Race

The racial categories of persons in the United States owning businesses can be broadly grouped into African American ("Black"), Asian, Hispanic, and White. This section offers an approach to analyzing research on race and entrepreneurship, and analyzes management, money, and markets as sources of racial gaps in business performance.

Introduction

The racial categories of persons in the U.S. owning business can be broadly grouped into African American ("Black"), Asian, Hispanic, and White. Black-owned and Hispanic-owned firms have higher failure rates than do White-owned and Asian-owned firms (Fairlie and Robb 2008). Studies find that large racial/ethnic gaps exist both in self-employment rates (Blanchflower 2009) (Fairlie 1999) (Fairlie and Meyer 2000) and business performance (Fairlie and Robb 2007).

Minority entrepreneurs, especially Black and Hispanic business owners, are still underrepresented among business owners in the U.S., and they also underperform compared to non-minority owners. According to the Small Business Administration (SBA) (SBA 2015), as of 2013, Black-owned firms represent 7 percent of all U.S. businesses, Asian-owned firms represent only 4.3 percent, and Hispanic-owned firms’ share is only 10.6 percent. We know there is still a substantial racial and ethnic gap, and inequality persists among entrepreneurs with different racial backgrounds.

The sources of the gaps in the performance of minority firms can be examined through three key factors for successful small-business ownership: 

  1. the leadership of sufficiently skilled and capable entrepreneurs ("management")
  2. having sufficient financial capital to buffer losses, achieve efficient scale, and exploit business opportunities ("money"), and 
  3. awareness of and access to markets in which to successfully sell the firm's products ("markets"). (Bates 2011)

Management: Large racial/ethnic gaps exist with the characteristics of minority owners (Fairlie, Robb and Hinson 2008). Prior family business ownership is less frequent among Black and Hispanic entrepreneurs than for Asian and White entrepreneurs (Bates 2011). Black and Hispanic entrepreneurs also have lower education levels and fewer years of managerial experience than Asian and White entrepreneurs (Fairlie and Robb 2008). These traits result in lower success at starting new businesses, greater propensity to enter business lines with low entry barriers (thus higher failure rates), and lower business survival rates(Van Der Sluis, Van Praag, and Vijverberg 2008) (Cassar 2006) (Lofstrom and Bates 2013). There have been recent increases in educational attainment and business experience (in both large and small firms) of Black and Hispanic potential entrepreneurs (Bates 2011) (Bradford 2014). These factors might reduce the gaps in the performance of new Black and Hispanic startups.

Money: Racial and ethnic gaps persist in access to credit (Blanchflower 2003) (Cavalluzzo and Wolken 2005) (Mijid and Bernasek 2013) (MItchell, Karlyn, and Pearce 2005) (Robb and Fairlie 2009). Black and Hispanic families have lower wealth levels than White families (Kochhar, Fry, and Taylor 2011) (McKernan, Ratcliffe, Steuerle, and Zhang 2013) (Bradford 2003), which results in the lower equity levels of new Black and Hispanic businesses compared to White businesses. Black-owned and Hispanic-owned businesses experience less favorable loan application outcomes than do White-owned and Asian-owned businesses after controlling for firm- and owner-specific characteristics (Blanchard, Zhao, and Yinger 2008) (Blanchflower 2003). As a result, Black and Hispanic entrepreneurs enter industries with low capital requirements and high failure rates (Lofstrom and Bates 2013) (Cassar 2006), which weakens their firms' abilities to buffer losses and financial growth if they survive in early stages (Headd 2003).

Markets: Minority-owned businesses are disproportionately located in urban areas and disproportionately serve ethnic retail markets (Wang 2012). Minority-owned firms that focus on co-ethnic retail markets do not perform as well as those that do not focus on co-ethnic retail markets (Shinnar, Aguilera, and Lyons 2011) (Bates and Robb 2008). Studies found that minority-owned businesses that cater to government markets achieve increased sales through government procurement programs (Chatterji, Chay, and Fairlie 2014) (Fairlie and Justin 2012); however, we still don't know the long-term effect of preferential minority business procurement programs on the viability of minority businesses. On the question of whether such programs have been positive or negative for individual firms, there is mixed evidence (Bates 2009).

