"(Svejnar and Woo 1990:80). In contrast,the Wenzhou model was more laissez-faire.The centrepiece of the Wenzhou model was an active informal credit market servicing private enterprises,much of which was not sanctioned by the central government.Despite the dynamism of the private sector,"the state banking system was neither willing nor jurisdictionally able to meet the credit needs of the new generation of individual entrepreneurs"(Tsai 2002:122-3).Informal financing mechanisms include rotating credit associations(hui),money houses,and credit cooperatives.The Wenzhou government began to recognize the importance of informal credit as early as in the mid-1980s and tried to regulate,rather than banning,informal finance.These informal financial facilities played a critical role in providing seed capital to many of the private firms in Wenzhou,which laid down the foundation for their fast growth in the 1990s(Tsai 2002:157-8). 3.Foreign ownership and domestic private sector development:Four hypotheses The well documented legal and financial treatments on domestic private firms can affect the ownership structures of foreign affiliates in two ways.First,they operate on the incentive side:private entrepreneurs might seek foreign firms as business partners to access the relatively superior legal protection and regulatory treatment accorded to foreign firms.4These incentives 14This incentive is not limited to establishing FIEs.The lack of legal protection created a nation-wide phenomenon of so-called"red-hat"firms-private firms registered as collective or even state-owned firms in order to access more political protection accorded to these firms.But this was not a costless arrangement.Private entrepreneurs had to cede substantial equity shares to the government,sometimes leading to acrimonious conflicts over the true ownership of these firms. 1313 but their development has been constrained by limits on loans, restricted access to inputs, and environmental and other regulations” (Svejnar and Woo 1990: 80). In contrast, the Wenzhou model was more laissez-faire. The centrepiece of the Wenzhou model was an active informal credit market servicing private enterprises, much of which was not sanctioned by the central government. Despite the dynamism of the private sector, “the state banking system was neither willing nor jurisdictionally able to meet the credit needs of the new generation of individual entrepreneurs” (Tsai 2002: 122-3). Informal financing mechanisms include rotating credit associations (hui), money houses, and credit cooperatives. The Wenzhou government began to recognize the importance of informal credit as early as in the mid-1980s and tried to regulate, rather than banning, informal finance. These informal financial facilities played a critical role in providing seed capital to many of the private firms in Wenzhou, which laid down the foundation for their fast growth in the 1990s (Tsai 2002: 157-8). 3. Foreign ownership and domestic private sector development: Four hypotheses The well documented legal and financial treatments on domestic private firms can affect the ownership structures of foreign affiliates in two ways. First, they operate on the incentive side: private entrepreneurs might seek foreign firms as business partners to access the relatively superior legal protection and regulatory treatment accorded to foreign firms.14 These incentives 14 This incentive is not limited to establishing FIEs. The lack of legal protection created a nation-wide phenomenon of so-called “red-hat” firms—private firms registered as collective or even state-owned firms in order to access more political protection accorded to these firms. But this was not a costless arrangement. Private entrepreneurs had to cede substantial equity shares to the government, sometimes leading to acrimonious conflicts over the true ownership of these firms