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Barriers to Entrepreneurship in Low and ModerateIncome Communities

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Title: Barriers to Entrepreneurship in Low and ModerateIncome Communities


1
Barriers to Entrepreneurship in Low- and
Moderate-Income Communities
Milken Institute October 2009
2
Overview
  • The importance of entrepreneurial activity to
    economic growth and social welfare.
  • The state of lending to businesses in low- and
    moderate-income communities.
  • A newly constructed measure of loan bias.
  • A review of datasets and the empirical and
    theoretical literature.
  • Regulatory stumbling blocks that impede
    entrepreneurial activity.
  • An alternative approach to trying to identify
    those factors that help explain the differences
    in entrepreneurial activity across geographical
    region

3
Economic Importance of Entrepreneurship
4
Business Ownership Rates Vary Across Demographic
Groups
5
Shares of Business Loans and Population
Uncorrelated
Loans to Businesses in Low- and Moderate-Income
Communities
Loans to Businesses in Low- Income Communities
6
Measures of LI and LMI Loan Bias
  • Deviation from proportionality of
  • Share of loans to businesses in LI (LMI)
    communities in a MSA
  • and the share of the total population in a MSA
    comprised by LI (LMI) individuals
  • 1-(share of loans/share of population)

7
Loan Bias Population and Business Loan Shares
Most Bias
Least Bias
8
Shares of Business Loans and Income Uncorrelated
Loans to Businesses in Low- and Moderate-Income
Communities
Loans to Businesses in Low- Income Communities
9
Measures of LI and LMI Loan Bias Income and
Loan Shares
  • Deviation from proportionality of
  • Share of loans to businesses in LI (LMI)
    communities in a MSA
  • and the share of the total income in a MSA
    comprised by LI (LMI) individuals
  • 1-(share of loans/share of income)

10
Loan Bias Income and Business Loan Shares
Most Bias
Least Bias
11
Entrepreneurial Activityin MSAs
  • An examination of factors that may help to
    explain variation in entrepreneurship across
    geographic regions (MSAs)
  • Data for 204 MSAs from all 50 states
  • Size of firms is used as a measure of
    entrepreneurship
  • We consider establishments grouped into four
    different size categories (0, 1-10, 10-100, and
    100 plus employees) as well as all establishments
    combined.

12
Empirical Model
  • ESTij a ß 1?Dij ß2?Pj ß 3?Fij eij
  • ESTij establishments for MSA i in state j
  • Dij demographic variables for MSA i in state j
  • Pj tax rate for state j
  • Fij financial variables for MSA i in state j
  • eij error term

13
Empirical ResultsDependent Variable Total
Number of Establishments in MSA
  • The greater the total number of establishments
  • the greater the share of population in the 25-44
    age group,
  • the greater the homeownership rate,
  • the greater the number of financial institutions,
  • and the greater the total number of loans made in
    an MSA to all businesses.
  • To the extent that a variable increases the
    total, any tradeoff between that variables
    effect on the size composition of establishments
    diminishes.

14
Empirical ResultsDependent Variable Proportion
of All Establishments with 0 Employees in MSA
  • The greater the share of total establishments
    that are 0 employee establishments
  • the lower the share of the population aged 25 to
    44,
  • the higher the household income,
  • the smaller the percentage of the labor force
    with a college degree,
  • the smaller the share of the labor force with a
    high school diploma or less,
  • the greater the race/ethnic mix of the
    population,
  • the lower the state sales tax rate,
  • the larger the number of financial institutions,
  • the lower the number of branches per institution,

15
Empirical ResultsDependent Variable Proportion
of All Establishments with 0 Employees in MSA
(Continued)
  • The greater the share of total establishments
    that are 0 employee establishments
  • the lower the deposits per institution,
  • the greater the number of loans,
  • the lower the average loan size,
  • the lower the share of the total amount of loans
    to businesses in LMI communities,
  • the larger the share of the total number of loans
    to businesses in LMI communities,
  • and the lower the share of the total number of
    loans made to businesses in low-income
    communities.

