Chinese rural enterprises (REs) have continued to grow rapidly since the end of the 1970s, and today these enterprises account for half of China’s industrial output, up from nine per cent in 1978. As a market-oriented nonstate sector, the development of the REs has significantly contributed to both China’s impressive post-reform economic growth and its transition away from a centrally planned economy. This thesis focuses on examining the following important, yet poorly understood, issues of the development of Chinese REs: patterns of local government investment decision-making and impact of local government on the capital structure of the REs through its capital investment and its influence on the REs’ access to bank loans and on the extent to which outstanding payments of taxes and other dues to government serve as an informal credit in the total capital of REs. the phenomenon of soft budget constraints in the RE sector; how it is affected by local government ownership of REs, and what the major sources of budget softness are among local government investment, bank loans, informal credits such as inter-firm arrears, and payment of taxes. the nature and characteristics of transaction costs facing REs and how economic and institutional factors such as the level of economic development, degree of marketisation, the role of local government as well as informal institutions may have affected these costs. The empirical studies of this thesis are based on a set of detailed data from a survey of 630 REs which was undertaken in Sichuan and Zhejiang provinces in 1990. The results of these studies show that in many respects of their operation, REs – especially those owned by local governments – tend to follow rules of neither a planned nor a market system, but those of somewhat in between. / Diss. Stockholm : Handelshögsk.