Discussion

Background

The interest in minority entrepreneurship in the U.S. is driven by three related concerns:  

  1. Successful entrepreneurship allows individuals to fulfill their potential to create value for themselves and others.
  2. Business ownership can reduce the racial disparity in economic well-being.
  3. Successful entrepreneurship can improve the overall economic status of the U.S. as it competes globally (Bradford 2014). 
These concerns have led to a large body of research on racial differences in entrepreneurship in the United States. Sociologists have studied minority entrepreneurship from the lens that the distinguishing drive for entrepreneurship among minorities is the avoidance of restricted access to or unfair treatment in employment because of race. While sociologists build much of their analyses on the benefits to minority entrepreneurs of co-ethnic markets and social capital within the racial group (Zhou 2004) (Kim and Aldrich 2005), economists have more often viewed minority entrepreneurship as the interaction of human/financial capital and opportunity recognition and access among minorities (Edelman, Brush, Manolova, and Greene 2010) (Ibrahim and Galt 2011). Studies have found evidence justifying both approaches (Kim, Aldrich and Keister, 2006) (Bates 2011) (Shelton 2010).

Racial categories:  Definition and differences within racial groups

The census officially recognizes these racial categories: White American, Native American and Alaska Native, Asian American, African American, and Native Hawaiian and Other Pacific Islander. The United States Census Bureau also classifies Americans as "Hispanic or Latino" and "Not Hispanic or Latino," which identifies Hispanic and Latino Americans as a racially diverse ethnicity. Some studies include Other Pacific Islander and Alaskan Native in the definition of Asian, while others do not. The U.S. Census Bureau has been inconsistent over time in defining these racial/ethnic groups. The Native American, Hawaiian, and Pacific Islander categories lack many in-depth studies of their entrepreneurial pursuits and outcomes and are essentially understudied.

Although researchers typically generalize about three major groups of minority entrepreneurs (Black, Hispanic, and Asian) there are differences within these groups (e.g., Mexican Americans versus Cuban Americans). For examples, for Black firms, see Oyelere and Belton 2011, for Asian firms, see Lunn and Steen 2005, and for Hispanic firms, see Aguilera 2009. This overview does not distinguish within a subgroup, nor does it separate minority groups by gender or by immigrant status. Subgroup comparisons and gender and immigrant status are additional dimensions of minority entrepreneurship. 

Analysis by stage of entrepreneurship

In addition to management, money, and markets, studies on minority entrepreneurship can also be grouped by entry stage (Davidsson and Gordon 2012). First, nascent entrepreneur (NE) traits distinguish persons seeking to start a business from those not seeking to start a business. Second, outcomes of nascent entrepreneurship, or traits that distinguish the NE traits that result in new firms from those that do not result in infant firms. The third stage of analysis concerns traits and performance characteristics of operating firms. The following discussion distinguishes these stages.

Performance of minority entrepreneurs

The number of minority entrepreneurs increased rapidly in the United States over the last two decades (Lowrey 2010) (Lowrey 2007); however, their share among business ownership is still small (Fairlie, Robb, and Hinson 2008) and their growth rate lags behind White-owned firms (Fairlie and Robb 2007). A review of parity conditions in 2007 among firms with fewer than 500 employees (the latest U.S. Census data available) (U.S. Census Bureau 2002) is Hispanic:  16 percent of the population and 8.3 percent of businesses, which produce 1.1 percent of business revenues.  Black: 13 percent of the population and 7.1 percent of businesses, which produce 0.5 percent of business revenues (Bradford 2014). We focus on these two groups because Asian-owned businesses are close to parity; Asian:  4.6 percent of the population and 5.7 percent of businesses, which produce 4.7 percent of business revenues. Several studies looked at the determinants of Asian-owned business success and find that they have better education and more start-up capital than Hispanics or Blacks (Fairlie, Robb and Hinson 2008) (Robb and Fairlie 2009).