16
Empirical ResultsDependent Variable Proportion
of All Establishments with 1-10 Employees in MSA
  • The greater the share of total establishments
    that are 1-10 employee establishments
  • the lower the share of the population aged 25 to
    44,
  • the higher the household income, the higher the
    percentage of the labor force with a college
    degree (in two of six regressions),
  • the higher the share of the labor force that has
    a high school diploma or less (in three of six
    regressions),
  • the lower the state sales tax rate,
  • the lower the average loan size,
  • the greater the share of the total amount of
    loans to businesses in MI communities,
  • the lower the share of the total number of loans
    to businesses in MI communities,
  • and the greater the share of the total number of
    loans made to establishments with receipts of
    less than one million dollars.

17
Empirical ResultsDependent Variable Proportion
of Establishments with 11-100 Employees in MSA
  • The greater the share of total establishments
    that are 11-100 employee establishments
  • the greater the share of the population aged 25
    to 44,
  • the higher the poverty rate,
  • the higher the state sales tax rate,
  • the higher the number of branches per
    institution,
  • the higher the amount of deposits per
    institution,
  • the higher the average loan size,
  • and the larger the share of the total number of
    loans to businesses in LI communities.

18
Empirical ResultsDependent Variable Proportion
of Establishments with 100 plus Employees in MSA
  • The greater the share of total establishments
    that are 100 plus employee establishments
  • the higher the population of the MSA,
  • the higher the share of the population aged 25 to
    44,
  • the lower the household income,
  • the lower the race/ethnic mix of the population,
  • the lower the unemployment rate (this is a
    marginal result in two of six regressions),
  • the higher the state sales tax rate,
  • the larger the average loan size,
  • the higher the share of the total number of the
    loans to businesses in MI communities,
  • and the lower the share of the total number of
    loans made to establishments with receipts of
    less than one million dollars

19
Key Findings and Policy Recommendations
  • Researchers use different definitions and control
    variables in their analyses hampering an
    understanding of the factors that influence
    entrepreneurship and thus policy.
  • One approach to addressing the problem of the
    use of different definitions and control
    variables is the construction of a single,
    multiuse dataset through the creation of a data
    consortium that pools information from different
    public and private datasets.
  • Incentives provided through Capital Access
    Programs (in which lenders, borrowers and the
    government each contribute to a reserve fund to
    cover loan losses) and other credit enhancement
    programs may be appropriate to help decrease loan
    bias not explained by economic factors.

20
Key Findings and Policy Recommendations
  • The financing received by businesses in many LI
    and LMI communities diverges from what some might
    consider appropriate, even when accounting for
    income disparity.
  • Incentives provided through Capital Access
    Programs (in which lenders, borrowers and the
    government each contribute to a reserve fund to
    cover loan losses) and other credit enhancement
    programs may be appropriate to help decrease loan
    bias not explained by economic factors.

21
Key Findings and Policy Recommendations
  • Financial variables are important to
    entrepreneurship.
  • One potential way to increase small business loan
    origination across MSAs is to increase the
    securitization of such loans. This would allow
    small business lenders to sell portions of their
    loan portfolios and use the proceeds to originate
    more loans, as well as lower their capital
    requirements.
  • Discrimination appears to persist, particularly
    as relates to capital access by black
    entrepreneurs.
  • The continued difficulty of black-owned firms to
    gain financing suggests the continuing need for
    efforts to extend capital and other forms of
    support to black entrepreneurs.

22
Key Findings and Policy Recommendations
  • Taxes and regulations are clearly potentially
    important impediments to entrepreneurship
  • High bankruptcy exemptions have been found to
    actually hurt borrowers by decreasing lenders
    willingness to provide capital and should be
    reviewed. The relationship found between lower
    sales taxes and greater entrepreneurship suggests
    one approach to mitigating this adverse effect
    would be decreased taxes.
  • There appears to be consensus in the literature
    that individuals can learn to become
    entrepreneurs.
  • Well-developed training programs, with targeted
    outreach, particularly to LI and LMI communities,
    can extend entrepreneurship to a wider
    population.
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