Despite increases in participation rates for minorities, there remains a lack of parity in the private business sector of U.S. Business ownership, and business receipts are still dominated by White-owned firms; however, minorities—particularly Black persons—have a higher propensity to attempt to start a business (Reynolds, Carter, Gartner, and Greene 2004) (Kim, Aldrich, and Keister 2006) (Köllinger and Minniti 2006). Although Blacks are more likely to try to start businesses, they are less likely to succeed at starting the business (Köllinger and Minniti 2006). The evidence indicates that Blacks and Hispanics do not lag behind Whites in their rates of self-employment entry nearly as dramatically as they lag behind Whites in their self-employment business size, profitability, and survival rates (Ahn 2011), especially in the first few years.

Management

Nascent entrepreneurs (NEs)—those seeking to start a business who have not yet done so—have higher educational attainment than comparable non-NEs (Davidsson and Gordon 2012) (Kim, Aldrich and Keister, 2006). Relative to comparable non-NEs, higher educational attainment for NEs is greater among Black men and women and Hispanic men than for non-Hispanic Whites (Reynolds, Carter, Gartner, and Greene 2004) (Singh and Crump 2007); however, education is not a predictor of successful movement from nascent entrepreneur to business creation (Davidsson and Gordon 2012).

Specifying the relation between education and entrepreneurial income is made difficult by the endogeneity between education and entrepreneurial income (Van Der Sluis, Van Praag, and Vijverberg 2008) (Block, Hoogerheide, and Thurik 2012) and measurement issues concerning entrepreneurial income:  tax evasion, income under-reporting, high non-response rates, incomparable legal structures, non-pecuniary benefits, and heterogeneities in entrepreneurial activities (Bradford 2014). For established businesses, owner education generally has a positive relation with firm performance (Shinnar, Aguiler, and Lyons 2011). Fairchild (2008) found that for African-Americans, the more segregated the individual's K through 12 education, the less likely the individual enters self-employment. Drawing research conclusions on the relationship between owner experience and firm performance has been complicated by researchers using different measures of experience combined with different measures of performance (Peake and Marshall 2011). There is evidence that the lack of prior industry experience contributes to minority entrepreneurs' lower survival rates in self-employment compared to non-Hispanic White entrepreneurs (Ahn 2011).

Money

The amount of personal net worth does not differ between nascent entrepreneurs (NEs) and others (Kim, Aldrich, and Keister 2006). The amount of the NE's net worth is not statistically significant in predicting transition from NE to business startup (Parker and Belghitar 2006). In addition, for each racial category, most business start-ups do not use debt financing (Gartner, Frid, and Alexander 2012) (Bates and Robb 2013). Differences exist across ethnic groups in how new businesses are financed (Gartner, Frid, and Alexander 2012) (Ortiz-Walters and Gius 2012) (Haynes, Onochie, and Lee 2008). One of the consistent relationships in financing minority businesses is the unexplained differential treatment of Black and Hispanic borrowers—particularly the former—in the bank lending markets.

Several studies point out that Black and Hispanic business owners are denied more often because they have less start-up capital (Fairlie and Robb 2008), less human capital (Lofstrom and Bates 2013), lower credit scores (Robb, Fairlie, and Robinson 2009), no or low collateral, etc. So we know that Black- and Hispanic-owned firms are denied more often, charged a higher interest rate and more discouraged to apply for a loan. Although some may argue that it is rational for banks to deny less productive, more risky, and less credit-worthy customers, we still find overwhelming evidences of higher loan denial rates and higher interest rates charged for Black- and Hispanic-owned firms even after controlling observable and relevant variables.  So can the large gap be explained by racial discrimination? This is still debatable:  some say yes (Blanchflower 2009) (Blanchflower 2003) (Cavalluzzo and Wolken 2005) (Chatterji and Seamans 2012) (Naranchimeg and Bernasek 2013), while others are careful when using the word "discrimination," and conclude the gap may be because of unobservable characteristics and missing data (Gai and Minniti 2015) (Cavalluzzo, Cavalluzzo, and Wolken 2002). Others argue that there is not much demand for loans, especially by Blacks and Hispanics (Bates, Lofstrom, and Servon 2011). Other relevant studies include Asiedu, Freeman, and Akwasi (2012); Coleman (2008); Mitchell and Pearce (2011); Gartner, Frid, and Alexander (2012); Freeland and Keister (2016); and Casey (2012). If discrimination does exist in this market, it is of interest to understand the degree to which the discrimination comes from statistical discrimination versus personal biases. Although both are illegal, the possible solutions may differ.

Despite knowing Black- and Hispanic-owned firms have less start-up capital than White- and Asian-owned firms (Robb and Fairlie 2007) (Robb, Fairlie, and Robinson 2009), we do not know whether there are any standards specific to certain industries. Do banks educate their loan customers and inform them of their underwriting criteria? We need to break a vicious cycle of poverty and promote a level playing field, but subsidized loans should target very specific groups of racial minorities as suggested by Bates, Lofstrom, and Servon (2011).

Markets

The decisions that the entrepreneur must make include both the clientele(s) served and the physical location(s) of the business. A growing interest among researchers is the geographic (re)distribution of minority firms on the sub-metropolitan level, i.e., their evolving spatial pattern between central cities and the suburbs in a restructured urban economy. The changes include the suburbanization of employment and economic activities (Hill and Brennan 2005) and the residential redistribution of minority and immigrant populations in urban areas (Frey 2006) (Singer 2008).

Minority firms have a stronger presence in cities versus the suburbs, but experienced faster growth in the suburbs between 2002 and 2007. This is especially true for Asian-owned and Hispanic-owned firms, whose geographic shift seems to coincide with the residential suburbanization of their respective populations. Black-owned businesses, on the other hand, remain the least suburbanized of all groups and did not keep up the suburbanizing pace of the Black population. It is possible that central cities provide favorable economic, social, and policy environments for Black businesses, while there exist higher entry barriers in suburban markets (Liu and Samir 2012).

Future Research

  • How to best develop minority entrepreneurial skills and knowledge through education programs

This research investigates how one can best develop skills and knowledge that enhance the performance of minorities through educational programs. Many entrepreneurship programs are run and supported financially by governments to teach entrepreneurship in schools; however, little is known about best practices in general or for minorities in particular. Now that we know that formal education contributes to the development of entrepreneurial performance in general, the next question is: How can one build entrepreneurial competencies and relevant knowledge efficiently in entrepreneurship courses? A literature on the evaluation of entrepreneurship education has only recently emerged (see Oosterbeek, van Praag, and Ijsselstein 2010; Martin, McNally, and Kay 2013; Barr 2015).

  • The degree to which the positive effect of education on entrepreneurial choice holds for all modes of entry into entrepreneurship

This research examines whether the positive effect of education on entrepreneurial choice for minorities holds for all modes of entry into entrepreneurship (e.g., new venture, extension of part-time business, carve out of existing business, business buyout) and if the effect is the same across all minority groups: Hispanic, Black and Asian.

  • The relationship between education and financial capital in business entry and performance

Lofstrom and Bates (2013) and Lofstrom, Bates, and Parker (2013) find that there are human and financial capital constraints that restrict the line of business entry. Their finding supports a dual-track approach to promoting entrepreneurship:  reduce financial capital constraints while developing initiatives to deepen human capital. Their findings suggest that duality is especially important when human capital and financial capital are interrelated and endogenous. Thus, the power of extra education to improve entrepreneurs' performance seems to be greater when capital constraints exist, because education helps relax these constraints and also has a direct effect on performance; but the interrelatedness of these phenomena prevented Lofstrom and Bates (2013) and Lofstrom, Bates, and Parker (2013) from recommending a correct balance between government programs that promote human capital as opposed to financial capital. The development of approaches to this design is an important area of future research.

  • The importance of owners' balanced skills ("jack of all trades") versus deep skills in minority business entry and performance

Lazear (2005) initiated a new stran of research based on his 'jack-of-all-trades' theory. The idea of the theory is that entrepreneurs, in their capacity as 'jacks-of-all-trades,' may require a broad mix of skills, possibly obtained through formal education, possibly not. Lazear (2005); Wagner (2006); Silva (2007); Hartog, van Praag, and van der Sluis (2010); and Stuetzer, Obschonka, and Schmitt-Rodermund (2013) perform empirical tests that support the idea that successful entrepreneurs are indeed 'jacks-of-all-trades.' The issues here are 1) the performance effects of a balanced skill set; and 2) potential sources of balanced skills. To what extent do the issues relating to balanced skill sets differ across minority groups, and what are the implications for the best educational preparation for entrepreneurship across minority groups?  

  • The importance of teams in minority business entry and performance

The entrepreneurial team is defined as the management team of the new venture (Timmons and Spinelli 2004). The entrepreneurial team is a core element of the entrepreneurship phenomenon. How important are teams for minority entrepreneurs compared to White entrepreneurs? How do multi-owner minority and White firms differ in team members' human capital and financial capital, and what effect does this have on the performance of minority firms compared to White firms?

  • Changes over time in the unexplained gap in bank lending to minority businesses

With regard to institutional lending to entrepreneurial firms, unfortunately, the latest quality data are the 2003 Survey of Small Business Finances (SSBF). None of the current, available, nationally representative data sets provide as much detailed information about lending decisions. In order to understand how different economic conditions change the relative ability of minorities to finance their firms, a data set and research agenda should be undertaken to estimate the changes in bank lending practices over time and under different local and regional circumstances. To what extent are the variables most important in creating unexplained differences in minority firms' access to financing changing over time, and why are these changes occurring?

  • Degree of ethnic mix of clients among other ethnic minorities

This research differentiates co-ethnic clients from other minority (of a different ethnic/racial background) and white clients. The literature reports, for example, that in their role of middle-man minorities, many Korean businesses serve other minorities in inner cities (Portes and Rumbaut 2006); however, the effect of differences in the mix of other ethnicities among clientele on firm performance is another under-studied area. It would be beneficial to examine whether certain types of firms benefit from a focus on co-ethnic clients more so than others. For example, Hispanic-owned firms are concentrated in retail and wholesale trade (62 percent) and construction (24 percent) (Census 2002). It may in fact be more beneficial to a retailer selling ethnic goods (such as foods for example) or offering specific 'in-language' services, to focus on a co-ethnic clientele. Indeed, Tienda and Raijman (2004) found that Hispanic business owners prefer to use the services of co-ethnic accountants, possibly because ''it is easier to communicate with (members of their co-ethnic group) and to establish a basis of trust'' (p. 15). A similar preference was identified by Shinnar and Young (2008):  65 percent of their sample Hispanic immigrant entrepreneurs had a preference for using a co-ethnic accountant. Differentiating between different types of firms and the goods and services they offer could identify firms that may benefit to a greater extent from focusing on a co-ethnic client base.

  • The benefits and effects of programs that increase diversity in government and private contracting

The evidence, both theoretical and empirical, is unsettled on the extent to which minority firms benefit from government preferential treatment in contracting (Marion 2009). In the private sector, many of the Fortune 500 firms also operate programs that seek to increase their purchases of products and services from minority firms. Future research should analyze the impact of changes in competitive structure of the industries of the minority firms and the benefit of the increased minority entrepreneurship and employment in addition to the direct impact of these programs on the purchasing firm.

  • Owner characteristics: behavioral approaches

Future research should also concentrate on collecting detailed data focusing on behavioral type of questions, such as motivations, preferences, goals, and growth perceptions of the owners. What are their goals? How they see themselves in five years or ten years? How they perceive their business and how they think they are perceived by others (banks, their customers, their competitors, their investors, etc.)?

We should also collect more demographic information about owners:  marital status, number of children (and their ages), education obtained before or after they start their business, etc.

  • Other:  Interacting ethnicity with other owner traits in predicting firm outcomes will result in better understanding of how ethnic differences affect differences in firm outcomes

It is useful to understand how the impact of demographic and firm traits on business performance (or other dependent variables of interest) differs across ethnic groups. How do the various variables that represent the determinants of business performance differ between minority-owned firms and White-owned firms? How, for example, does the impact of age on performance differ between White entrepreneurs and minority entrepreneurs? How does this differ across racial groups? Interacting minority (a dummy variable) with one or more of the independent variables to see if the impact of say, education, on performance is different between minority-owned and White-owned firms, is a better way for the understanding of differences between minority- and White-owned firms on the impact of age, education, experience, gender, etc.


Data Sources

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